e10vq
UNITED STATES SECURITIES AND
EXCHANGE COMMISSION
Washington, D.C.
20549
FORM 10-Q
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QUARTERLY REPORT PURSUANT TO
SECTION 13 OR
15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934.
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For the quarterly period ended
September 30, 2008
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TRANSITION REPORT PURSUANT TO
SECTION 13 OR
15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934.
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For the transition period
from
to
Commission File Number: 000-53330
Federal Home Loan Mortgage
Corporation
(Exact name of registrant as
specified in its charter)
Freddie Mac
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Federally chartered corporation
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52-0904874
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(State or other jurisdiction
of
incorporation or organization)
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(I.R.S. Employer
Identification No.)
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8200 Jones Branch Drive, McLean, Virginia
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22102-3110
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(Address of principal executive
offices)
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(Zip Code)
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(703) 903-2000
(Registrants telephone
number, including area code)
Indicate by check mark whether the
registrant: (1) has filed all reports required
to be filed by Section 13 or
15(d) of the
Securities Exchange Act of 1934 during the preceding
12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been
subject to such filing requirements for the past
90 days. x Yes o No
Indicate by check mark whether the registrant is a large
accelerated filer, an accelerated filer, a non-accelerated
filer, or a smaller reporting company. See the definitions of
accelerated filer, large accelerated
filer and smaller reporting company in
Rule 12b-2
of the Exchange Act.
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Large
accelerated
filer o
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Accelerated
filer o
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Non-accelerated
filer (Do not check if a smaller
reporting
company) x
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Smaller
reporting
company o
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Indicate by check mark whether the registrant is a shell company
(as defined in
Rule 12b-2
of the Exchange
Act). o Yes x No
As of November 10, 2008, there were 647,158,633 shares
of the registrants common stock outstanding.
TABLE OF
CONTENTS
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FINANCIAL
STATEMENTS
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PART
I FINANCIAL INFORMATION
This Quarterly Report on
Form 10-Q
includes forward-looking statements, which may include
expectations and objectives related to our operating results,
financial condition, business, capital management, remediation
of significant deficiencies in internal controls, credit losses,
market share and trends, the conservatorship and its effects on
our business and other matters. You should not rely unduly on
our forward-looking statements. Actual results might differ
significantly from those described in or implied by such
forward-looking statements due to various factors and
uncertainties, including those described in
(i) MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS, or
MD&A, FORWARD-LOOKING STATEMENTS and RISK
FACTORS in this
Form 10-Q
and in the comparably captioned sections of our
Form 10-Q
for the quarter ended June 30, 2008 and our Form 10
Registration Statement filed and declared effective by the SEC
on July 18, 2008, or Registration Statement, and
(ii) the BUSINESS section of our Registration
Statement. These forward-looking statements are made as of the
date of this
Form 10-Q
and we undertake no obligation to update any forward-looking
statement to reflect events or circumstances after the date of
this
Form 10-Q,
or to reflect the occurrence of unanticipated events.
ITEM 2.
MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
EXECUTIVE
SUMMARY
Conservatorship
Entry
Into Conservatorship and Treasury Agreements
On September 7, 2008, Henry M. Paulson, Jr.,
Secretary of the U.S. Department of the Treasury, or
Treasury, and James B. Lockhart III, Director of the
Federal Housing Finance Agency, or FHFA, announced several
actions taken by Treasury and FHFA regarding Freddie Mac and
Fannie Mae. Director Lockhart stated that they took these
actions to help restore confidence in Fannie Mae and
Freddie Mac, enhance their capacity to fulfill their mission,
and mitigate the systemic risk that has contributed directly to
the instability in the current market. These actions
included the following:
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placing us and Fannie Mae in conservatorship;
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the execution of a senior preferred stock purchase agreement by
our Conservator, on our behalf, and Treasury, pursuant to which
we issued to Treasury both senior preferred stock and a warrant
to purchase common stock; and
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the agreement to establish a temporary secured lending credit
facility that is available to us.
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Entry
into Conservatorship
On September 6, 2008, at the request of the Secretary of
the Treasury, the Chairman of the Board of Governors of the
Federal Reserve and the Director of FHFA, our Board of Directors
adopted a resolution consenting to putting the company into
conservatorship. After obtaining this consent, the Director of
FHFA appointed FHFA as our Conservator on September 6,
2008, in accordance with the Federal Housing Finance Regulatory
Reform Act of 2008, or Reform Act, and the Federal Housing
Enterprises Financial Safety and Soundness Act of 1992.
Upon its appointment, the Conservator immediately succeeded to
all rights, titles, powers and privileges of Freddie Mac, and of
any stockholder, officer or director of Freddie Mac with respect
to Freddie Mac and its assets, and succeeded to the title to all
books, records and assets of Freddie Mac held by any other legal
custodian or third party. The Conservator has the power to take
over our assets and operate our business with all the powers of
our stockholders, directors and officers, and to conduct all
business of the company. The Conservator announced at that time
that it would eliminate the payment of dividends on common and
preferred stock during the conservatorship.
On September 7, 2008, the Director of FHFA issued a
statement that he had determined that we could not continue to
operate safely and soundly and fulfill our critical public
mission without significant action to address FHFAs
concerns, which were principally: safety and soundness concerns
as they existed at that time, including our capitalization;
market conditions; our financial performance and condition; our
inability to obtain funding according to normal practices and
prices; and our critical importance in supporting the U.S.
residential mortgage market. We describe the terms of the
conservatorship and the powers of our Conservator in detail
below under Legislative and Regulatory Matters
Conservatorship and Treasury Agreements.
Overview
of Treasury Agreements
Senior
Preferred Stock Purchase Agreement
The Conservator, acting on our behalf, entered into a senior
preferred stock purchase agreement, or Purchase Agreement, with
Treasury on September 7, 2008. Under the Purchase
Agreement, Treasury provided us with its commitment to provide
up to $100 billion in funding under specified conditions.
The Purchase Agreement requires Treasury, upon the request of
the Conservator, to provide funds to us after any quarter in
which we have a negative net worth (that is, our total
liabilities exceed our total assets, as reflected on our GAAP
balance sheet). In addition, the Purchase Agreement requires
Treasury, upon the request of the Conservator, to provide funds
to us if the Conservator determines, at any time, that it will
be mandated by law to appoint a receiver for us unless we
receive funds from Treasury under the Commitment. In exchange
for Treasurys funding commitment, we issued to Treasury,
as an initial commitment fee: (1) one million shares
of Variable Liquidation Preference Senior Preferred Stock (with
an initial liquidation preference of $1 billion), which we
refer to as the senior preferred stock; and (2) a warrant
to purchase, for a nominal price, shares of our common stock
equal to 79.9% of the total number of shares of our common stock
outstanding on a fully diluted basis at the time the warrant is
exercised, which we refer to as the warrant. We received no
other consideration from Treasury as a result of issuing the
senior preferred stock or the warrant.
Under the terms of the agreement, Treasury is entitled to a
quarterly dividend of 10% per year (which increases to 12% per
year if not paid timely and in cash) on the aggregate
liquidation preference of the senior preferred stock. To the
extent we are required to draw on Treasurys funding
commitment the liquidation preference of the senior preferred
stock will be increased by the amount of any funds we receive.
The amounts payable for this dividend could be substantial and
have an adverse impact on our financial position and net worth.
The senior preferred stock is senior in liquidation preference
to our common stock and all other series of preferred stock. In
addition, beginning on March 31, 2010, we are required to
pay a quarterly commitment fee to Treasury, which will accrue
from January 1, 2010. We are required to pay this fee each
quarter for as long as the Purchase Agreement is in effect. The
amount of this fee has not yet been determined.
The Purchase Agreement includes significant restrictions on our
ability to manage our business, including limiting the amount of
indebtedness we can incur to 110% of our aggregate indebtedness
as of June 30, 2008 and capping the size of our retained
portfolio at $850 billion as of December 31, 2009. See
CONSOLIDATED BALANCE SHEETS ANALYSIS Retained
Portfolio and OUR PORTFOLIOS for a description
and composition of our portfolios. In addition, beginning in
2010, we must decrease the size of our retained portfolio at the
rate of 10% per year until it reaches $250 billion.
Depending on the pace of future mortgage liquidations, we may
need to reduce or eliminate our purchases of mortgage assets or
sell mortgage assets to achieve this reduction. We currently do
not have plans to sell our mortgage assets at a loss. In
addition, while the senior preferred stock is outstanding, we
are prohibited from paying dividends (other than on the senior
preferred stock) or issuing equity securities without
Treasurys consent. The terms of the Purchase Agreement and
warrant make it unlikely that we will be able to obtain equity
from private sources.
The Purchase Agreement has an indefinite term and can terminate
only in very limited circumstances, which do not include the end
of the conservatorship. The agreement therefore could continue
after the conservatorship ends. Treasury has the right to
exercise the warrant, in whole or in part, at any time on or
before September 7, 2028. We provide more detail about the
provisions of the Purchase Agreement, the senior preferred stock
and the warrant, the limited circumstances under which those
agreements terminate, and the limitations they place on our
ability to manage our business under Legislative and
Regulatory Matters Conservatorship and Treasury
Agreements below. See ITEM 1A. RISK
FACTORS for a discussion of how the restrictions under the
Purchase Agreement may have a material adverse effect on our
business.
Expected
Draw Under the Purchase Agreement
At September 30, 2008, our liabilities exceeded our assets
under GAAP by $(13.7) billion while our stockholders
equity (deficit) totaled $(13.8) billion. The Director of
FHFA has submitted a request under the Purchase Agreement in the
amount of $13.8 billion to Treasury. We expect to receive
such funds by November 29, 2008. If the Director of FHFA
were to determine in writing that our assets are, and have been
for a period of 60 days, less than our obligations to
creditors and others, FHFA would be required to place us into
receivership. As a result of this draw, the aggregate
liquidation preference of the senior preferred stock will
increase to $14.8 billion, and our annual aggregate
dividend payment to Treasury, at the 10% dividend rate, would
increase to $1.5 billion. If we are unable to pay such
dividend in cash in any quarter, the unpaid amount will be added
to the aggregate liquidation preference of the senior preferred
stock and the dividend rate on the unpaid liquidation preference
will increase to 12% per year.
Treasury
Credit Facility
On September 18, 2008, we entered into a lending agreement
with Treasury, or Lending Agreement, pursuant to which Treasury
established a new secured lending credit facility that is
available to us until December 31, 2009 as a liquidity
back-stop. In order to borrow pursuant to the Lending Agreement,
we are required to post collateral in the form of Freddie Mac or
Fannie Mae mortgage-backed securities to secure all borrowings
under the facility. The terms of any borrowings under the
Lending Agreement, including the interest rate payable on the
loan and the amount of collateral we will need to provide as
security for the loan, will be determined by Treasury. Treasury
is not obligated under the Lending Agreement to make any loan to
us. Treasury does not have authority to extend the term of this
credit facility beyond December 31, 2009, which is when
Treasurys temporary authority to purchase our obligations
and other securities, granted by the Reform Act, expires. After
December 31, 2009, Treasury may purchase up to
$2.25 billion of our obligations under its permanent
authority, as set forth in our charter.
As of November 14, 2008, we have not borrowed any amounts
under the Lending Agreement. The terms of the Lending Agreement
are described in more detail in Legislative and Regulatory
Matters Conservatorship and Treasury
Agreements.
Changes
in Company Management and our Board of Directors
Since our entry into conservatorship on September 6, 2008,
eight members of our Board of Directors have resigned, including
Richard F. Syron, our former Chairman and Chief Executive
Officer. On September 16, 2008, the Conservator appointed
John A. Koskinen as the new non-executive Chairman of our
Board of Directors. We currently have four members of our
Board of Directors and nine vacancies.
As noted above, as our Conservator, FHFA has assumed the powers
of our Board of Directors. Accordingly, the current Board of
Directors acts with neither the power nor the duty to manage,
direct or oversee our business and affairs. The Conservator has
indicated that it intends to appoint a full Board of Directors
to which it will delegate specified roles and responsibilities.
On September 7, 2008, the Conservator appointed
David M. Moffett as our Chief Executive Officer, effective
immediately. Since September 7, 2008, we have announced the
departures of our former Chief Financial Officer and our former
Chief Business Officer.
Supervision
of our Business under the Reform Act and During
Conservatorship
During the third quarter of 2008, the company experienced a
number of significant changes in our regulatory supervisory
environment. First, on July 30, 2008, President Bush signed
into law the Reform Act, which placed us under the regulation of
a new regulator, FHFA. That legislation strengthened the
existing safety and soundness oversight of the government
sponsored enterprises, or GSEs, and provided FHFA with new
safety and soundness authority that is comparable to, and in
some respects, broader than that of the federal bank agencies.
That legislation gave FHFA enhanced powers that, even if we were
not placed into conservatorship, gave them the authority to
raise capital levels above statutory minimum levels, regulate
the size and content of our portfolio, and to approve new
mortgage products. That legislation also gave FHFA the authority
to place the GSEs into conservatorship or receivership under
conditions set forth in the statute. Refer to
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS EXECUTIVE
SUMMARY Legislative and Regulatory Matters in
our
Form 10-Q
for the period ended June 30, 2008 for additional detail
regarding the provisions of the Reform Act. See
ITEM 1A. RISK FACTORS, for additional risks and
information regarding this legislation, including the
receivership provisions.
Second, we experienced a change in control when we were placed
into conservatorship on September 6, 2008. Under
conservatorship, we have additional heightened supervision and
direction from our regulator, FHFA, who is also acting as our
Conservator.
Below is a summary comparison of various features of our
business before and after we were placed into conservatorship
and entered into the Purchase Agreement. Following this summary,
we provide additional information about a number of aspects of
our business now that we are in conservatorship under
Managing Our Business During Conservatorship
Our Objectives. In addition, we describe the impacts of
the Treasury agreements on our business above under
Overview of Treasury Agreements and below under
Legislative and Regulatory Matters
Conservatorship and Treasury Agreements.
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Topic
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Before Conservatorship
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During Conservatorship
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Authority of Board of Directors, Management and Stockholders
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Board of Directors with right to determine the general policies governing the operations of the corporation and exercise all power and authority of the company except as vested in stockholders or as the Board chooses to delegate to management
Board of Directors delegated significant authority to management
Stockholders with specified voting rights
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FHFA, as Conservator, has all of the power and authority of the Board of Directors, management and the shareholders
The Conservator has delegated authority to management to conduct day-to-day operations so that the company can continue to operate in the ordinary course of business. The Conservator retains overall management authority, including the authority to withdraw its delegations to us at any time.
Stockholders have no voting rights
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Regulatory Supervision
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Regulated by FHFA, our new regulator created by the Reform Act
Reform Act gave regulator significant additional safety and soundness supervisory powers
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Regulated by FHFA, with powers as provided by Reform Act
Additional management authority by FHFA, which is serving as our Conservator
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Structure of Board of Directors
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13 directors: 11 independent, plus Chairman and Chief Executive Officer, and one vacancy; independent, non-management lead director
Five separate Board committees, including Audit Committee in which one of the five independent members was an audit committee financial expert
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Currently, four directors, consisting of a non-management Chairman of the Board and three independent directors (who were also directors of Freddie Mac immediately prior to conservatorship), with neither the power nor the duty to manage, direct or oversee our business and affairs
No Board committees have members or authority to act
Conservator has indicated its intent to appoint a full Board of Directors to which it will delegate specified roles and responsibilities
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Management
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Richard F. Syron served as Chairman
and Chief Executive Officer from December 2003 to
September 6, 2008
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David M. Moffett began serving as
Chief Executive Officer on September 7, 2008
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Capital
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Statutory and regulatory capital requirements
Capital classifications as to adequacy of capital provided by FHFA on quarterly basis
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Capital requirements not binding
Quarterly capital classifications by FHFA suspended
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Net
Worth(1)
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Receivership mandatory if we have
negative net worth for 60 days
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Conservator has directed management to focus on maintaining positive stockholders equity in order to avoid both the need to request funds under the Purchase Agreement and our mandatory receivership
Receivership mandatory if we have negative net worth for 60 days(2)
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Managing for the Benefit of Shareholders
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Maximize shareholder value over the long term
Fulfill our mission of providing liquidity, stability and affordability to the mortgage market
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No longer managed with a strategy to maximize common shareholder returns
Maintain positive net worth and fulfill our mission of providing liquidity, stability and affordability to the mortgage market
Focus on returning to long-term profitability if it does not adversely affect our ability to maintain net worth or fulfill our mission
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(1)
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Our net worth refers to our assets
less our liabilities, as reflected on our GAAP balance sheet. If
we have a negative net worth (which means that our liabilities
exceed our assets, as reflected on our GAAP balance sheet),
then, if requested by the Conservator (or by our Chief Financial
Officer, if we are not under conservatorship), Treasury is
required to provide funds to us pursuant to the Purchase
Agreement. Net worth is substantially the same as
stockholders equity (deficit); however, net worth also
includes the minority interests that third parties own in our
consolidated subsidiaries (which was $95 million as of
September 30, 2008). At September 30, 2008, we had a
negative net worth of $13.7 billion. In addition, if the
Director of FHFA were to determine in writing that our assets
are, and would have been for a period of 60 days, less than
our obligations to creditors and others, FHFA would be required
to place us into receivership.
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(2)
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Treasurys funding commitment
under the Purchase Agreement is expected to enable us to
maintain a positive net worth as long as Treasury has not
invested the full $100 billion provided for in that
agreement.
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The conservatorship has no specified termination date. There can
be no assurance as to when or how the conservatorship will be
terminated, whether we will continue to exist following
conservatorship, or what our business structure will be during
or following our conservatorship. In a statement issued on
September 7, 2008, the Secretary of the Treasury indicated
that 2008 and 2009 should be viewed as a time out
where we and Fannie Mae are stabilized while policymakers decide
our future role and structure. He also stated that there is a
consensus that we and Fannie Mae pose a systemic risk and that
we cannot continue in our current form. For more information on
the risks to our business relating to the conservatorship and
uncertainties regarding the future of our business, see
ITEM 1A. RISK FACTORS.
Managing
Our Business During Conservatorship
Our
Management
FHFA, in its role as Conservator, has overall management
authority over our business. During the conservatorship, the
Conservator has delegated authority to management to conduct
day-to-day
operations so that the company can continue to operate in the
ordinary course of business. We can, and have continued to,
enter into and enforce contracts with third parties. The
Conservator retains the authority to withdraw its delegations to
us at any time. The Conservator is working actively with
management to address and determine the strategic direction for
the enterprise, and in general has retained final
decision-making authority in areas regarding: significant
impacts on operational, market, reputational or credit risk;
major accounting determinations, including policy changes; the
creation of subsidiaries or affiliates and transacting with
them; significant litigation; setting executive compensation;
retention of external auditors; significant mergers and
acquisitions; and any other matters the Conservator believes are
strategic or critical to the enterprise in order for the
Conservator to fulfill its obligations during conservatorship.
See Conservatorship and Treasury Agreements
Conservatorship General Powers of the Conservator
Under the Regulatory Reform Act for more information.
Our
Objectives
Based on the Federal Home Loan Mortgage Corporation Act, which
we refer to as our charter, public statements from Treasury
officials and guidance from our Conservator, we have a variety
of different, and potentially conflicting, objectives, including:
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providing liquidity, stability and affordability in the mortgage
market;
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immediately providing additional assistance to the struggling
housing and mortgage markets;
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reducing the need to draw funds from Treasury pursuant to the
Purchase Agreement;
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returning to long-term profitability; and
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protecting the interests of the taxpayers.
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These objectives create conflicts in strategic and
day-to-day
decision making that will likely lead to less than optimal
outcomes for one or more, or possibly all, of these objectives.
For example, maintaining a positive net worth could require us
to constrain some of our business activities, including
activities that provide liquidity, stability and affordability
to the mortgage market. Conversely, to the extent we increase
activities to assist the mortgage market, our financial results
are likely to suffer, and we may be less able to maintain a
positive net worth. We regularly consult with and get direction
from our Conservator on how to balance these objectives. To the
extent that we are unable to maintain a positive net worth
following our expected draw of funds from Treasury after the
filing of this
Form 10-Q,
we will be required to request additional funding from Treasury
under the Purchase Agreement, which will further increase our
ongoing dividend obligations and, therefore, extend the period
of time until we might be able to return to profitability. These
objectives also create risks that we discuss in
ITEM 1A. RISK FACTORS.
Changes
in Strategies to Meet New Objectives
Since September 6, 2008, we have made a number of changes
in the strategies we use to manage our business in support of
our new objectives outlined above. These include the changes we
describe below.
Eliminating
Planned Increase in Adverse Market Delivery Charge
As part of our efforts to increase liquidity in the mortgage
market and make mortgage loans more affordable, we announced on
October 3, 2008 that we were eliminating our previously
announced 25 basis point increase in our adverse market
delivery charge that was scheduled to take effect on
November 7, 2008. The elimination of this charge will
reduce our future net income.
Temporarily
Increasing the Size of Our Mortgage Portfolio
Consistent with our ability under the senior preferred stock
purchase agreement to increase the size of our on-balance sheet
mortgage portfolio through the end of 2009, FHFA has directed us
to acquire and hold increased amounts of mortgage loans and
mortgage-related securities in our mortgage portfolio to provide
additional liquidity to the mortgage market. Our extremely
limited ability to issue callable or long-term debt at this time
makes it difficult to increase the size of our mortgage
portfolio. In addition, we are also subject to the covenant in
the senior preferred stock purchase agreement
prohibiting us from issuing debt in excess of 110% of our
aggregate indebtedness as of June 30, 2008. For a
discussion of the limitations we are currently experiencing on
our ability to issue debt securities, see LIQUIDITY AND
CAPITAL RESOURCES and RISK FACTORS.
Current
Conditions in the Housing and Mortgage Market
Deterioration
in Market Conditions and Impact on Third Quarter
Results
Market conditions affecting the company deteriorated
dramatically during the third quarter. This had a materially
adverse impact on our quarterly results of operations in the
third quarter of 2008 compared to the second quarter of 2008.
Home prices nationwide resumed the rate of decline experienced
earlier in the year after briefly leveling off during the second
quarter of 2008. The percentage decline in home prices was
particularly large in California, Florida, Arizona and Nevada,
where Freddie Mac has significant concentrations of mortgage
loans.
Unemployment rates also worsened significantly. California,
Arizona and Nevada saw increases of between 14 and 27% in
unemployment from the second quarter to the third quarter of
2008, on a seasonally-adjusted basis, while the national rate
exceeded 6%. Unemployment rates increased again in October to a
national rate of 6.5%. An upward spike in food and other goods
prices during the third quarter of 2008 further eroded household
financial conditions, and real consumer spending declined
significantly. Both consumer and business credit tightened
considerably during the third quarter of 2008 as financial
institutions curtailed their lending activities. This
contributed to significant increases in credit spreads for both
mortgage and corporate loans.
These macro-economic conditions and other factors contributed to
a substantial increase in the number of delinquent loans in our
single-family mortgage portfolio during the third quarter of
2008. The rate of transition of these loans from delinquency
through foreclosure also increased. We observed a significant
increase in market-reported delinquency rates for mortgages
serviced by financial institutions not only for subprime and
Alt-A loans
but also for prime loans. This delinquency data suggests that
continuing home price declines and growing unemployment are now
affecting behavior by a broader segment of mortgage borrowers,
increasing numbers of whom are underwater, or owing
more on their mortgage loans than their homes are currently
worth. Our loan loss severities, or the average amount of
recognized losses per loan, also increased in the third quarter
of 2008, especially in California, Florida and Arizona, where
home price declines have been more severe and where we have
significant concentrations of mortgage loans with higher average
loan balances than in other states.
We were not the only financial institution that was adversely
affected by the worsening market conditions during the third
quarter of 2008. IndyMac Bank, FSB and Washington Mutual Bank
were placed into receivership, and Lehman Brothers Holdings,
Inc., or Lehman, filed for bankruptcy. American International
Group, Inc. received a substantial infusion of cash from the
U.S. government, and both Merrill Lynch & Co,
Inc. and Wachovia Corporation were acquired by other
institutions. In an attempt to stabilize the markets and restore
liquidity, the U.S. government introduced several
unprecedented programs to provide various forms of financial
support to market participants. One of these proposed programs
involves guarantees by the Federal Deposit Insurance
Corporation, or FDIC, of the debt obligations issued by banks.
This proposal and other existing programs have created
uncertainty in the market resulting in limited access to
long-term and callable funding. Uncertainty has also contributed
to increased borrowing costs relative to the U.S. Treasury
market and the London Interbank Offered Rate, or LIBOR. See
LIQUIDITY AND CAPITAL RESOURCES for further
information.
These market developments have been the principal drivers of our
substantially increased loss for the third quarter of 2008. Our
provision for credit losses increased from $2.5 billion in
the second quarter of 2008 to $5.7 billion in the third
quarter of 2008, principally due to increased estimates of
incurred losses caused by the deteriorating economic conditions
and evidenced by our increased rates of delinquency and
foreclosure; increased mortgage loan loss severities; and, to a
much lesser extent, heightened concerns that certain of our
seller/servicer counterparties may fail to perform their
recourse or repurchase obligations to us.
Our security impairments on available for sale securities
increased from $1.0 billion in the second quarter of 2008
to $9.1 billion in the third quarter of 2008. The
deteriorating market conditions during the third quarter also
led to a considerably more pessimistic outlook for the
performance of the non-agency mortgage-related securities in our
retained portfolio. The loans backing these securities exhibited
much worse delinquency behavior than that mentioned above with
respect to loans in our guarantee portfolio. Rising
unemployment, accelerating house price declines, tight credit
conditions, volatility in interest rates, and weakening consumer
confidence not only contributed to poor performance during the
third quarter but significantly impacted our expectations
regarding future performance, both of which are critical in
assessing security impairments. Furthermore, the
mortgage-related securities backed by subprime and
Alt-A and
other loans, including Moving Treasury Average, or MTA, loans,
have significantly greater concentrations in the states that are
undergoing the greatest stress, including California, Florida,
Arizona and Nevada. MTA adjustable-rate mortgages (also referred
to as option ARMs) have adjustable interest rates and optional
payment terms, including options that result in negative
amortization, for an initial period of years that allow for
deferral of principal repayments. MTA loans generally have a
date when the
mortgage is recast to require principal payments under new
terms, which can result in substantial increases in monthly
payments to the borrower. Additionally, during the third quarter
of 2008 there were significant negative ratings actions and
unprecedented and sustained categorical asset price declines
most notably in the mortgage-related securities backed by
Alt-A loans,
including MTA loans, in our portfolio. The combination of all of
these factors not only had a material, negative impact on our
view of expected performance in the third quarter, but also
significantly reduced the likelihood of more favorable outcomes,
resulting in a substantial increase in
other-than-temporary
impairments in the third quarter of 2008.
Our aggregate losses on trading securities, our guarantee asset
and derivatives, net of the unrealized gains on foreign-currency
denominated debt, increased from $481 million in the second
quarter of 2008 to $4.2 billion in the third quarter of
2008, as the turmoil in the markets contributed to dislocations
in the normal correlations between different instruments. In our
capacity as securities administrator for our issued securities,
we also incurred a $1.1 billion loss in the third quarter
of 2008 related to investments in short-term unsecured loans as
a result of Lehmans bankruptcy.
We determined it was necessary to establish a partial valuation
allowance against our deferred tax assets due to the rapid
deterioration of market conditions discussed above, the
uncertainty of future market conditions on our results of
operations and the uncertainty surrounding our future business
model as a result of our placement into conservatorship by FHFA
on September 6, 2008. These and other factors led us to
record a non-cash charge of $14.3 billion in the third
quarter of 2008 in order to establish a partial valuation
allowance against our deferred tax asset. As a result, at
September 30, 2008, we had a net deferred tax asset of
$11.9 billion representing the tax effect of unrealized
losses on our available-for-sale securities portfolio.
Each of these drivers of our third quarter results is discussed
in more detail below within GAAP Results and our
CONSOLIDATED RESULTS OF OPERATIONS.
Credit
Overview
The factors affecting all residential mortgage market
participants during 2008 have continued to adversely impact our
single-family mortgage portfolio during the third quarter of
2008. The following statistics illustrate the credit
deterioration of loans in our single-family mortgage portfolio,
which consists of single-family mortgage loans in our retained
portfolio and those backing our guaranteed PCs and Structured
Securities.
Table 1
Credit Statistics, Single-Family Mortgage
Portfolio(1)
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|
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|
|
|
|
|
|
|
|
As of
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|
|
09/30/2008
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|
06/30/2008
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|
03/31/2008
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|
12/31/2007
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|
09/30/2007
|
|
Delinquency rate (in basis points, or
bps)(2)
|
|
|
122
|
|
|
|
93
|
|
|
|
77
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|
|
|
65
|
|
|
|
51
|
|
Non-performing assets (in
millions)(3)
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$
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35,497
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|
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$
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27,480
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|
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$
|
22,379
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|
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$
|
18,121
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|
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$
|
13,118
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|
REO inventory (in units)
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|
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28,089
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|
|
|
22,029
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|
|
|
18,419
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|
|
|
14,394
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|
|
|
11,916
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|
|
|
|
|
|
|
|
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|
|
|
|
|
|
|
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|
|
|
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For the Three Months Ended
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09/30/2008
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06/30/2008
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03/31/2008
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12/31/2007
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09/30/2007
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(in units, unless noted)
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Loan
modifications(4)
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|
|
8,316
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|
|
|
4,827
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|
|
|
4,246
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|
|
|
2,272
|
|
|
|
1,752
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|
REO acquisitions
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|
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15,880
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|
|
|
12,410
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|
|
|
9,939
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|
|
|
7,284
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|
|
|
5,905
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|
REO disposition severity
ratio(5)
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29.3
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%
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|
|
25.2
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%
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|
|
21.4
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%
|
|
|
18.1
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%
|
|
|
14.1
|
%
|
Single-family credit losses (in
millions)(6)
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|
$
|
1,270
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|
|
$
|
810
|
|
|
$
|
528
|
|
|
$
|
236
|
|
|
$
|
122
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|
|
|
(1)
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Consists of single-family mortgage
loans for which we actively manage credit risk, which are those
loans held in our retained portfolio as well as those loans
underlying our PCs and Structured Securities, excluding
Structured Transactions and that portion of our Structured
Securities that are backed by Government National Mortgage
Association, or Ginnie Mae, Certificates.
|
(2)
|
We report single-family delinquency
rate information based on the number of loans that are
90 days or more past due and those in the process of
foreclosure. Mortgage loans whose contractual terms have been
modified under agreement with the borrower are not included if
the borrower is less than 90 days delinquent under the
modified terms. See CREDIT RISKS Credit
Performance Delinquencies for further
information.
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(3)
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Includes those loans in our
single-family mortgage portfolio, based on unpaid principal
balances, that are past due for 90 days or more or where
contractual terms have been modified as a troubled debt
restructuring. Also includes single-family real estate owned, or
REO, which are acquired principally through foreclosure on loans
within our single-family mortgage portfolio.
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(4)
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Consist of modifications under
agreement with the borrower. Excludes forbearance agreements,
which are made in certain circumstances and under which reduced
or no payments are required during a defined period as well as
repayment plans, which are separate agreements with the borrower
to repay past due amounts and return to compliance with the
original terms.
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(5)
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Calculated as the aggregate amount
of our losses recorded on disposition of REO properties during
the respective quarterly period divided by the aggregate unpaid
principal balances of the related loans with the borrowers. The
amount of losses recognized on disposition of the properties is
equal to the amount by which the unpaid principal balance of
loans exceeds the amount of gross sales proceeds from
disposition of the properties. Excludes other related credit
losses, such as property maintenance and selling expenses, as
well as related recoveries from credit enhancements, such as
mortgage insurance.
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(6)
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Consists of REO operations expense
plus charge-offs, net of recoveries from third-party insurance
and other credit enhancements. See CREDIT
RISKS Credit Performance Credit Loss
Performance for further information.
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As the table above illustrates, we experienced continued
deterioration in the performance of our single-family mortgage
portfolio. Certain loan groups of the single-family mortgage
portfolio, such as
Alt-A and
interest-only loans, as well as 2006 and 2007 vintage loans, are
the main contributors to our worsening credit statistics. These
loan groups have been affected by certain macro-economic
factors, such as recent declines in home prices, which have
resulted in erosion in the borrowers equity. These loan
groups are also concentrated in the West region. The West region
comprised 26% of the unpaid principal balances of our
single-family mortgage portfolio as of September 30, 2008,
but accounted for 48% and 43% of our REO
acquisitions in the third and second quarters of 2008,
respectively.
Alt-A loans,
which represented 10% of our single-family mortgage portfolio as
of September 30, 2008, accounted for approximately 50% of
our credit losses for the nine months ended September 30,
2008. In addition, stressed markets in the West region
(especially California, Arizona and Nevada) and Florida tend to
have higher average loan balances than the rest of the U.S. and
were most affected by the steep home price declines. As we
continue to experience home price declines in these and other
regions, the severity of our single-family credit losses will
continue to increase, as evidenced by our REO disposition
severity ratio.
As of September 30, 2008, single-family mortgage loans in
the state of Florida comprise 7% of our single-family mortgage
portfolio; however the loans in this state make up more than 20%
of the total delinquent loans in our single-family mortgage
portfolio, based on unpaid principal balances. Consequently,
Florida remains our leading state for serious delinquencies,
although these have not yet evidenced themselves in REO
acquisitions or our credit losses due to the duration of
Floridas foreclosure process. California and Arizona were
the states with the highest credit losses in the third quarter
of 2008 with 44% of our single-family credit losses on a
combined basis. These and other factors caused us to
significantly increase our estimate for loan loss reserves
during the third quarter of 2008.
In an effort to mitigate our losses and the continued growth of
non-performing assets, we continue to expand our efforts to
increase our foreclosure alternatives. Due to the overall
deterioration in the mortgage credit environment, our loss
mitigation activity has increased, as exemplified by our
increased volumes of loan modifications in 2008. We are
continuing to implement and develop strategies designed to
mitigate the increase in our credit losses, including a recently
announced program by our Conservator to expedite the
modification process for certain troubled borrowers.
Our non-agency securities in our retained portfolio, which are
primarily backed by subprime,
Alt-A and
MTA mortgage loans, also continue to be affected by the
deteriorating credit conditions during 2008. The table below
illustrates the changes in delinquencies that are 60 days or
more past due within our non-agency mortgage-related securities
portfolio backed by subprime,
Alt-A, and
MTA loans in our retained portfolio. Increases in delinquencies
that are 60 days or more past due do not fully reflect the
recent poor performance of these securities as cumulative losses
are also growing considerably more rapidly. Given the recent
unprecedented deterioration in the economic outlook and the
renewed acceleration of housing price declines, future
performance of the loans backing these securities could continue
to deteriorate.
Table 2 Credit
Statistics, Non-Agency Mortgage-Related Securities Backed by
Subprime,
Alt-A and
MTA Loans
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As of
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09/30/2008
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06/30/2008
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03/31/2008
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12/31/2007
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09/30/2007
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|
Delinquency rates:
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|
Non-agency mortgage-related securities backed by:
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Subprime 1st Lien
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35
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%
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31
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%
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27
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%
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|
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21
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%
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|
|
16
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%
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Alt-A(1)
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14
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%
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|
12
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%
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|
|
10
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%
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|
|
8
|
%
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|
|
5
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%
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MTA
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|
24
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%
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|
|
18
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%
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|
|
12
|
%
|
|
|
7
|
%
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|
|
4
|
%
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Cumulative loss:
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Non-agency mortgage-related securities backed by:
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Subprime 1st Lien
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4
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%
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2
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%
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1
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%
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|
|
1
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%
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|
|
1
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%
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Alt-A(1)
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1
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%
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0
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%
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|
0
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%
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0
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%
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|
0
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%
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MTA
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1
|
%
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|
|
0
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%
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|
|
0
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%
|
|
|
0
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%
|
|
|
0
|
%
|
Gross unrealized losses, pre-tax (in millions)
|
|
$
|
22,411
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|
|
$
|
25,858
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|
|
$
|
28,065
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|
|
$
|
11,127
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|
|
$
|
2,993
|
|
Impairment loss for the three months ended (in millions)
|
|
$
|
8,856
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|
|
$
|
826
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
|
(1)
|
Exclude non-agency mortgage-related
securities backed by other loans primarily comprised of
securities backed by home equity lines of credit.
|
We held unpaid principal balances of $125.7 billion of
non-agency mortgage-related securities backed by subprime and
Alt-A and
other loans in our retained portfolio as of September 30,
2008 compared to $152.6 billion as of December 31,
2007. We recognized impairment losses on these securities of
$8.9 billion for the three months ended September 30,
2008. We had gross unrealized losses, net of tax, on these
securities totaling $14.6 billion and $7.2 billion at
September 30, 2008 and December 31, 2007,
respectively. The increase in unrealized losses, despite the
decline in unpaid principal balance, is due to the significant
declines in non-agency mortgage asset prices which occurred
during 2008 and which accelerated significantly for
Alt-A and
other loans, including MTA loans, during the third quarter of
2008. We believe the majority of the declines in the fair value
of these securities are attributable to decreased liquidity and
larger risk premiums in the mortgage market. See
CONSOLIDATED BALANCE SHEETS ANALYSIS Retained
Portfolio for further information.
GAAP
Results
Summary
of Financial Results for the Three Months Ended
September 30, 2008
Net loss was $25.3 billion and $1.2 billion for the
three months ended September 30, 2008 and 2007,
respectively. Net loss increased in the three months ended
September 30, 2008 compared to the same period of 2007,
principally due to the establishment of a partial valuation
allowance on our deferred tax asset, increased losses on
investment activities, increased derivative losses, increased
losses on our guarantee asset as well as increased
credit-related expenses, which consist of the provision for
credit losses and REO operations expense. In the third quarter
of 2008, we recorded a non-cash charge of
$14.3 billion related to the establishment of a partial
valuation allowance against our deferred tax asset. The
valuation allowance excludes the portion of the deferred tax
asset representing the tax effect of unrealized losses on
available-for-sale securities recorded in accumulated other
comprehensive income, or AOCI, which management has the intent
and ability to hold until recovery of the unrealized loss
amounts. See CONSOLIDATED BALANCE SHEETS
ANALYSIS Deferred Tax Asset for further
information. These loss and expense items for the three months
ended September 30, 2008 were partially offset by:
(a) higher net interest income and income on guarantee
obligation; (b) unrealized gains on foreign-currency
denominated debt recorded at fair value; (c) lower losses
on certain credit guarantees; and (d) lower losses on loans
purchased due principally to changes in our operational practice
of purchasing delinquent loans out of PC securitization pools in
December 2007. As a result of the net loss, at
September 30, 2008, our liabilities exceeded our assets
under GAAP by $(13.7) billion while our stockholders
equity (deficit) totaled $(13.8) billion. The Director of
FHFA has submitted a request under the Purchase Agreement in the
amount of $13.8 billion to Treasury. We expect to receive
such funds by November 29, 2008.
Net interest income was $1.8 billion for the three months
ended September 30, 2008, compared to $761 million for
the three months ended September 30, 2007. We held higher
amounts of fixed-rate agency mortgage-related securities in our
retained portfolio at significantly wider spreads relative to
our funding costs during the three months ended
September 30, 2008. The increase in net interest income and
yield is also due to significantly lower short-term interest
rates on our short-term borrowings and lower long-term interest
rates on our long-term borrowings for the three months ended
September 30, 2008. The combination of a higher proportion
of short-term debt, together with a higher proportion of
fixed-rate securities within our retained portfolio during a
steep yield curve environment, contributed to the improvement in
net interest income and net interest yield during the three
months ended September 30, 2008.
Non-interest income (loss) was $(11.3) billion for the
three months ended September 30, 2008, compared to
non-interest income of $117 million for the three months
ended September 30, 2007. The decrease in non-interest
income in the third quarter of 2008 was primarily due to higher
losses on investment activity, increased derivative losses, net
of related foreign-currency gains and higher losses on our
guarantee asset, partially offset by increased income on our
guarantee obligation and higher management and guarantee income.
Increased losses on investment activity during the third quarter
of 2008 were principally attributed to $9.1 billion of
security impairments primarily recognized on
available-for-sale
non-agency mortgage-related securities backed by subprime and
Alt-A and
other loans during the third quarter of 2008. See
CONSOLIDATED BALANCE SHEET ANALYSIS Retained
Portfolio for additional information. Income on our
guarantee obligation was $783 million and $473 million
for the three months ended September 30, 2008 and 2007,
respectively. The amortization of income on our guarantee
obligation was accelerated in the third quarter of 2008 as
compared to the third quarter of 2007 in order to match our
economic release from risk on the pools of mortgage loans we
guarantee. Management and guarantee income increased 16%, to
$832 million for the three months ended September 30,
2008 from $718 million for the three months ended
September 30, 2007. This reflects increases in the average
balance of our PCs and Structured Securities of 11% on an
annualized basis for the three months ended September 30,
2008, as compared to the average balance during the third
quarter of 2007. This increase in management and guarantee
income also reflects higher average fee rates for the three
months ended September 30, 2008 compared to the third
quarter of 2007.
Non-interest expense for the three months ended
September 30, 2008 and 2007 totaled $7.9 billion and
$3.1 billion, respectively. This includes normal
credit-related expenses of $6.0 billion and
$1.4 billion for the three months ended September 30,
2008 and 2007, respectively. For the three months ended
September 30, 2008, our provision for credit losses
significantly increased due to continued credit deterioration in
our single-family credit guarantee portfolio, primarily due to
further increases in delinquency rates and higher severity of
losses on a per-property basis. Credit deterioration has been
largely driven by declines in home prices and regional economic
conditions as well as the effect of a greater composition of
interest-only and
Alt-A
mortgage products in the mortgage origination market that we
have purchased or guaranteed. REO operations expense increased
primarily as a result of an increase in market-based write-downs
of REO property due to the decline in home prices, coupled with
higher volumes in REO inventory, particularly in the states of
California, Florida, Arizona, Michigan and Nevada.
Non-interest expense, excluding normal credit-related expenses,
for the three months ended September 30, 2008 totaled
$1.9 billion compared to $1.7 billion for the three
months ended September 30, 2007. The increase in
non-interest expense, excluding normal credit-related expenses,
was primarily due to a loss of $1.1 billion during the
third quarter of 2008, related to the investments in short-term,
unsecured loans we made to Lehman in our role as securities
administrator for certain trust-related assets offset by
decreases in losses on certain credit guarantees and losses on
loans purchased. We refer to these transactions with Lehman as
the Lehman short-term lending transactions. For more information
on the Lehman short-term lending transactions, see
CONSOLIDATED RESULTS OF OPERATIONS Securities
Administrator Loss on Investment Activity. Losses on
certain credit guarantees decreased to $2 million for the
three months ended September 30, 2008, compared to
$392 million for the three months ended September 30,
2007, due to the change in our method for determining the fair
value of our newly-issued guarantee obligation upon adoption of
Statement of Accounting Standards, or SFAS,
No. 157, Fair Value Measurements, or
SFAS 157, effective January 1, 2008. Losses on loans
purchased decreased to $252 million for the three months
ended September 30, 2008, compared to $649 million for
the three months ended September 30, 2007, due to changes
in our operational practice of purchasing delinquent loans out
of PC pools. See CONSOLIDATED RESULTS OF
OPERATIONS Non-Interest Expense
Losses on Certain Credit Guarantees and
Losses on Loans Purchased, for additional
information on this change in our operational practice.
Administrative expenses totaled $308 million for the three
months ended September 30, 2008, down from
$428 million for the three months ended September 30,
2007 primarily due to a reduction in our short-term performance
compensation during the third quarter of 2008 as well as a
decrease in our use of consultants throughout 2008. As a
percentage of our average total mortgage portfolio,
administrative expenses declined to 5.6 basis points for
the three months ended September 30, 2008, from
8.7 basis points for the three months ended
September 30, 2007.
For the three months ended September 30, 2008 and 2007, we
recognized effective tax rates of (46)% and 44%, respectively.
See NOTE 12: INCOME TAXES to our consolidated
financial statements for additional information about how our
effective tax rate is determined.
Summary
of Financial Results for the Nine Months Ended
September 30, 2008
Effective January 1, 2008, we adopted SFAS 157 which
defines fair value, establishes a framework for measuring fair
value in financial statements and expands required disclosures
about fair value measurements. In connection with the adoption
of SFAS 157, we changed our method for determining the fair
value of our newly-issued guarantee obligations. Under
SFAS 157, the initial fair value of our guarantee
obligation equals the fair value of compensation received,
consisting of management and guarantee fees and other upfront
compensation, in the related securitization transaction, which
is a practical expedient for determining fair value. As a
result, prospectively from January 1, 2008, we no longer
record estimates of deferred gains or immediate, day
one losses on most guarantees. Our adoption of
SFAS 157 did not result in an immediate recognition of gain
or loss, but the prospective change had a positive impact on our
financial results for the three and nine months ended
September 30, 2008.
Also effective January 1, 2008, we adopted
SFAS No. 159, The Fair Value Option for
Financial Assets and Financial Liabilities, Including an
Amendment of FASB Statement No. 115, or
SFAS 159 or the fair value option, which permits companies
to choose to measure certain eligible financial instruments at
fair value that are not currently required to be measured at
fair value in order to mitigate volatility in reported earnings
caused by measuring assets and liabilities differently. We
initially elected the fair value option for certain
available-for-sale
mortgage-related securities and our foreign-currency denominated
debt. Upon adoption of SFAS 159, we recognized a
$1.0 billion after-tax increase to our retained earnings at
January 1, 2008. We may continue to elect the fair value
option for certain securities to mitigate interest-rate aspects
of our guarantee asset and certain non-hedge designated
pay-fixed swaps.
Net loss was $26.3 billion and $642 million for the
nine months ended September 30, 2008 and 2007,
respectively. Net loss increased during the nine months ended
September 30, 2008 compared to the same periods of 2007,
principally due to the establishment of a partial valuation
allowance against our deferred tax asset, increased losses on
investment activity primarily related to impairment losses on
certain non-agency mortgage-related securities, increased
derivative losses, increased losses on guarantee asset as well
as an increase in normal credit-related expenses, which consist
of our provision for credit losses and REO operations expense.
In the third quarter of 2008, we recorded a $14.3 billion
non-cash charge related to the establishment of a partial
valuation allowance against our deferred tax asset. The
valuation allowance excludes the portion of the deferred tax
asset representing the tax effect of unrealized losses on
available-for-sale securities recorded in AOCI, which management
has the intent and ability to hold until recovery of the
unrealized loss amounts. These loss and expense items for the
nine months ended September 30, 2008 were partially offset
by higher net interest income and income on our guarantee
obligation as well as lower losses on certain credit guarantees
due to our use of the practical expedient for determining fair
value under SFAS 157 and lower losses on loans purchased
due to changes in our operational practice of purchasing
delinquent loans out of PC securitization pools.
Net interest income was $4.2 billion for the nine months
ended September 30, 2008, compared to $2.3 billion for
the nine months ended September 30, 2007. The 2% annualized
limitation on the growth of our retained portfolio established
by FHFA expired during March of 2008 as we became a timely filer
of our financial statements. As a result, we were able to hold
higher amounts of fixed-rate agency mortgage-related securities
at significantly wider spreads relative to our funding costs
during the nine months ended September 30, 2008.
Non-interest income (loss) was $(10.4) billion and
$1.6 billion for the nine months ended September 30,
2008 and 2007, respectively. The decrease in non-interest income
in the 2008 period was primarily due to higher losses on
investment activity, higher derivative losses excluding
foreign-currency related effects, and higher losses on our
guarantee asset. These losses were partially offset by increased
income on our guarantee obligation and higher management and
guarantee income in the 2008 period. Non-interest expense for
the nine months ended September 30, 2008 and 2007 totaled
$13.5 billion and $5.8 billion, respectively, and
included normal credit-related expenses of $10.3 billion
and $2.1 billion, respectively. Non-interest expense,
excluding normal credit-related expenses, for the nine
months ended September 30, 2008 and 2007 totaled
$3.2 billion and $3.7 billion, respectively. The
decline in non-interest expense, excluding normal credit-related
expenses, was primarily due to the reductions in losses on
certain credit guarantees and losses on loans purchased and was
partially offset by the $1.1 billion loss on the Lehman
short-term lending transactions. Administrative expenses totaled
$1.1 billion for the nine months ended September 30,
2008, down from $1.3 billion for the nine months ended
September 30, 2007. As a percentage of our average total
mortgage portfolio, administrative expenses declined to 6.8
basis points for the nine months ended September 30, 2008,
from 8.8 basis points for the nine months ended
September 30, 2007.
For the nine months ended September 30, 2008 and 2007, we
recognized effective tax rates of (33)% and 66%, respectively.
See NOTE 12: INCOME TAXES to our consolidated
financial statements for additional information about how our
effective tax rate is determined.
Segments
We manage our business through three reportable segments subject
to the conduct of our business under the direction of the
Conservator, as discussed above under Managing Our
Business During Conservatorship Our
Objectives.:
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Investments;
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Single-family Guarantee; and
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Multifamily.
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Certain activities that are not part of a segment are included
in the All Other category. We manage and evaluate the
performance of the segments and All Other using a Segment
Earnings approach. Segment Earnings differs significantly from,
and should not be used as a substitute for, net income (loss) as
determined in accordance with GAAP. There are important
limitations to using Segment Earnings as a measure of our
financial performance. Among them, our regulatory capital
measures are based on our GAAP results, as is the need to obtain
funding under the Purchase Agreement. Segment Earnings adjusts
for the effects of certain gains and losses and
mark-to-fair-value items, which depending on market
circumstances, can significantly affect, positively or
negatively, our GAAP results and have in recent periods caused
us to record significant GAAP net losses. GAAP net losses will
adversely impact our GAAP stockholders equity (deficit),
as well as our need for funding under the Purchase Agreement,
regardless of results reflected in Segment Earnings. For a
summary and description of our financial performance on a
segment basis, see CONSOLIDATED RESULTS OF
OPERATIONS Segment Earnings and
NOTE 16: SEGMENT REPORTING to our consolidated
financial statements.
In managing our business, we present the operating performance
of our segments using Segment Earnings. Segment Earnings present
our results on an accrual basis as the cash flows from our
segments are earned over time. The objective of Segment Earnings
is to present our results in a manner more consistent with our
business models. The business model for our investment activity
is one where we generally buy and hold our investments in
mortgage-related assets for the long term, fund our investments
with debt and use derivatives to minimize interest rate risk,
thus generating net interest income in line with our return on
equity objectives. We believe it is meaningful to measure the
performance of our investment business using long-term returns,
not short-term value. The business model for our credit
guarantee activity is one where we are a long-term guarantor in
the conforming mortgage markets, manage credit risk and generate
guarantee and credit fees, net of incurred credit losses. As a
result of these business models, we believe that this
accrual-based metric is a meaningful way to present our results
as actual cash flows are realized, net of credit losses and
impairments. We believe Segment Earnings provides us with a view
of our financial results that is more consistent with our
business objectives and helps us better evaluate the performance
of our business, both from period-to-period and over the longer
term.
Table 3 presents Segment Earnings (loss) by segment and the
All Other category and includes a reconciliation of Segment
Earnings (loss) to net income (loss) prepared in accordance with
GAAP.
Table 3
Reconciliation of Segment Earnings (Loss) to GAAP Net Income
(Loss)
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|
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Three Months Ended
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Nine Months Ended
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September 30,
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September 30,
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2008
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2007
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2008
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2007
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(in millions)
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Segment Earnings (loss) after taxes:
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|
|
|
|
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|
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|
|
|
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Investments
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$
|
(1,119
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)
|
|
$
|
503
|
|
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$
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(213
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)
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|
$
|
1,588
|
|
Single-family Guarantee
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|
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(3,501
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)
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(483
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)
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(5,347
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)
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(130
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)
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Multifamily
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135
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|
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83
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351
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292
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All Other
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(6
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)
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(45
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)
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134
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|
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(104
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)
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|
|
|
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Total Segment Earnings (loss), net of taxes
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(4,491
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)
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58
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(5,075
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)
|
|
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1,646
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|
|
|
|
|
|
|
|
|
|
|
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Reconciliation to GAAP net loss:
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|
|
|
|
|
|
|
|
|
|
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Derivative- and foreign-currency denominated debt-related
adjustments
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|
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(1,292
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)
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(1,725
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)
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|
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(1,959
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)
|
|
|
(3,278
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)
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Credit guarantee-related adjustments
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|
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(1,076
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)
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|
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(925
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)
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568
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|
|
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(596
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)
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Investment sales, debt retirements and fair value-related
adjustments
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(7,717
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)
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|
659
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|
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(9,288
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)
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349
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|
Fully taxable-equivalent adjustments
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(103
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)
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(98
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)
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(318
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)
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|
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(288
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)
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|
|
|
|
|
|
|
|
|
|
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Total pre-tax adjustments
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(10,188
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)
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|
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(2,089
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)
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|
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(10,997
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)
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(3,813
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)
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Tax-related
adjustments(1)
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(10,616
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)
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793
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|
|
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(10,195
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)
|
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1,525
|
|
|
|
|
|
|
|
|
|
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|
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Total reconciling items, net of taxes
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|
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(20,804
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)
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|
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(1,296
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)
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|
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(21,192
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)
|
|
|
(2,288
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)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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GAAP net loss
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$
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(25,295
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)
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|
$
|
(1,238
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)
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$
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(26,267
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)
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$
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(642
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)
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|
|
|
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(1)
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Includes a non-cash charge related
to the establishment of a partial valuation allowance against
our deferred tax assets of $14.3 billion that is not
included in Segment Earnings.
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Investments
Segment
Our Investments segment is responsible for our investment
activity in mortgages and mortgage-related securities, other
investments, debt financing and managing our interest-rate risk,
liquidity and capital positions. We invest principally in
mortgage-related securities and single-family mortgage loans
through our mortgage-related investment portfolio.
We seek to manage our mortgage-related investments portfolio to
generate positive returns while maintaining a disciplined
approach to interest-rate risk and capital management. We seek
to accomplish this objective through opportunistic purchases,
sales and restructurings of mortgage assets and repurchases of
liabilities. Although we are primarily a buy-and-hold investor
in mortgage assets, we may sell assets that are no longer
expected to produce desired results, to reduce risk, to respond
to capital constraints, to provide liquidity or to structure
certain transactions in order to improve our returns. We
currently do not plan to sell assets at a loss. We estimate our
expected investment returns using an option-adjusted spread, or
OAS, approach. Our Investments segment activities may also
include the purchase of mortgages and mortgage-related
securities with less attractive investment returns and with
incremental risk in order to achieve our mission. Additionally,
we maintain a cash and non-mortgage-related securities
investment portfolio in this segment to help manage our
liquidity needs.
Investments segment performance highlights for the three and
nine months ended September 30, 2008:
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Segment Earnings (loss) decreased to $(1.1) billion in the
third quarter of 2008 compared to Segment Earnings of
$503 million in the third quarter of 2007. For the nine
months ended September 30, 2008, Segment Earnings (loss)
decreased to $(213) million compared to Segment Earnings of
$1.6 billion during the nine months ended
September 30, 2007.
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Segment Earnings net interest yield was 72 basis points in
the third quarter of 2008, an increase of 19 basis points
as compared to the third quarter of 2007 due to both the
purchase of fixed-rate assets at wider spreads relative to our
funding costs and the replacement of higher cost short- and
long-term debt with lower cost debt issuances, which was
partially offset by lower returns on floating rate securities.
Segment Earnings net interest yield increased 5 basis
points in the nine months ended September 30, 2008 compared
to the nine months ended September 30, 2007 to
58 basis points, due to wider spreads as a result of lower
funding costs in the second and third quarters of 2008 and the
replacement of higher cost short- and long-term debt with lower
cost debt issuances. Also contributing to the increase was the
amortization of gains on certain futures positions that matured
in March 2008.
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During the third quarter of 2008, we recognized security
impairments in Segment Earnings of $1.9 billion that
reflect expected credit principal losses. In contrast,
non-credit related security impairments of $7.2 billion are
not included in Segment Earnings during the third quarter of
2008.
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Segment Earnings non-interest expense for the third quarter of
2008 includes a loss of $1.1 billion on investment
transactions related to the Lehman short-term lending
transactions. For more information on the Lehman short-term
lending transactions, see CONSOLIDATED RESULTS OF
OPERATIONS Securities Administrator Loss on
Investment Activity.
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The unpaid principal balance of our mortgage-related investment
portfolio increased 0.8% to $669 billion at
September 30, 2008 compared to $663 billion at
December 31, 2007. Agency securities comprised
approximately 65% of the unpaid principal balance of the
mortgage-related investment portfolio at September 30, 2008
versus 61% at December 31, 2007.
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Over the course of the past year, worldwide financial markets
have experienced unprecedented levels of volatility. This has
been particularly true over the latter half of the third quarter
of 2008 as market participants struggled to digest the new
government initiatives, including our conservatorship. In this
environment where demand for debt instruments weakened
considerably, the debt funding markets are sometimes frozen, and
our ability to access both the term and callable debt markets
has been limited. As a result, toward the latter part of the
third quarter and continuing into the fourth quarter, we have
relied increasingly on the issuance of shorter-term debt at
higher-interest rates. While we use interest rate derivatives to
economically hedge a significant portion of our interest rate
exposure, we are exposed to risks relating to both our ability
to issue new debt when our outstanding debt matures and to the
variability in interest costs on our new issuances of debt,
which directly impacts our Investments Segment earnings.
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The objectives set forth for us under our charter and
conservatorship may negatively impact our Investments segment
results. For example, the planned reduction in our retained
portfolio balance to $250 billion, through successive
annual 10% declines commencing in 2010, will result in an impact
on our net interest income. This may cause our Investments
segment results to decline.
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Single-family
Guarantee Segment
In our Single-family Guarantee segment, we securitize
substantially all of the newly or recently originated
single-family mortgages we have purchased and issue
mortgage-related securities called PCs that can be sold to
investors or held by us in our Investments segment. We guarantee
the payment of principal and interest on our single-family PCs,
including those held in our retained portfolio, in exchange for
management and guarantee fees, which are paid on a monthly basis
as a percentage of the underlying unpaid principal balance of
the loans, and initial upfront cash payments referred to as
credit or delivery fees. Earnings for this segment consist of
management and guarantee fee revenues, including amortization of
upfront payments, and trust management fees, less the related
credit costs (i.e., provision for credit losses) and
operating expenses. Also included is the interest earned on
assets held in the Investments segment related to single-family
guarantee activities, net of allocated funding costs.
Single-family Guarantee segment performance highlights for the
three and nine months ended September 30, 2008
and 2007:
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Segment Earnings (loss) decreased to $(3.5) billion for the
three months ended September 30, 2008 compared to earnings
(loss) of $(483) million for the three months ended
September 30, 2007. Segment Earnings (loss) decreased to
$(5.3) billion for the nine months ended September 30,
2008 compared to $(130) million for the nine months ended
September 30, 2007.
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Segment Earnings provision for credit losses for the
Single-family Guarantee segment increased to $5.9 billion
for the three months ended September 30, 2008 from
$1.4 billion for the three months ended September 30,
2007. Segment Earnings provision for credit losses for the
Single-family Guarantee segment increased to $9.9 billion
for the nine months ended September 30, 2008 from
$2.2 billion for the nine months ended September 30,
2007.
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Realized single-family credit losses were 27.9 basis points
of the average single-family credit guarantee portfolio for the
three months ended September 30, 2008, compared to
3.0 basis points for the three months ended
September 30, 2007. Realized single-family credit losses
for the nine months ended September 30, 2008 were
19.4 basis points compared to 2.2 basis points for the
nine months ended September 30, 2007.
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We implemented several delivery fee increases that were
effective at varying dates between March and June 2008, or as
our customers contracts permitted. These increases
included a 25 basis point fee assessed on all loans issued
through flow-business channels, as well as higher or new
delivery fees for certain mortgage products and for mortgages
deemed to be higher-risk based primarily on property type, loan
purpose, loan-to-value, or LTV ratio
and/or
borrower credit scores. Certain of our planned increases in
delivery fees that were to be implemented in November 2008 have
been cancelled. Our efforts to provide increased support to the
mortgage market will likely affect our future guarantee pricing
decisions.
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The single-family credit guarantee portfolio increased by 2% and
18% on an annualized basis for the three months ended
September 30, 2008 and 2007, respectively.
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Average rates of Segment Earnings management and guarantee fee
income for the Single-family Guarantee segment increased to
19.4 basis points for the three months ended
September 30, 2008 compared to 18.1 basis points for
the three months ended September 30, 2007. Average rates of
Segment Earnings management and guarantee fee income
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for the Single-family Guarantee segment increased to
19.5 basis points for the nine months ended
September 30, 2008 compared to 18.0 basis points for
the nine months ended September 30, 2007.
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The objectives set forth for us under our charter and
conservatorship may negatively impact our Single-family
Guarantee segment results. For example our objective of
assisting the mortgage market may cause us to change our pricing
strategy in our core mortgage loan purchase or guarantee
business, which may cause our Single-Family guarantee segment
results to suffer.
|
Multifamily
Segment
Our Multifamily segment activities include purchases of
multifamily mortgages for our retained portfolio and guarantees
of payments of principal and interest on multifamily
mortgage-related securities and mortgages underlying multifamily
housing revenue bonds. The assets of the Multifamily segment
include mortgages that finance multifamily rental apartments.
Our Multifamily segment also includes certain equity investments
in various limited partnerships that sponsor low- and
moderate-income multifamily rental apartments, which benefit
from low-income housing tax credits, or LIHTC. These activities
support our mission to supply financing for affordable rental
housing. Also included is the interest earned on assets held in
our Investments segment related to multifamily guarantee
activities, net of allocated funding costs.
Multifamily segment performance highlights for the three and
nine months ended September 30, 2008 and 2007:
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Segment Earnings increased 63% to $135 million for the
three months ended September 30, 2008 versus
$83 million for the three months ended September 30,
2007. Segment Earnings increased 20% to $351 million for
the nine months ended September 30, 2008 versus
$292 million for the nine months ended September 30,
2007.
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Segment Earnings net interest income was $120 million for
the three months ended September 30, 2008, an increase of
$32 million versus the three months ended
September 30, 2007 as a result of an increase in interest
income on mortgage loans due to higher average balances,
partially offset by a decrease in prepayment fees, or yield
maintenance income. Segment Earnings net interest income was
$293 million for the nine months ended September 30,
2008, a decline of $12 million versus the nine months ended
September 30, 2007.
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Mortgage purchases into our multifamily loan portfolio increased
approximately 56% for the three months ended September 30,
2008 to $5.2 billion from $3.3 billion for the three
months ended September 30, 2007. Mortgage purchases into
our multifamily loan portfolio increased approximately 52% for
the nine months ended September 30, 2008 to
$13.4 billion from $8.8 billion for the nine months
ended September 30, 2007.
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Unpaid principal balance of our multifamily loan portfolio
increased to $68.3 billion at September 30, 2008 from
$57.6 billion at December 31, 2007 as market
fundamentals continued to provide opportunities to purchase
loans to be held in our portfolio.
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Segment Earnings provision for credit losses for the Multifamily
segment totaled $14 million and $30 million for the
three and nine months ended September 30, 2008,
respectively. Segment Earnings provision for credit losses for
the Multifamily segment totaled $16 million and
$20 million for the three and nine months ended
September 30, 2007, respectively.
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The objectives set forth for us under our charter and
conservatorship may negatively impact our Multifamily segment
results. For example, our objective of assisting the mortgage
market may cause us to change our pricing strategy in our core
mortgage loan purchase or guarantee business, which may cause
our Multifamily segment results to suffer.
|
Capital
Management
The conservatorship resulted in changes to the assessment of our
capital adequacy and our management of capital. On
October 9, 2008, FHFA announced that it was suspending
capital classification of us during conservatorship in light of
the Purchase Agreement. Concurrent with this announcement, FHFA
classified us as undercapitalized as of June 30, 2008 based
on discretionary authority provided by statute. FHFA noted that
although our capital calculations as of June 30, 2008
reflected that we met the statutory and FHFA-directed
requirements for capital, the continued market downturn in July
and August of 2008 raised significant questions about the
sufficiency of our capital. Factors cited by FHFA leading to the
downgrade in our capital classification and the need for
conservatorship included (a) our accelerated safety and
soundness weaknesses, especially with regard to our credit risk,
earnings outlook and capitalization, (b) continued and
substantial deterioration in equity, debt and mortgage-related
securities market conditions, (c) our current and projected
financial performance, (d) our inability to raise capital
or issue debt according to normal practices and prices,
(e) our critical importance in supporting the
U.S. residential mortgage markets and (f) concerns
over the proportion of intangible assets as part of our core
capital.
FHFA will continue to closely monitor our capital levels, but
the existing statutory and FHFA-directed regulatory capital
requirements will not be binding during conservatorship. We will
continue to provide our regular submissions to FHFA on both
minimum and risk-based capital. FHFA will publish relevant
capital figures (minimum capital requirement, core capital, and
GAAP net worth) but does not intend to publish our critical
capital, risk-based capital or subordinated debt levels during
conservatorship. Additionally, FHFA announced it will engage in
rule-making to revise our minimum capital and risk-based capital
requirements. See NOTE 9: REGULATORY CAPITAL to
our consolidated financial statements for our minimum capital
requirement, core capital and GAAP net worth results as of
September 30, 2008.
FHFA has directed us to focus our risk and capital management on
maintaining a positive balance of GAAP stockholders equity
while returning to long-term profitability. FHFA is directing us
to manage to a positive stockholders equity position in
order to reduce the likelihood that we will need to make a draw
on the Purchase Agreement with Treasury. The Purchase Agreement
provides that, if FHFA determines as of quarter end that our
liabilities have exceeded our assets under GAAP, Treasury will
contribute funds to us in an amount equal to the difference
between such liabilities and assets; a higher amount may be
drawn if Treasury and Freddie Mac mutually agree that the draw
should be increased beyond the level by which liabilities exceed
assets under GAAP. The maximum aggregate amount that may be
funded under the Purchase Agreement is $100 billion. At
September 30, 2008, our liabilities exceeded our assets
under GAAP by $(13.7) billion while our stockholders
equity (deficit) totaled $(13.8) billion. The Director of
FHFA has submitted a request under the Purchase Agreement in the
amount of $13.8 billion to Treasury. Under the Reform Act,
FHFA must place us into receivership if our assets are less than
our obligations for a period of 60 days. If this were to
occur, we would be required to obtain funding from Treasury
pursuant to its commitment under the Purchase Agreement in order
to avoid a mandatory trigger of receivership under the Reform
Act.
The Purchase Agreement places several restrictions on our
business activities, which, in turn, affect our management of
capital. For instance, our retained portfolio may not exceed
$850 billion as of December 31, 2009 and must then
decline by 10% per year until it reaches $250 billion. We
are also unable to issue capital stock of any kind without
Treasurys prior approval, other than in connection with
the common stock warrant issued to Treasury under the Purchase
Agreement or binding agreements in effect on the date of the
Purchase Agreement. In addition, on September 7, 2008, the
Director of FHFA announced the elimination of dividends on our
common and preferred stock, excluding the senior preferred
stock, which will accrue quarterly cumulative dividends at a
rate of 10% per year or 12% in any quarter in which dividends
are not paid in cash until all dividend accruals have been paid
in cash. See Legislative and Regulatory Matters for
additional information regarding covenants under the Purchase
Agreement.
A variety of factors could materially affect the level and
volatility of our GAAP stockholders equity (deficit) in
future periods, requiring us to make additional draws under the
Purchase Agreement. Key factors include continued deterioration
in the housing market, which could increase credit expenses;
adverse changes in interest rates, the yield curve, implied
volatility or mortgage OAS, which could increase realized and
unrealized mark-to-market losses recorded in earnings or AOCI;
dividend obligations under the Purchase Agreement; establishment
of a valuation allowance for our remaining deferred tax assets;
changes in accounting practices or standards; or changes in
business practices resulting from legislative and regulatory
developments or mission fulfillment activities or as directed by
the Conservator. At September 30, 2008, our remaining
deferred tax assets, which could be subject to a valuation
allowance in future periods, totaled $11.9 billion. In
addition, during October 2008 mortgage spreads widened
significantly, resulting in additional mark-to-market losses
included in stockholders equity (deficit). As a result of
the factors described above, it is difficult for us to manage
our stockholders equity (deficit). Thus, it may be
difficult for us to meet the objective of managing to a positive
stockholders equity (deficit).
If we need additional draws under the Purchase Agreement, this
would result in a considerably higher dividend obligation for
us. Higher dividends combined with potentially substantial
commitment fees payable to Treasury starting in 2010 and limited
flexibility to pay down capital draws will have a significant
adverse impact on our future financial position and net worth.
For additional information concerning the potential impact of
the Purchase Agreement, including taking additional large draws,
see RISK FACTORS.
Liquidity
Since early July 2008, we have experienced significant
deterioration in our access to the unsecured medium- and
long-term debt markets and in the yields on our debt as compared
to relevant market benchmarks. Consistent demand for our debt
securities has decreased for our term debt and callable debt,
and the spreads we must pay on our new issuances of short-term
debt securities increased.
There are many factors contributing to the reduced demand for
our debt securities, including continued severe market
disruptions, market concerns about our capital position and the
future of our business (including its future profitability,
future structure, regulatory actions and agency status) and the
extent of U.S. government support for our debt securities. In
addition, the various U.S. government programs are still
being digested by market participants creating uncertainty as to
whether competing obligations of other companies are more
attractive investments than our debt securities.
As noted above, due to our limited ability to issue long-term
debt, we have relied increasingly on short-term debt to fund our
purchases of mortgage assets and to refinance maturing debt. As
a result, we are required to refinance our debt on a more
frequent basis, exposing us to an increased risk of insufficient
demand, increasing interest rates and adverse credit market
conditions. It is unclear when these market conditions will
reverse allowing us access to the longer term debt
markets. See LIQUIDITY AND CAPITAL RESOURCES
Liquidity for more information on our debt funding
activities and risks posed by our current market challenges and
Part II Item 1A Risk
Factors for a discussion of the risks to our business
posed by our reliance on the issuance of debt to fund our
operations.
Fair
Value Results
Our consolidated fair value measurements are a component of our
risk management processes, as we use daily estimates of the
changes in fair value to calculate our Portfolio Market Value
Sensitivity, or PMVS, and duration gap measures.
During the three months ended September 30, 2008, the fair
value of net assets, before capital transactions, decreased by
$36.7 billion compared to a $8.4 billion decrease
during the three months ended September 30, 2007. Included
in the reduction of the fair value of net assets is
$19.4 billion related to our partial valuation allowance
for our deferred tax asset for the three months ended
September 30, 2008.
Our attribution of changes in the fair value of net assets
relies on models, assumptions and other measurement techniques
that evolve over time. The following attribution of changes in
fair value reflects our current estimate of the items presented
(on a pre-tax basis) and excludes the effect of returns on
capital and administrative expenses.
During the three months ended September 30, 2008, our
investment activities decreased fair value by approximately
$12.2 billion. This estimate includes declines in fair
value of approximately $5.3 billion attributable to the net
widening of mortgage-to-debt OAS. Of this amount, approximately
$7.9 billion was related to the impact of the net
mortgage-to-debt OAS widening on our portfolio of non-agency
mortgage-related securities with a limited, but increasing
amount attributable to the risk of future losses, as well as an
$11.1 billion decrease in negative fair value from our
preferred stock. The reduction in fair value was partially
offset by our higher core spread income. Core spread income on
our retained portfolio is a fair value estimate of the net
current period accrual of income from the spread between
mortgage-related investments and debt, calculated on an
option-adjusted basis.
During the three months ended September 30, 2007, our
investment activities decreased fair value by approximately
$6.2 billion. This estimate includes declines in fair value
of approximately $8.0 billion attributable to the net
widening of mortgage-to-debt OAS. Of this amount, approximately
$3.5 billion was related to the impact of the net
mortgage-to-debt OAS widening on our portfolio of non-agency
mortgage-related securities.
The impact of mortgage-to-debt OAS widening during the three
months ended September 30, 2008 decreased the current fair
value of our investment activities. Due to the relatively wide
OAS levels for purchases during the period, there is a
likelihood that, in future periods, we will be able to recognize
core-spread income from our investment activities at a higher
spread level than historically. We estimate that for the three
months ended September 30, 2008, we will recognize core
spread income at a net mortgage-to-debt OAS level of
approximately 190 to 210 basis points in the long run, as
compared to approximately 60 to 70 basis points estimated
for the three months ended September 30, 2007. As market
conditions change, our estimate of expected fair value gains
from OAS may also change, leading to significantly different
fair value results.
During the three months ended September 30, 2008, our
credit guarantee activities, including our single-family whole
loan credit exposure, decreased fair value by an estimated
$8.1 billion. This estimate includes an increase in the
single-family guarantee obligation of approximately
$6.3 billion, primarily attributable to an increase in
expected default costs.
During the three months ended September 30, 2007, our
credit guarantee activities decreased fair value by an estimated
$6.4 billion. This estimate includes an increase in the
single-family guarantee obligation of approximately
$7.6 billion, primarily attributable to the markets
pricing of mortgage credit. This increase in the single-family
guarantee obligation was partially offset by a fair value
increase in the single-family guarantee asset of approximately
$0.5 billion and cash receipts primarily related to
management and guarantee fees and other up-front fees related to
new business.
See CONSOLIDATED FAIR VALUE BALANCE SHEETS ANALYSIS
for additional information regarding attribution of changes in
the fair value of net assets for the nine months ended
September 30, 2008.
Legislative
and Regulatory Matters
Conservatorship
and Treasury Agreements
Conservatorship
On September 6, 2008, FHFA, our safety, soundness and
mission regulator, was appointed as our Conservator when the
Director of FHFA placed us into conservatorship. The
conservatorship is a statutory process designed to preserve and
conserve our assets and property, and put the company in a sound
and solvent condition. As Conservator, FHFA has assumed the
powers of our Board of Directors and management, as well as the
powers of our stockholders. The powers of the Conservator under
the Reform Act are summarized below.
The conservatorship has no specified termination date. In a Fact
Sheet issued by FHFA on September 7, 2008, FHFA indicated
that the Director of FHFA will issue an order terminating the
conservatorship upon the Directors determination that the
Conservators plan to restore the company to a safe and
solvent condition has been completed successfully. The
FHFAs
September 7, 2008 Fact Sheet also indicated that, at
present, there is no time frame that can be given as to when the
conservatorship may end.
General
Powers of the Conservator Pursuant to the Reform
Act
Upon its appointment, the Conservator immediately succeeded to
all rights, titles, powers and privileges of Freddie Mac, and of
any stockholder, officer or director of Freddie Mac with respect
to Freddie Mac and its assets, and succeeded to the title to all
books, records and assets of Freddie Mac held by any other legal
custodian or third party. The Conservator has the power to take
over our assets and operate our business with all the powers of
our stockholders, directors and officers, and to conduct all
business of the company.
The Conservator may take any actions it determines are necessary
and appropriate to carry on our business and preserve and
conserve our assets and property. The Conservators powers
include the ability to transfer or sell any of our assets or
liabilities (subject to limitations and post-transfer notice
provisions for transfers of qualified financial contracts, as
defined below under Special Powers of the
Conservator Security Interests Protected; Exercise
of Rights Under Qualified Financial Contracts) without any
approval, assignment of rights or consent. The Reform Act,
however, provides that mortgage loans and mortgage-related
assets that have been transferred to a Freddie Mac
securitization trust must be held for the beneficial owners of
the trust and cannot be used to satisfy our general creditors.
In connection with any sale or disposition of our assets, the
Conservator must conduct its operations to maximize the net
present value return from the sale or disposition, to minimize
the amount of any loss realized, and to ensure adequate
competition and fair and consistent treatment of offerors. The
Conservator is required to pay all of our valid obligations that
were due and payable on September 6, 2008 (the date we were
placed into conservatorship), but only to the extent that the
proceeds realized from the performance of contracts or sale of
our assets are sufficient to satisfy those obligations. In
addition, the Conservator is required to maintain a full
accounting of the conservatorship and make its reports available
upon request to stockholders and members of the public.
We remain liable for all of our obligations relating to our
outstanding debt and mortgage-related securities. In a Fact
Sheet dated September 7, 2008, FHFA indicated that our
obligations will be paid in the normal course of business during
the conservatorship.
Special
Powers of the Conservator Under the Reform Act
Disaffirmance
and Repudiation of Contracts
The Conservator may disaffirm or repudiate contracts (subject to
certain limitations for qualified financial contracts) that we
entered into prior to its appointment as Conservator if it
determines, in its sole discretion, that performance of the
contract is burdensome and that disaffirmation or repudiation of
the contract promotes the orderly administration of our affairs.
The Reform Act requires FHFA to exercise its right to disaffirm
or repudiate most contracts within a reasonable period of time
after its appointment as Conservator. As of November 14,
2008, the Conservator had not determined whether or not such
reasonable period of time had passed for purposes of the
applicable provisions of the Reform Act.
As of November 14, 2008, the Conservator has advised us
that it has not disaffirmed or repudiated any contracts we
entered into prior to its appointment as Conservator. We can,
and have continued to, enter into and enforce contracts with
third parties.
The Conservator has advised us that it has no intention of
repudiating any guarantee obligation relating to Freddie
Macs mortgage-related securities because it views
repudiation as incompatible with the goals of the
conservatorship. In addition, as noted above, the Conservator
cannot use mortgage loans or mortgage-related assets that have
been transferred to a securitization trust to satisfy the
general creditors of the company. The Conservator must hold
these assets for the beneficial owners of the related Freddie
Mac mortgage-related securities.
In general, the liability of the Conservator for the
disaffirmance or repudiation of any contract is limited to
actual direct compensatory damages determined as of
September 6, 2008, which is the date we were placed into
conservatorship. The liability of the Conservator for the
disaffirmance or repudiation of a qualified financial contract
is limited to actual direct compensatory damages determined as
of the date of the disaffirmance or repudiation. If the
Conservator disaffirms or repudiates any lease to or from us, or
any contract for the sale of real property, the Reform Act
specifies the liability of the Conservator.
Limitations
on Enforcement of Contractual Rights by Counterparties
The Reform Act provides that the Conservator may enforce most
contracts entered into by us, notwithstanding any provision of
the contract that provides for termination, default,
acceleration, or exercise of rights upon the appointment of, or
the exercise of rights or powers by, a conservator.
Security
Interests Protected; Exercise of Rights Under Qualified
Financial Contracts
Notwithstanding the Conservators powers described above,
the Conservator must recognize legally enforceable or perfected
security interests, except where such an interest is taken in
contemplation of our insolvency or with the intent to hinder,
delay or defraud us or our creditors. In addition, the Reform
Act provides that no person will be stayed or prohibited from
exercising specified rights in connection with qualified
financial contracts, including termination or acceleration
(other than solely by reason of, or incidental to, the
appointment of the Conservator), rights of offset, and rights
under any security agreement or arrangement or other credit
enhancement relating to such contract. The term qualified
financial contract means any securities contract, commodity
contract, forward contract, repurchase agreement, swap agreement
and any similar agreement, as determined by FHFA.
Avoidance
of Fraudulent Transfers
The Conservator may avoid, or refuse to recognize, a transfer of
any property interest of Freddie Mac or of any of our debtors,
and also may avoid any obligation incurred by Freddie Mac or by
any debtor of Freddie Mac, if the transfer or obligation was
made: (1) within five years of September 6, 2008; and
(2) with the intent to hinder, delay, or defraud Freddie
Mac, FHFA, the Conservator or, in the case of a transfer in
connection with a qualified financial contract, our creditors.
To the extent a transfer is avoided, the Conservator may
recover, for our benefit, the property or, by court order, the
value of that property from the initial or subsequent
transferee, unless the transfer was made for value and in good
faith. These rights are superior to any rights of a trust or any
other party, other than a federal agency, under the U.S.
bankruptcy code.
Modification
of Statutes of Limitations
Under the Reform Act, notwithstanding any provision of any
contract, the statute of limitations with regard to any action
brought by the Conservator is: (1) for claims relating to a
contract, the longer of six years or the applicable period under
state law; and (2) for tort claims, the longer of three
years or the applicable period under state law, in each case,
from the later of September 6, 2008 or the date on which
the cause of action accrues. In addition, notwithstanding the
state law statute of limitation for tort claims, the Conservator
may bring an action for any tort claim that arises from fraud,
intentional misconduct resulting in unjust enrichment, or
intentional misconduct resulting in substantial loss to us, if
the states statute of limitations expired not more than
five years before September 6, 2008.
Suspension
of Legal Actions
In any judicial action or proceeding to which we are or become a
party, the Conservator may request, and the applicable court
must grant, a stay for a period not to exceed 45 days.
Treatment
of Breach of Contract Claims
Any final and unappealable judgment for monetary damages against
the Conservator for breach of an agreement executed or approved
in writing by the Conservator will be paid as an administrative
expense of the Conservator.
Attachment
of Assets and Other Injunctive Relief
The Conservator may seek to attach assets or obtain other
injunctive relief without being required to show that any
injury, loss or damage is irreparable and immediate.
Subpoena
Power
The Reform Act provides the Conservator, with the approval of
the Director of FHFA, with subpoena power for purposes of
carrying out any power, authority or duty with respect to
Freddie Mac.
Current
Management of the Company Under Conservatorship
As noted above, as our Conservator, FHFA has assumed the powers
of our Board of Directors. Accordingly, the current Board of
Directors acts with neither the power nor the duty to manage,
direct or oversee our business and affairs. The Conservator has
indicated that it intends to appoint a full Board of Directors
to which it will delegate specified roles and responsibilities.
Until FHFA has made these delegations, our Board of Directors
has no power to determine the general policies that govern our
operations, to create committees and elect the members of those
committees, to select our officers, to manage, direct or oversee
our business and affairs, or to exercise any of the other powers
of the Board of Directors that are set forth in our charter and
bylaws.
FHFA, in its role as Conservator, has overall management
authority over our business. During the conservatorship, the
Conservator has delegated authority to management to conduct
day-to-day
operations so that the company can continue to operate in the
ordinary course of business. The Conservator retains the
authority to withdraw its delegations to management at any time.
The Conservator is working actively with management to address
and determine the strategic direction for the enterprise, and in
general has retained final decision-making authority in areas
regarding: significant impacts on operational, market,
reputational or credit risk; major accounting determinations,
including policy changes; the creation of subsidiaries or
affiliates and transacting with them; significant litigation;
setting executive compensation; retention of external auditors;
significant mergers and acquisitions; and any other matters the
Conservator believes are strategic or critical to the enterprise
in order for the Conservator to fulfill its obligations during
conservatorship.
Treasury
Agreements
The Reform Act granted Treasury temporary authority (through
December 31, 2009) to purchase any obligations and
other securities issued by Freddie Mac on such terms and
conditions and in such amounts as Treasury may determine, upon
mutual agreement between Treasury and Freddie Mac. As of
November 14, 2008, Treasury had used this authority as
follows:
Agreement
and Related Issuance of Senior Preferred Stock and Common Stock
Warrant
Purchase
Agreement
On September 7, 2008, we, through FHFA, in its capacity as
Conservator, and Treasury entered into the Purchase Agreement.
The Purchase Agreement was subsequently amended and restated on
September 26, 2008. Pursuant to the Purchase Agreement, we
agreed to issue to Treasury one million shares of senior
preferred stock with an initial liquidation preference equal to
$1,000 per share (for an aggregate liquidation preference of
$1 billion), and a warrant for the purchase of our common
stock. The terms of the senior preferred stock and warrant are
summarized in separate sections below. We did not receive any
cash proceeds from Treasury as a result of issuing the senior
preferred stock or the warrant.
The senior preferred stock and warrant were sold and issued to
Treasury as an initial commitment fee in consideration of the
commitment from Treasury to provide up to $100 billion in
funds to us under the terms and conditions set forth in the
Purchase Agreement. In addition to the issuance of the senior
preferred stock and warrant, beginning on March 31, 2010,
we are required to pay a quarterly commitment fee to Treasury.
This quarterly commitment fee will accrue from January 1,
2010. The fee, in an amount to be mutually agreed upon by us and
Treasury and to be determined with reference to the market value
of Treasurys funding commitment as then in effect, will be
determined on or before December 31, 2009, and will be
reset every five years. 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. 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.
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
$100 billion. 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 $100 billion 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
$100 billion 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.
The Purchase Agreement provides that the Treasurys funding
commitment will terminate under any the following circumstances:
(1) the completion of our liquidation and fulfillment of
Treasurys obligations under its funding commitment at that
time; (2) the payment in full of, or reasonable provision
for, all of our liabilities (whether or not contingent,
including mortgage guarantee obligations); and (3) the
funding by Treasury of $100 billion under the Purchase
Agreement. In addition, Treasury may terminate its funding
commitment and declare the Purchase Agreement null and void if a
court vacates, modifies, amends, conditions, enjoins, stays or
otherwise affects the appointment of the Conservator or
otherwise curtails the Conservators powers. Treasury may
not terminate its funding commitment under the agreement solely
by reason of our being in conservatorship, receivership or other
insolvency proceeding, or due to our financial condition or any
adverse change in our financial condition.
The Purchase Agreement provides that most provisions of the
agreement may be waived or amended by mutual written agreement
of the parties; however, no waiver or amendment of the agreement
is permitted that would decrease Treasurys aggregate
funding commitment or add conditions to Treasurys funding
commitment if the waiver or amendment would adversely affect in
any material respect the holders of our debt securities or
Freddie Mac mortgage guarantee obligations.
In the event of our default on payments with respect to our debt
securities or Freddie Mac mortgage guarantee obligations, if
Treasury fails to perform its obligations under its funding
commitment and if we and/or the Conservator are not diligently
pursuing remedies in respect of that failure, the holders of
these debt securities or Freddie Mac mortgage
guarantee obligations may file a claim in the United States
Court of Federal Claims for relief requiring Treasury to fund to
us the lesser of: (1) the amount necessary to cure the
payment defaults on our debt and Freddie Mac mortgage guarantee
obligations; and (2) the lesser of: (a) the deficiency
amount; and (b) $100 billion less the aggregate amount
of funding previously provided under the commitment. Any payment
that Treasury makes under those circumstances will be treated
for all purposes as a draw under the Purchase Agreement that
will increase the liquidation preference of the senior preferred
stock.
The Purchase Agreement includes several covenants that
significantly restrict our business activities, which are
described below under Covenants Under Treasury
Agreements Purchase Agreement Covenants.
The Purchase Agreement is filed as an exhibit to this
Form 10-Q.
Issuance
of Senior Preferred Stock
Pursuant to the Purchase Agreement described above, we issued
one million shares of senior preferred stock to Treasury on
September 8, 2008. The senior preferred stock was issued to
Treasury in partial consideration of Treasurys commitment
to provide up to $100 billion in funds to us under the
terms set forth in the Purchase Agreement.
Shares of the senior preferred stock have no par value, and have
a stated value and initial liquidation preference equal to
$1,000 per share. The liquidation preference of the senior
preferred stock is subject to adjustment. Dividends that are not
paid in cash for any dividend period will accrue and be added to
the liquidation preference of the senior preferred stock. In
addition, any amounts Treasury pays to us pursuant to its
funding commitment under the Purchase Agreement and any
quarterly commitment fees that are not paid in cash to Treasury
or waived by Treasury will be added to the liquidation
preference of the senior preferred stock. As described below, we
may make payments to reduce the liquidation preference of the
senior preferred stock.
Holders of the senior preferred stock are entitled to receive,
when, as and if declared by our Board of Directors, cumulative
quarterly cash dividends at the annual rate of 10% per year on
the then-current liquidation preference of the senior preferred
stock. The initial dividend, if declared, will be payable on
December 31, 2008 and will be for the period from but not
including September 8, 2008 through and including
December 31, 2008. If at any time we fail to pay cash
dividends in a timely manner, then immediately following such
failure and for all dividend periods thereafter until the
dividend period following the date on which we have paid in cash
full cumulative dividends (including any unpaid dividends added
to the liquidation preference), the dividend rate will be 12%
per year.
The senior preferred stock ranks ahead of our common stock and
all other outstanding series of our preferred stock, as well as
any capital stock we issue in the future, as to both dividends
and rights upon liquidation. The senior preferred stock provides
that we may not, at any time, declare or pay dividends on, make
distributions with respect to, or redeem, purchase or acquire,
or make a liquidation payment with respect to, any common stock
or other securities ranking junior to the senior preferred stock
unless: (1) full cumulative dividends on the outstanding
senior preferred stock (including any unpaid dividends added to
the liquidation preference) have been declared and paid in cash;
and (2) all amounts required to be paid with the net
proceeds of any issuance of capital stock for cash (as described
in the following paragraph) have been paid in cash. Shares of
the senior preferred stock are not convertible. Shares of the
senior preferred stock have no general or special voting rights,
other than those set forth in the certificate of designation for
the senior preferred stock or otherwise required by law. The
consent of holders of at least two-thirds of all outstanding
shares of senior preferred stock is generally required to amend
the terms of the senior preferred stock or to create any class
or series of stock that ranks prior to or on parity with the
senior preferred stock.
We are not permitted to redeem the senior preferred stock prior
to the termination of Treasurys funding commitment set
forth in the Purchase Agreement; however, we are permitted to
pay down the liquidation preference of the outstanding shares of
senior preferred stock to the extent of (1) accrued and
unpaid dividends previously added to the liquidation preference
and not previously paid down; and (2) quarterly commitment
fees previously added to the liquidation preference and not
previously paid down. In addition, if we issue any shares of
capital stock for cash while the senior preferred stock is
outstanding, the net proceeds of the issuance must be used to
pay down the liquidation preference of the senior preferred
stock; however, the liquidation preference of each share of
senior preferred stock may not be paid down below $1,000 per
share prior to the termination of Treasurys funding
commitment. Following the termination of Treasurys funding
commitment, we may pay down the liquidation preference of all
outstanding shares of senior preferred stock at any time, in
whole or in part. If, after termination of Treasurys
funding commitment, we pay down the liquidation preference of
each outstanding share of senior preferred stock in full, the
shares will be deemed to have been redeemed as of the payment
date.
The certificate of designation for the senior preferred stock is
incorporated by reference as an exhibit to this
Form 10-Q.
Issuance
of Common Stock Warrant
Pursuant to the Purchase Agreement described above, on
September 7, 2008, we, through FHFA, in its capacity as
Conservator, issued a warrant to purchase common stock to
Treasury. The warrant was issued to Treasury in partial
consideration of Treasurys commitment to provide up to
$100 billion in funds to us under the terms set forth in
the Purchase Agreement.
The warrant gives Treasury the right to purchase shares of our
common stock equal to 79.9% of the total number of shares of our
common stock outstanding on a fully diluted basis on the date of
exercise. The warrant may be exercised in whole or in part at
any time on or before September 7, 2028, by delivery to us
of: (a) a notice of exercise; (b) payment of the
exercise price of $0.00001 per share; and (c) the warrant.
If the market price of one share of our common stock is greater
than the exercise price, then, instead of paying the exercise
price, Treasury may elect to receive shares equal to the value
of the warrant (or portion thereof being canceled) pursuant to
the formula specified in the warrant. Upon exercise of the
warrant, Treasury may assign the right to receive the shares of
common stock issuable upon exercise to any other person. The
warrant contains several covenants, which are described under
Covenants Under Treasury Agreements Treasury
Warrant Covenants.
As of November 14, 2008, Treasury has not exercised the
warrant. The warrant is incorporated by reference as an exhibit
to this
Form 10-Q.
Lending
Agreement
On September 18, 2008, we entered into the Lending
Agreement with Treasury under which we may request loans until
December 31, 2009. Loans under the Lending Agreement
require approval from Treasury at the time of request. Treasury
is not obligated under the Lending Agreement to make, increase,
renew or extend any loan to us. The Lending Agreement does not
specify a maximum amount that may be borrowed thereunder, but
any loans made to us by Treasury pursuant to the Lending
Agreement must be collateralized by Freddie Mac or Fannie Mae
mortgage-backed securities. Further, unless amended or waived by
Treasury, the amount we may borrow under the Lending Agreement
is limited by the restriction under the Purchase Agreement on
incurring debt in excess of 110% of our aggregate indebtedness
as of June 30, 2008.
The Lending Agreement does not specify the maturities or
interest rate of loans that may be made by Treasury under the
credit facility. In a Fact Sheet regarding the credit facility
published by Treasury on September 7, 2008, Treasury
indicated that loans made pursuant to the credit facility will
be for short-term durations and would in general be expected to
be for less than one month but no shorter than one week. The
Fact Sheet further indicated that the interest rate on loans
made pursuant to the credit facility ordinarily will be based on
daily LIBOR, fixed for a similar term of the loan plus
50 basis points. Given that the interest rate we are likely
to be charged under the credit facility will be significantly
higher than the rates we have historically achieved through the
sale of unsecured debt, use of the facility in significant
amounts could have a material adverse impact on our financial
results.
As of November 14, 2008, we have not requested any loans or
borrowed any amounts under the Lending Agreement.
For a description of the covenants contained in the Lending
Agreement, refer to Covenants under Treasury
Agreements Lending Agreement Covenants below.
For additional information on the terms of the Lending
Agreement, refer to our Current Report on
Form 8-K
filed with the SEC on September 23, 2008 and a copy of the
Lending Agreement is incorporated by reference as an exhibit to
this
Form 10-Q.
Covenants
under Treasury Agreements
The Purchase Agreement, warrant and Lending Agreement contain
covenants that significantly restrict our business activities.
These covenants, which are summarized below, include a
prohibition on our issuance of additional equity securities
(except in limited instances), a prohibition on the payment of
dividends or other distributions on our equity securities (other
than the senior preferred stock or warrant), a prohibition on
our issuance of subordinated debt and a limitation on the total
amount of debt securities we may issue. As a result, we can no
longer obtain additional equity financing (other than pursuant
to the Purchase Agreement ) and we are limited in the amount and
type of debt financing we may obtain.
Purchase
Agreement Covenants
The Purchase Agreement provides that, until the senior preferred
stock is repaid or redeemed in full, we may not, without the
prior written consent of Treasury:
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Declare or pay any dividend (preferred or otherwise) or make any
other distribution with respect to any Freddie Mac equity
securities (other than with respect to the senior preferred
stock or warrant);
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Redeem, purchase, retire or otherwise acquire any Freddie Mac
equity securities (other than the senior preferred stock or
warrant);
|
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Sell or issue any Freddie Mac equity securities (other than the
senior preferred stock, the warrant and the common stock
issuable upon exercise of the warrant and other than as required
by the terms of any binding agreement in effect on the date of
the Purchase Agreement);
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|
|
Terminate the conservatorship (other than in connection with a
receivership);
|
|
|
|
|
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Sell, transfer, lease or otherwise dispose of any assets, other
than dispositions for fair market value: (a) to a limited
life regulated entity (in the context of a receivership);
(b) of assets and properties in the ordinary course of
business, consistent with past practice; (c) in connection
with our liquidation by a receiver; (d) of cash or cash
equivalents for cash or cash equivalents; or (e) to the
extent necessary to comply with the covenant described below
relating to the reduction of our portfolio of retained mortgages
and mortgage-backed securities beginning in 2010;
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Incur indebtedness that would result in our aggregate
indebtedness exceeding 110% of our aggregate indebtedness as of
June 30, 2008;
|
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|
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Issue any subordinated debt;
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|
|
|
Enter into a corporate reorganization, recapitalization, merger,
acquisition or similar event; or
|
|
|
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Engage in transactions with affiliates unless the transaction is
(a) pursuant to the Purchase Agreement, the senior
preferred stock or the warrant, (b) upon arms length
terms or (c) a transaction undertaken in the ordinary
course or pursuant to a contractual obligation or customary
employment arrangement in existence on the date of the Purchase
Agreement.
|
The Purchase Agreement also provides that we may not own
mortgage assets in excess of: (a) $850 billion on
December 31, 2009; or (b) on December 31 of each
year thereafter, 90% of the aggregate amount of our mortgage
assets as of December 31 of the immediately preceding
calendar year, provided that we are not required to own less
than $250 billion in mortgage assets.
In addition, the Purchase Agreement provides that we may not
enter into any new compensation arrangements or increase amounts
or benefits payable under existing compensation arrangements of
any named executive officer (as defined by SEC rules) without
the consent of the Director of FHFA, in consultation with the
Secretary of the Treasury.
We are required under the Purchase Agreement to provide annual
reports on
Form 10-K,
quarterly reports on
Form 10-Q
and current reports on
Form 8-K
to Treasury in accordance with the time periods specified in the
SECs rules. In addition, our designated representative
(which, during the conservatorship, is the Conservator) is
required to provide quarterly certifications to Treasury
certifying compliance with the covenants contained in the
Purchase Agreement and the accuracy of the representations made
pursuant to the agreement. We also are obligated to provide
prompt notice to Treasury of the occurrence of specified events,
such as the filing of a lawsuit that would reasonably be
expected to have a material adverse effect. As of
November 13, 2008, we believe we were in compliance with
the covenants under the Purchase Agreement.
For a summary of the terms of the Purchase Agreement, see
Purchase Agreement and Related Issuance of Senior
Preferred Stock and Common Stock Warrant Purchase
Agreement above. For the complete terms of the covenants,
see the copy of the Purchase Agreement filed as an exhibit to
this
Form 10-Q.
Warrant
Covenants
The warrant we issued to Treasury includes, among others, the
following covenants: our SEC filings under the Exchange Act will
comply in all material respects as to form with the Exchange Act
and the rules and regulations thereunder; we may not permit any
of our significant subsidiaries to issue capital stock or equity
securities, or securities convertible into or exchangeable for
such securities, or any stock appreciation rights or other
profit participation rights; we may not take any action that
will result in an increase in the par value of our common stock;
we may not take any action to avoid the observance or
performance of the terms of the warrant and we must take all
actions necessary or appropriate to protect Treasurys
rights against impairment or dilution; and we must provide
Treasury with prior notice of specified actions relating to our
common stock, such as setting a record date for a dividend
payment, granting subscription or purchase rights, authorizing a
recapitalization, reclassification, merger or similar
transaction, commencing a liquidation of the company or any
other action that would trigger an adjustment in the exercise
price or number or amount of shares subject to the warrant.
The warrant remains outstanding through September 7, 2028.
As of November 13, 2008, we believe we were in compliance
with the covenants under the warrant. For a summary of the terms
of the warrant, see Purchase Agreement and Related
Issuance of Senior Preferred Stock and Common Stock
Warrant Issuance of Common Stock Warrant
above. For the complete terms of the covenants contained in the
warrant, a copy of the warrant is incorporated by reference as
an exhibit to this
Form 10-Q.
Lending
Agreement Covenants
The Lending Agreement includes covenants requiring us, among
other things:
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to maintain Treasurys security interest in the collateral,
including the priority of the security interest, and take
actions to defend against adverse claims;
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|
|
not to sell or otherwise dispose of, pledge or mortgage the
collateral (other than Treasurys security interest);
|
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not to act in any way to impair, or to fail to act in a way to
prevent the impairment of, Treasurys rights or interests
in the collateral;
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|
|
|
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promptly to notify Treasury of any failure or impending failure
to meet our regulatory capital requirements;
|
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|
|
to provide for periodic audits of collateral held under
borrower-in-custody
arrangements, and to comply with certain notice and
certification requirements;
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|
|
promptly to notify Treasury of the occurrence or impending
occurrence of an event of default under the terms of the lending
agreement; and
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|
|
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to notify Treasury of any change in applicable law or
regulations, or in our charter or bylaws, or certain other
events, that may materially affect our ability to perform our
obligations under the lending agreement.
|
The Lending Agreement expires on December 31, 2009.
As of November 13, 2008, we believe we were in compliance
with the covenants under the Lending Agreement. For a summary of
the terms of the Lending Agreement, see Lending
Agreement above. For the complete terms of the covenants
contained in the Lending Agreement, a copy of the agreement is
incorporated by reference as an exhibit to this
Form 10-Q.
Effect of
Conservatorship and Treasury Agreements on Existing
Stockholders
The conservatorship and Purchase Agreement have materially
limited the rights of our common and preferred stockholders
(other than Treasury as holder of the senior preferred stock).
The conservatorship has had the following adverse effects on our
common and preferred stockholders:
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the powers of the stockholders are suspended during the
conservatorship. Accordingly, our common stockholders do not
have the ability to elect directors or to vote on other matters
during the conservatorship unless the Conservator delegates this
authority to them;
|
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|
|
the Conservator has eliminated common and preferred stock
dividends (other than dividends on the senior preferred stock)
during the conservatorship; and
|
|
|
|
according to a statement made by the Secretary of the Treasury
on September 7, 2008, because we are in conservatorship, we
will no longer be managed with a strategy to maximize
common shareholder returns.
|
The Purchase Agreement and the senior preferred stock and
warrant issued to Treasury pursuant to the agreement have had
the following adverse effects on our common and preferred
stockholders:
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|
|
|
|
the senior preferred stock ranks senior to the common stock and
all other series of preferred stock as to both dividends and
distributions upon dissolution, liquidation or winding up of the
company;
|
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|
|
the Purchase Agreement prohibits the payment of dividends on
common or preferred stock (other than the senior preferred
stock) without the prior written consent of Treasury; and
|
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|
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the warrant provides Treasury with the right to purchase shares
of our common stock equal to up to 79.9% of the total number of
shares of our common stock outstanding on a fully diluted basis
on the date of exercise for a nominal price, thereby
substantially diluting the ownership in Freddie Mac of our
common stockholders at the time of exercise. Until Treasury
exercises its rights under the warrant or its right to exercise
the warrant expires on September 7, 2028 without having
been exercised, the holders of our common stock continue to have
the risk that, as a group, they will own no more than 20.1% of
the total voting power of the company. Under our charter, bylaws
and applicable law, 20.1% is insufficient to control the outcome
of any vote that is presented to the common shareholders.
Accordingly, existing common shareholders have no assurance
that, as a group, they will be able to control the election of
our directors or the outcome of any other vote after the time,
if any, that the conservatorship ends.
|
As described above, the conservatorship and Treasury agreements
also impact our business in ways that indirectly affect our
common and preferred stockholders. By their terms, the Purchase
Agreement, senior preferred stock and warrant will continue to
exist even if we are released from the conservatorship. For a
description of the risks to our business relating to the
conservatorship and Treasury agreements, see ITEM 1A.
RISK FACTORS.
Treasury
Mortgage-Backed Securities Purchase Program
Pursuant to its authority under our charter, as amended by the
Reform Act, on September 7, 2008, Treasury announced a
program under which Treasury will purchase GSE mortgage-backed
securities in the open market. The size and timing of
Treasurys investments in GSE mortgage-backed securities
will be subject to the discretion of the Secretary of the
Treasury. The scale of the program will be based on developments
in the capital markets and housing markets. Treasurys
authority to purchase GSE mortgage-backed securities expires on
December 31, 2009.
New York
Stock Exchange Matters
As of November 14, 2008, our common stock continues to
trade on the New York Stock Exchange, or NYSE. We have been in
discussions with the staff of the NYSE regarding the effect of
the conservatorship on our ongoing compliance with the rules of
the NYSE and the continued listing of our stock on the NYSE in
light of the unique circumstances of the conservatorship. To
date, we have not been informed of any non-compliance by the
NYSE.
Other
Regulatory Matters
FHFA is responsible for implementing the various provisions of
the Reform Act. In a statement published on September 7,
2008, the Director of FHFA indicated that FHFA will continue to
work expeditiously on the many regulations needed to implement
the new legislation, and that some of the key regulations will
address minimum capital standards, prudential safety and
soundness standards and portfolio limits. In general, we remain
subject to existing regulations, orders and determinations until
new ones are issued or made.
Since we entered into conservatorship on September 6, 2008,
FHFA has taken the following actions relating to the
implementation of provisions of the Reform Act.
Adoption
by FHFA of Regulation Relating to Golden Parachute
Payments
FHFA issued interim final regulations pursuant to the Reform Act
relating to golden parachute payments in September
2008. Under these regulations, FHFA may limit golden parachute
payments as defined. On September 14, 2008, the Director of
FHFA notified us that severance and other payments contemplated
in the employment contract of Richard F. Syron, our former
Chairman and Chief Executive Officer, are golden parachute
payments within the meaning of the Reform Act and that these
payments should not be paid, effective immediately. On
September 22, 2008, the Director of FHFA notified us that
severance payments contemplated in the employment agreement of
Anthony S. Piszel, our former Chief Financial Officer, are
golden parachute payments within the meaning of the Reform Act
and should not be paid. Patricia L. Cook, our former Chief
Business Officer, also will not receive severance payments
contemplated under her employment agreement.
Suspension
of Regulatory Capital Requirements During
Conservatorship
As described in Capital Management, FHFA announced
in October 2008 that our existing statutory and FHFA-directed
regulatory capital requirements will not be binding during the
conservatorship.
Subordinated
Debt
FHFA has directed us to continue to make interest and principal
payments on our subordinated debt, even if we fail to maintain
required capital levels. As a result, the terms of any of our
subordinated debt that provide for us to defer payments of
interest under certain circumstances, including our failure to
maintain specified capital levels, are no longer applicable. In
addition, the requirements in the agreement we entered into with
FHFA in September 2005 with respect to issuance, maintenance,
and reporting and disclosure of Freddie Mac subordinated debt
have been suspended during the term of conservatorship and
thereafter until directed otherwise.
Emergency
Economic Stabilization Act of 2008, or EESA
On October 3, 2008, the President signed into law the EESA
which among other actions, gave further authority to Treasury to
purchase or guarantee financial assets from financial
institutions in the public market. The EESA also requires FHFA,
as Conservator, to implement a plan for delinquent single family
and multifamily mortgage loans (including mortgage-backed
securities and asset-backed securities) to maximize assistance
for homeowners and encourage servicers to take advantage of the
HOPE for Homeowners Program implemented by the U.S. Department
of Housing and Urban Development, or HUD, or other available
programs to minimize foreclosure. FHFA must develop and begin
implementing a plan 60 days after the date of enactment. We
cannot predict the content of the plan FHFA may implement or its
effect on our business.
Mission
and Affordable Housing Goals
As was the case in 2007, market conditions are making it harder
to meet certain affordable housing targets. Nevertheless, we
estimate that our affordable mortgage purchases will
substantially mirror the levels of goal-qualifying loans being
originated in the market today.
On September 12, 2008, FHFA issued a statement indicating
that support for multifamily housing finance is central to our
public purpose and that the conservatorship does not affect
existing contracts, our authority to enter into new contracts,
or their enforceability. The statement indicated that FHFA, as
Conservator, expects us to continue underwriting and financing
sound multifamily business.
On October 27, 2008, FHFA issued a letter finding that we
had officially met or exceeded the affordable housing goals for
2007, except for the two subgoals which HUD had previously
determined to be infeasible.
Conforming
Loan Limits
On November 7, 2008, FHFA announced that the conforming
loan limit will remain $417,000 for 2009, with higher limits in
certain cities and counties.
Pursuant to the Reform Act, FHFA has set loan limits for certain
high-cost areas in 2009. These limits are set equal
to 115% of area median house prices and cannot exceed 150% of
the base limit, or $625,500 for a
one-unit
property. The new limits affect loans purchased in 2009.
SELECTED
FINANCIAL DATA AND OTHER OPERATING
MEASURES(1)
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|
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|
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|
|
|
|
|
|
|
|
|
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|
|
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At or for the Nine
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|
|
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Months Ended September 30,
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At or for the Year Ended December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
|
(dollars in millions, except share-related amounts)
|
|
|
Income Statement Data
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income
|
|
$
|
4,171
|
|
|
$
|
2,325
|
|
|
$
|
3,099
|
|
|
$
|
3,412
|
|
|
$
|
4,627
|
|
|
$
|
8,313
|
|
|
$
|
8,598
|
|
Non-interest income (loss)
|
|
|
(10,387
|
)
|
|
|
1,589
|
|
|
|
194
|
|
|
|
2,086
|
|
|
|
1,003
|
|
|
|
(2,723
|
)
|
|
|
532
|
|
Non-interest expense
|
|
|
(13,534
|
)
|
|
|
(5,813
|
)
|
|
|
(9,270
|
)
|
|
|
(3,216
|
)
|
|
|
(3,100
|
)
|
|
|
(2,378
|
)
|
|
|
(2,123
|
)
|
Net income (loss) before cumulative effect of change in
accounting principle
|
|
|
(26,267
|
)
|
|
|
(642
|
)
|
|
|
(3,094
|
)
|
|
|
2,327
|
|
|
|
2,172
|
|
|
|
2,603
|
|
|
|
4,809
|
|
Cumulative effect of change in accounting principle, net of taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(59
|
)
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
|
(26,267
|
)
|
|
|
(642
|
)
|
|
|
(3,094
|
)
|
|
|
2,327
|
|
|
|
2,113
|
|
|
|
2,603
|
|
|
|
4,809
|
|
Net income (loss) available to common stockholders
|
|
|
(26,777
|
)
|
|
|
(938
|
)
|
|
|
(3,503
|
)
|
|
|
2,051
|
|
|
|
1,890
|
|
|
|
2,392
|
|
|
|
4,593
|
|
Earnings (loss) per common share before cumulative effect of
change in accounting principle:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
(30.90
|
)
|
|
|
(1.43
|
)
|
|
|
(5.37
|
)
|
|
|
3.01
|
|
|
|
2.82
|
|
|
|
3.47
|
|
|
|
6.68
|
|
Diluted
|
|
|
(30.90
|
)
|
|
|
(1.43
|
)
|
|
|
(5.37
|
)
|
|
|
3.00
|
|
|
|
2.81
|
|
|
|
3.46
|
|
|
|
6.67
|
|
Earnings (loss) per common share after cumulative effect of
change in accounting principle:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
(30.90
|
)
|
|
|
(1.43
|
)
|
|
|
(5.37
|
)
|
|
|
3.01
|
|
|
|
2.73
|
|
|
|
3.47
|
|
|
|
6.68
|
|
Diluted
|
|
|
(30.90
|
)
|
|
|
(1.43
|
)
|
|
|
(5.37
|
)
|
|
|
3.00
|
|
|
|
2.73
|
|
|
|
3.46
|
|
|
|
6.67
|
|
Dividends per common share
|
|
|
0.50
|
|
|
|
1.50
|
|
|
|
1.75
|
|
|
|
1.91
|
|
|
|
1.52
|
|
|
|
1.20
|
|
|
|
1.04
|
|
Weighted average common shares outstanding (in
thousands)(2):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
866,472
|
|
|
|
653,825
|
|
|
|
651,881
|
|
|
|
680,856
|
|
|
|
691,582
|
|
|
|
689,282
|
|
|
|
687,094
|
|
Diluted
|
|
|
866,472
|
|
|
|
653,825
|
|
|
|
651,881
|
|
|
|
682,664
|
|
|
|
693,511
|
|
|
|
691,521
|
|
|
|
688,675
|
|
Balance Sheet Data
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
804,390
|
|
|
$
|
786,871
|
|
|
$
|
794,368
|
|
|
$
|
804,910
|
|
|
$
|
798,609
|
|
|
$
|
779,572
|
|
|
$
|
787,962
|
|
Short-term debt
|
|
|
319,641
|
|
|
|
252,776
|
|
|
|
295,921
|
|
|
|
285,264
|
|
|
|
279,764
|
|
|
|
266,024
|
|
|
|
279,180
|
|
Long-term senior debt
|
|
|
459,808
|
|
|
|
468,903
|
|
|
|
438,147
|
|
|
|
452,677
|
|
|
|
454,627
|
|
|
|
443,772
|
|
|
|
438,738
|
|
Long-term subordinated debt
|
|
|
4,501
|
|
|
|
5,232
|
|
|
|
4,489
|
|
|
|
6,400
|
|
|
|
5,633
|
|
|
|
5,622
|
|
|
|
5,613
|
|
All other liabilities
|
|
|
34,140
|
|
|
|
34,196
|
|
|
|
28,911
|
|
|
|
33,139
|
|
|
|
31,945
|
|
|
|
32,720
|
|
|
|
32,094
|
|
Minority interests in consolidated subsidiaries
|
|
|
95
|
|
|
|
281
|
|
|
|
176
|
|
|
|
516
|
|
|
|
949
|
|
|
|
1,509
|
|
|
|
1,929
|
|
Stockholders equity (deficit)
|
|
|
(13,795
|
)
|
|
|
25,483
|
|
|
|
26,724
|
|
|
|
26,914
|
|
|
|
25,691
|
|
|
|
29,925
|
|
|
|
30,408
|
|
Portfolio
Balances(3)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Retained
portfolio(4)
|
|
$
|
736,876
|
|
|
$
|
713,164
|
|
|
$
|
720,813
|
|
|
$
|
703,959
|
|
|
$
|
710,346
|
|
|
$
|
653,261
|
|
|
$
|
645,767
|
|
Total PCs and Structured Securities
issued(5)
|
|
|
1,834,408
|
|
|
|
1,664,776
|
|
|
|
1,738,833
|
|
|
|
1,477,023
|
|
|
|
1,335,524
|
|
|
|
1,208,968
|
|
|
|
1,162,068
|
|
Total mortgage portfolio
|
|
|
2,196,338
|
|
|
|
2,021,935
|
|
|
|
2,102,676
|
|
|
|
1,826,720
|
|
|
|
1,684,546
|
|
|
|
1,505,531
|
|
|
|
1,414,700
|
|
Ratios
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Return on average
assets(6)
|
|
|
(4.4
|
)%
|
|
|
(0.1
|
)%
|
|
|
(0.4
|
)%
|
|
|
0.3
|
%
|
|
|
0.3
|
%
|
|
|
0.3
|
%
|
|
|
0.6
|
%
|
Return on common
equity(7)
|
|
|
N/A
|
|
|
|
(6.6
|
)
|
|
|
(21.0
|
)
|
|
|
9.8
|
|
|
|
8.1
|
|
|
|
9.4
|
|
|
|
17.7
|
|
Return on total
equity(8)
|
|
|
N/A
|
|
|
|
(3.3
|
)
|
|
|
(11.5
|
)
|
|
|
8.8
|
|
|
|
7.6
|
|
|
|
8.6
|
|
|
|
15.8
|
|
Dividend payout ratio on common
stock(9)
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
63.9
|
|
|
|
56.9
|
|
|
|
34.9
|
|
|
|
15.6
|
|
Equity to assets
ratio(10)
|
|
|
0.8
|
|
|
|
3.3
|
|
|
|
3.4
|
|
|
|
3.3
|
|
|
|
3.5
|
|
|
|
3.8
|
|
|
|
4.0
|
|
Preferred stock to core capital
ratio(11)
|
|
|
130.2
|
|
|
|
23.4
|
|
|
|
37.3
|
|
|
|
17.3
|
|
|
|
13.2
|
|
|
|
13.5
|
|
|
|
14.2
|
|
|
|
(1)
|
See ITEM 2. FINANCIAL
INFORMATION SELECTED FINANCIAL DATA AND OTHER
OPERATING MEASURES in our Registration Statement for
information regarding accounting changes impacting periods prior
to January 1, 2008.
|
(2)
|
Includes the weighted average
number of shares during the 2008 periods that are associated
with the warrant for our common stock issued to Treasury as part
of the Purchase Agreement. This warrant is included in basic
EPS, since it is unconditionally exercisable by the holder at a
minimal cost of $.00001 per share.
|
(3)
|
Represent the unpaid principal
balance and exclude mortgage loans and mortgage-related
securities traded, but not yet settled. Effective in December
2007, we established a trust for the administration of cash
remittances received related to the underlying assets of our PCs
and Structured Securities issued. As a result, for December 2007
and each period in 2008, we report the balance of our mortgage
portfolios to reflect the publicly-available security balances
of our PCs and Structured Securities. For periods prior to
December 2007, we report these balances based on the unpaid
principal balance of the underlying mortgage loans. We reflected
this change as an increase in the unpaid principal balance of
our retained portfolio by $2.8 billion at December 31,
2007.
|
(4)
|
The retained portfolio presented on
our consolidated balance sheets differs from the retained
portfolio in this table because the consolidated balance sheet
caption includes valuation adjustments and deferred balances.
See CONSOLIDATED BALANCE SHEETS ANALYSIS
Table 17 Characteristics of Mortgage Loans and
Mortgage-Related Securities in our Retained Portfolio for
more information.
|
(5)
|
Includes PCs and Structured
Securities that are held in our retained portfolio. See
OUR PORTFOLIOS Table 53
Freddie Macs Total Mortgage Portfolio and Segment
Portfolio Composition for the composition of our total
mortgage portfolio. Excludes Structured Securities for which we
have resecuritized our PCs and Structured Securities. These
resecuritized securities do not increase our credit-related
exposure and consist of single-class Structured Securities
backed by PCs, Real Estate Mortgage Investment Conduits, or
REMICs, and principal-only strips. The notional balances of
interest-only strips are excluded because this line item is
based on unpaid principal balance. Includes other guarantees
issued that are not in the form of a PC, such as long-term
standby commitments and credit enhancements for multifamily
housing revenue bonds.
|
(6)
|
Ratio computed as annualized net
income (loss) divided by the simple average of the beginning and
ending balances of total assets.
|
(7)
|
Ratio computed as annualized net
income (loss) available to common stockholders divided by the
simple average of the beginning and ending balances of
stockholders equity, net of preferred stock (at redemption
value). Ratio is not computed for periods in which
stockholders equity is less than zero.
|
(8)
|
Ratio computed as annualized net
income (loss) divided by the simple average of the beginning and
ending balances of stockholders equity. Ratio is not
computed for periods in which stockholders equity is less
than zero.
|
(9)
|
Ratio computed as common stock
dividends declared divided by net income available to common
stockholders. Ratio is not computed for periods in which net
income (loss) available to common stockholders was a loss.
|
(10)
|
Ratio computed as the simple
average of the beginning and ending balances of
stockholders equity divided by the simple average of the
beginning and ending balances of total assets.
|
(11)
|
Ratio computed as preferred stock
(excluding senior preferred), at redemption value divided by
core capital. Senior preferred stock does not meet the statutory
definition of core capital. See NOTE 9: REGULATORY
CAPITAL to our consolidated financial statements for more
information regarding core capital.
|
CONSOLIDATED
RESULTS OF OPERATIONS
The following discussion of our consolidated results of
operations should be read in conjunction with our consolidated
financial statements including the accompanying notes. Also see
CRITICAL ACCOUNTING POLICIES AND ESTIMATES for more
information concerning our more significant accounting policies
and estimates applied in determining our reported financial
position and results of operations.
Table 4
Summary Consolidated Statements of Income
GAAP Results
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
|
|
(in millions)
|
|
|
Net interest income
|
|
$
|
1,844
|
|
|
$
|
761
|
|
|
$
|
4,171
|
|
|
$
|
2,325
|
|
Non-interest income (loss):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Management and guarantee income
|
|
|
832
|
|
|
|
718
|
|
|
|
2,378
|
|
|
|
1,937
|
|
Gains (losses) on guarantee asset
|
|
|
(1,722
|
)
|
|
|
(465
|
)
|
|
|
(2,002
|
)
|
|
|
(168
|
)
|
Income on guarantee obligation
|
|
|
783
|
|
|
|
473
|
|
|
|
2,721
|
|
|
|
1,377
|
|
Derivative gains
(losses)(1)
|
|
|
(3,080
|
)
|
|
|
(188
|
)
|
|
|
(3,210
|
)
|
|
|
(394
|
)
|
Gains (losses) on investment activity
|
|
|
(9,747
|
)
|
|
|
478
|
|
|
|
(11,855
|
)
|
|
|
(44
|
)
|
Unrealized gains (losses) on foreign-currency denominated debt
recorded at fair value
|
|
|
1,500
|
|
|
|
|
|
|
|
684
|
|
|
|
|
|
Gains (losses) on debt retirement
|
|
|
36
|
|
|
|
91
|
|
|
|
312
|
|
|
|
187
|
|
Recoveries on loans impaired upon purchase
|
|
|
91
|
|
|
|
125
|
|
|
|
438
|
|
|
|
232
|
|
Foreign-currency gains (losses), net
|
|
|
|
|
|
|
(1,162
|
)
|
|
|
|
|
|
|
(1,692
|
)
|
Other income
|
|
|
25
|
|
|
|
47
|
|
|
|
147
|
|
|
|
154
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-interest income (loss)
|
|
|
(11,282
|
)
|
|
|
117
|
|
|
|
(10,387
|
)
|
|
|
1,589
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-interest expense
|
|
|
(7,886
|
)
|
|
|
(3,070
|
)
|
|
|
(13,534
|
)
|
|
|
(5,813
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss before income tax (expense) benefit
|
|
|
(17,324
|
)
|
|
|
(2,192
|
)
|
|
|
(19,750
|
)
|
|
|
(1,899
|
)
|
Income tax (expense) benefit
|
|
|
(7,971
|
)
|
|
|
954
|
|
|
|
(6,517
|
)
|
|
|
1,257
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(25,295
|
)
|
|
$
|
(1,238
|
)
|
|
$
|
(26,267
|
)
|
|
$
|
(642
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
Includes derivative gains (losses)
on foreign-currency swaps of $(1,578) million and
$1,155 million for the three months ended
September 30, 2008 and 2007, respectively, and
$(389) million and $1,685 million for the nine months
ended September 30, 2008 and 2007, respectively. Also
includes derivative gains (losses) of $228 million and
$(69) million on foreign-currency denominated receive-fixed
swaps for the three and nine months ended September 30,
2008, respectively.
|
Net
Interest Income
Table 5 presents an analysis of net interest income,
including average balances and related yields earned on assets
and incurred on liabilities.
Table 5
Net Interest Income/Yield and Average Balance Analysis
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
|
|
|
2008
|
|
|
2007
|
|
|
|
|
|
|
Interest
|
|
|
|
|
|
|
|
|
Interest
|
|
|
|
|
|
|
Average
|
|
|
Income
|
|
|
Average
|
|
|
Average
|
|
|
Income
|
|
|
Average
|
|
|
|
Balance(1)(2)
|
|
|
(Expense)(1)
|
|
|
Rate
|
|
|
Balance(1)(2)
|
|
|
(Expense)(1)
|
|
|
Rate
|
|
|
|
(dollars in millions)
|
|
|
Interest-earning assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage
loans(3)
|
|
$
|
95,174
|
|
|
$
|
1,361
|
|
|
|
5.72
|
%
|
|
$
|
71,163
|
|
|
$
|
1,103
|
|
|
|
6.20
|
%
|
Mortgage-related securities
|
|
|
676,197
|
|
|
|
8,590
|
|
|
|
5.08
|
|
|
|
655,215
|
|
|
|
8,943
|
|
|
|
5.46
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total retained portfolio
|
|
|
771,371
|
|
|
|
9,951
|
|
|
|
5.16
|
|
|
|
726,378
|
|
|
|
10,046
|
|
|
|
5.53
|
|
Investments(4)
|
|
|
47,393
|
|
|
|
356
|
|
|
|
2.94
|
|
|
|
44,135
|
|
|
|
592
|
|
|
|
5.25
|
|
Securities purchased under agreements to resell and federal
funds sold
|
|
|
29,379
|
|
|
|
162
|
|
|
|
2.20
|
|
|
|
27,046
|
|
|
|
367
|
|
|
|
5.42
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest-earning assets
|
|
|
848,143
|
|
|
|
10,469
|
|
|
|
4.93
|
|
|
|
797,559
|
|
|
|
11,005
|
|
|
|
5.51
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Short-term debt
|
|
|
241,150
|
|
|
|
(1,468
|
)
|
|
|
(2.38
|
)
|
|
|
175,407
|
|
|
|
(2,292
|
)
|
|
|
(5.12
|
)
|
Long-term
debt(5)
|
|
|
589,377
|
|
|
|
(6,795
|
)
|
|
|
(4.60
|
)
|
|
|
588,936
|
|
|
|
(7,521
|
)
|
|
|
(5.10
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total debt securities
|
|
|
830,527
|
|
|
|
(8,263
|
)
|
|
|
(3.96
|
)
|
|
|
764,343
|
|
|
|
(9,813
|
)
|
|
|
(5.10
|
)
|
Due to PC investors
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7,401
|
|
|
|
(98
|
)
|
|
|
(5.31
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest-bearing liabilities
|
|
|
830,527
|
|
|
|
(8,263
|
)
|
|
|
(3.96
|
)
|
|
|
771,744
|
|
|
|
(9,911
|
)
|
|
|
(5.10
|
)
|
Expense related to derivatives
|
|
|
|
|
|
|
(362
|
)
|
|
|
(0.18
|
)
|
|
|
|
|
|
|
(333
|
)
|
|
|
(0.17
|
)
|
Impact of net non-interest-bearing funding
|
|
|
17,616
|
|
|
|
|
|
|
|
0.09
|
|
|
|
25,815
|
|
|
|
|
|
|
|
0.17
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total funding of interest-earning assets
|
|
$
|
848,143
|
|
|
|
(8,625
|
)
|
|
|
(4.05
|
)
|
|
$
|
797,559
|
|
|
|
(10,244
|
)
|
|
|
(5.10
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income/yield
|
|
|
|
|
|
|
1,844
|
|
|
|
0.88
|
|
|
|
|
|
|
|
761
|
|
|
|
0.41
|
|
Fully taxable-equivalent
adjustments(6)
|
|
|
|
|
|
|
98
|
|
|
|
0.05
|
|
|
|
|
|
|
|
98
|
|
|
|
0.05
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income/yield (fully taxable-equivalent basis)
|
|
|
|
|
|
$
|
1,942
|
|
|
|
0.93
|
|
|
|
|
|
|
$
|
859
|
|
|
|
0.46
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30,
|
|
|
|
2008
|
|
|
2007
|
|
|
|
|
|
|
Interest
|
|
|
|
|
|
|
|
|
Interest
|
|
|
|
|
|
|
Average
|
|
|
Income
|
|
|
Average
|
|
|
Average
|
|
|
Income
|
|
|
Average
|
|
|
|
Balance(1)(2)
|
|
|
(Expense)(1)
|
|
|
Rate
|
|
|
Balance(1)(2)
|
|
|
(Expense)(1)
|
|
|
Rate
|
|
|
|
(dollars in millions)
|
|
|
Interest-earning assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage
loans(3)
|
|
$
|
89,760
|
|
|
$
|
3,924
|
|
|
|
5.83
|
%
|
|
$
|
68,580
|
|
|
$
|
3,244
|
|
|
|
6.31
|
%
|
Mortgage-related securities
|
|
|
656,548
|
|
|
|
25,103
|
|
|
|
5.10
|
|
|
|
649,030
|
|
|
|
26,278
|
|
|
|
5.40
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total retained portfolio
|
|
|
746,308
|
|
|
|
29,027
|
|
|
|
5.19
|
|
|
|
717,610
|
|
|
|
29,522
|
|
|
|
5.49
|
|
Investments(4)
|
|
|
46,970
|
|
|
|
1,155
|
|
|
|
3.23
|
|
|
|
47,328
|
|
|
|
1,849
|
|
|
|
5.15
|
|
Securities purchased under agreements to resell and federal
funds sold
|
|
|
21,491
|
|
|
|
403
|
|
|
|
2.49
|
|
|
|
26,138
|
|
|
|
1,048
|
|
|
|
5.34
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest-earning assets
|
|
|
814,769
|
|
|
|
30,585
|
|
|
|
5.00
|
|
|
|
791,076
|
|
|
|
32,419
|
|
|
|
5.46
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Short-term debt
|
|
|
228,640
|
|
|
|
(5,149
|
)
|
|
|
(2.96
|
)
|
|
|
173,083
|
|
|
|
(6,749
|
)
|
|
|
(5.14
|
)
|
Long-term
debt(5)
|
|
|
565,705
|
|
|
|
(20,231
|
)
|
|
|
(4.76
|
)
|
|
|
583,521
|
|
|
|
(22,028
|
)
|
|
|
(5.03
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total debt securities
|
|
|
794,345
|
|
|
|
(25,380
|
)
|
|
|
(4.24
|
)
|
|
|
756,604
|
|
|
|
(28,777
|
)
|
|
|
(5.05
|
)
|
Due to PC investors
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
8,043
|
|
|
|
(322
|
)
|
|
|
(5.33
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest-bearing liabilities
|
|
|
794,345
|
|
|
|
(25,380
|
)
|
|
|
(4.24
|
)
|
|
|
764,647
|
|
|
|
(29,099
|
)
|
|
|
(5.06
|
)
|
Expense related to derivatives
|
|
|
|
|
|
|
(1,034
|
)
|
|
|
(0.17
|
)
|
|
|
|
|
|
|
(995
|
)
|
|
|
(0.17
|
)
|
Impact of net non-interest-bearing funding
|
|
|
20,424
|
|
|
|
|
|
|
|
0.11
|
|
|
|
26,429
|
|
|
|
|
|
|
|
0.17
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total funding of interest-earning assets
|
|
$
|
814,769
|
|
|
|
(26,414
|
)
|
|
|
(4.30
|
)
|
|
$
|
791,076
|
|
|
|
(30,094
|
)
|
|
|
(5.06
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income/yield
|
|
|
|
|
|
|
4,171
|
|
|
|
0.70
|
|
|
|
|
|
|
|
2,325
|
|
|
|
0.40
|
|
Fully taxable-equivalent
adjustments(6)
|
|
|
|
|
|
|
310
|
|
|
|
0.05
|
|
|
|
|
|
|
|
292
|
|
|
|
0.05
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income/yield (fully taxable-equivalent basis)
|
|
|
|
|
|
$
|
4,481
|
|
|
|
0.75
|
|
|
|
|
|
|
$
|
2,617
|
|
|
|
0.45
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
Excludes mortgage loans and
mortgage-related securities traded, but not yet settled.
|
(2)
|
For securities in our retained
portfolio and cash and investment portfolios, we calculated
average balances based on their unpaid principal balance plus
their associated deferred fees and costs (e.g., premiums
and discounts), but excluded the effect of mark-to-fair-value
changes.
|
(3)
|
Non-performing loans, where
interest income is recognized when collected, are included in
average balances.
|
(4)
|
Consist of cash and cash
equivalents and non-mortgage-related securities.
|
(5)
|
Includes current portion of
long-term debt.
|
(6)
|
The determination of net interest
income/yield (fully taxable-equivalent basis), which reflects
fully taxable-equivalent adjustments to interest income,
involves the conversion of tax-exempt sources of interest income
to the equivalent amounts of interest income that would be
necessary to derive the same net return if the investments had
been subject to income taxes using our federal statutory tax
rate of 35%.
|
Net interest income and net interest yield on a fully
taxable-equivalent basis increased during the three and nine
months ended September 30, 2008 compared to the three and
nine months ended September 30, 2007. During the latter
half of the first quarter of 2008 and continuing into the second
quarter of 2008, liquidity concerns in the market resulted in
more favorable investment opportunities for agency
mortgage-related securities at wider spreads. In response, we
increased our purchase activities resulting in an increase in
the average balance of our interest-earning assets. The
increases in net interest income and net interest yield on a
fully taxable-equivalent basis are primarily attributable to
both the purchases of fixed-rate assets at wider spreads
relative to our funding costs and the replacement of higher cost
short- and long-term debt with lower cost debt issuances.
Interest income for the third quarter of 2008 includes
$80 million of income related to the accretion of
other-than-temporary impairments of investments in
available-for-sale securities recorded in the second quarter of
2008. Net interest income and net interest yield for the three
and nine months ended September 30, 2008 also benefited
from funding fixed-rate assets with a higher proportion of
short-term debt in a steep yield curve environment as well as
replacing higher cost long-term debt with lower cost issuances.
However, our use of short-term debt funding has also been driven
by the unprecedented levels of volatility in the worldwide
financial markets, which has limited our ability to obtain
long-term and callable debt funding. During the first nine
months of 2008, our short-term funding balances increased
significantly when compared to the first nine months of 2007. We
seek to manage interest rate risk by attempting to substantially
match the duration characteristics of our assets and
liabilities. To accomplish this, we use a strategy that involves
asset and liability portfolio management, including the use of
derivatives for purposes of rebalancing the portfolio and
maintaining low PMVS and duration gap. While we use interest
rate derivatives to economically hedge a significant portion of
our interest rate exposure, due to the market turmoil we are
exposed to risks relating to both our ability to issue new debt
when our outstanding debt matures and to the variability in
interest costs on our new issuances of debt which directly
impacts our net interest income and net interest yield. The
increases in net interest income and net interest yield on a
fully tax-equivalent basis during the nine months ended
September 30, 2008 were partially offset by the impact of
declining interest rates because our floating rate assets reset
faster than our short-term debt during the first quarter of
2008. As a result of the creation of the securitization trusts
in December of 2007, interest due to PC investors is now
recorded in trust management fees within other income on our
consolidated statements of income. See Non-Interest
Income Other Income for additional
information about due to PC investors interest expense.
Non-Interest
Income
Management
and Guarantee Income
Table 6 provides summary information about management and
guarantee income. Management and guarantee income consists of
contractual amounts due to us (reflecting buy-ups and buy-downs
to base management and guarantee fees) as well as amortization
of certain
pre-2003
deferred credit and buy-down fees received by us that were
recorded as deferred income as a component of other liabilities.
Post-2002
credit and buy-down fees are reflected as increased income on
guarantee obligation as the guarantee obligation is amortized.
Table 6
Management and Guarantee
Income(1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
|
|
Nine Months Ended September 30,
|
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
|
|
Amount
|
|
|
Rate
|
|
|
Amount
|
|
|
Rate
|
|
|
Amount
|
|
|
Rate
|
|
|
Amount
|
|
|
Rate
|
|
|
|
(dollars in millions, rates in basis points)
|
|
|
Contractual management and guarantee fees
|
|
$
|
796
|
|
|
|
17.6
|
|
|
$
|
657
|
|
|
|
16.2
|
|
|
$
|
2,331
|
|
|
|
17.5
|
|
|
$
|
1,884
|
|
|
|
16.1
|
|
Amortization of credit and buy-down fees included in other
liabilities
|
|
|
36
|
|
|
|
0.8
|
|
|
|
61
|
|
|
|
1.5
|
|
|
|
47
|
|
|
|
0.4
|
|
|
|
53
|
|
|
|
0.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total management and guarantee income
|
|
$
|
832
|
|
|
|
18.4
|
|
|
$
|
718
|
|
|
|
17.7
|
|
|
$
|
2,378
|
|
|
|
17.9
|
|
|
$
|
1,937
|
|
|
|
16.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unamortized balance of credit and buy-down fees included in
other liabilities, at period end
|
|
$
|
371
|
|
|
|
|
|
|
$
|
390
|
|
|
|
|
|
|
$
|
371
|
|
|
|
|
|
|
$
|
390
|
|
|
|
|
|
|
|
(1)
|
Consists of management and
guarantee fees related to all issued and outstanding guarantees,
including those issued prior to adoption of Financial
Interpretation No. 45, Guarantors Accounting
and Disclosure Requirements for Guarantees, Including indirect
Guarantees of Indebtedness of Others, an interpretation of FASB
Statements No. 5, 57 and 107 and rescission of FASB
Interpretation No. 34, or FIN 45, in January
2003, which did not require the establishment of a guarantee
asset.
|
The primary drivers affecting management and guarantee income
are the average balance of our PCs and Structured Securities and
changes in management and guarantee fee rates. Contractual
management and guarantee fees include adjustments to the
contractual rates for
buy-ups and
buy-downs, whereby the contractual management and guarantee fee
rate is adjusted for up-front cash payments we make
(buy-up) or
receive (buy-down) at guarantee issuance. Our average rates of
management and guarantee income are also affected by the mix of
products we issue, competition in market pricing and customer
preference for
buy-up and
buy-down fees. The majority of our guarantees are issued under
customer flow channel contracts, which have pricing
schedules for our management and guarantee fees that are fixed
for periods of up to one year. The remainder of our purchase and
guarantee securitization of mortgage loans occurs through
bulk purchasing with management and guarantee fees
negotiated on an individual transaction basis. The appointment
of FHFA as Conservator and the Conservators subsequent
directive that we provide increased support to the mortgage
market will likely affect our future guarantee pricing decisions.
Management and guarantee income increased for the three and nine
months ended September 30, 2008 compared to the three and
nine months ended September 30, 2007, primarily reflecting
an increase in the average PCs and Structured Securities
balances of 11% and 14%, respectively, on an annualized basis.
The average contractual management and guarantee fee rate for
the three and nine months ended September 30, 2008 was
higher than the three and nine months ended September 30,
2007, primarily due to an increase in
buy-up
activity. To a lesser extent, increased purchases of
30-year
fixed-rate product during 2008, which has higher guarantee fee
rates relative to adjustable-rate mortgages, or ARMs, and
15-year
fixed-rate product, have also contributed to the increase in
guarantee fee rates.
Gains
(Losses) on Guarantee Asset
Upon issuance of a guarantee of securitized assets, we record a
guarantee asset on our consolidated balance sheets representing
the fair value of the management and guarantee fees we expect to
receive over the life of our PCs or Structured Securities.
Guarantee assets are recognized in connection with transfers of
PCs and Structured Securities that are accounted for as sales
under SFAS No. 140, Accounting for Transfers
and Servicing of Financial Assets and Extinguishment of
Liabilities, a replacement of Financial Accounting Standards
Board, or FASB, Statement No. 125. Additionally,
we recognize guarantee assets for PCs issued through our
guarantor swap program and for certain Structured Transactions
that we issue to third parties in exchange for non-agency
mortgage-related securities. Subsequent changes in the fair
value of the future cash flows of our guarantee asset are
reported in the current period income as gains (losses) on
guarantee asset.
The change in fair value of our guarantee asset reflects:
|
|
|
|
|
reductions related to the management and guarantee fees received
that are considered a return of our recorded investment in our
guarantee asset; and
|
|
|
|
changes in the fair value of management and guarantee fees we
expect to receive over the life of the related PC or Structured
Security.
|
The fair value of future management and guarantee fees is driven
primarily by expected changes in interest rates that affect the
estimated life of mortgages underlying our PCs and Structured
Securities and related discount rates used to determine the net
present value of the cash flows. For example, an increase in
interest rates generally slows the rate of
prepayments and extends the life of our guarantee asset and
increases the fair value of future management and guarantee
fees. Our valuation methodology for our guarantee asset uses
market-based information, including market values of
interest-only securities, to determine the fair value of future
cash flows associated with our guarantee asset.
Table 7
Attribution of Change Gains (Losses) on Guarantee
Asset
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
|
|
(in millions)
|
|
|
Contractual management and guarantee fees
|
|
$
|
(730
|
)
|
|
$
|
(585
|
)
|
|
$
|
(2,139
|
)
|
|
$
|
(1,661
|
)
|
Portion related to imputed interest income
|
|
|
299
|
|
|
|
138
|
|
|
|
757
|
|
|
|
395
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Return of investment on guarantee asset
|
|
|
(431
|
)
|
|
|
(447
|
)
|
|
|
(1,382
|
)
|
|
|
(1,266
|
)
|
Change in fair value of management and guarantee fees
|
|
|
(1,291
|
)
|
|
|
(18
|
)
|
|
|
(620
|
)
|
|
|
1,098
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gains (losses) on guarantee asset
|
|
$
|
(1,722
|
)
|
|
$
|
(465
|
)
|
|
$
|
(2,002
|
)
|
|
$
|
(168
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Losses on our guarantee asset increased by $1.3 billion for
the three months ended September 30, 2008 compared to the
three months ended September 30, 2007, primarily due to
greater declines in market valuations for interest-only mortgage
securities, which are used to value our guarantee asset, during
the third quarter of 2008 compared to the third quarter of 2007.
Contractual management and guarantee fees represent cash
received in the current period related to our PCs and Structured
Securities with an established guarantee asset and have
increased proportionately with the average balance of
outstanding guarantees. Losses on our guarantee asset increased
by $1.8 billion for the nine months ended
September 30, 2008 compared to the nine months ended
September 30, 2007, primarily due to the decreases in fair
value of management and guarantee fees resulting from lower
market valuations for interest-only mortgage securities.
Declines in market values for interest-only mortgage securities
during 2008 were attributed to decreases in interest rates
during the three and nine months ended September 30, 2008
combined with the effects of a decline in investor demand for
mortgage-related securities.
Income
on Guarantee Obligation
Upon issuance of our guarantee, we record a guarantee obligation
on our consolidated balance sheets representing the fair value
of our obligation to perform under the terms of the guarantee.
Our guarantee obligation primarily represents our performance
and other related costs, which consist of estimated credit
costs, including estimated unrecoverable principal and interest
that will be incurred over the expected life of the underlying
mortgages backing PCs, estimated foreclosure-related costs, and
estimated administrative and other costs related to our
guarantee. Our guarantee obligation is amortized into income
using a static effective yield determined at inception of the
guarantee based on forecasted repayments of the principal
balances. The static effective yield is periodically evaluated
and adjusted when significant changes in economic events cause a
shift in the pattern of our economic release from risk. For
example, certain market environments may lead to sharp and
sustained changes in home prices, which results in the need for
an adjustment in the static effective yield for specific
mortgage pools underlying the guarantee. When this type of
change is required, a cumulative
catch-up
adjustment, which could be significant in a given period, will
be recognized and a new static effective yield will be used to
determine our guarantee obligation amortization.
Effective January 1, 2008, we began estimating the fair
value of our newly-issued guarantee obligations at their
inception using the practical expedient provided by FIN 45,
as amended by SFAS 157. Using this approach, the initial
guarantee obligation is recorded at an amount equal to the fair
value of the compensation received in the related guarantee
transactions, including upfront delivery and other fees. As a
result, we no longer record estimates of deferred gains or
immediate day one losses on most guarantees. All
unamortized amounts recorded prior to January 1, 2008 will
continue to be deferred and amortized using existing
amortization methods.
Table 8 provides information about the components of income
on guarantee obligation.
Table 8
Income on Guarantee Obligation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
|
|
|
|
|
(in millions)
|
|
|
|
|
|
Amortization income related to:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Static effective yield
|
|
$
|
679
|
|
|
$
|
432
|
|
|
$
|
1,940
|
|
|
$
|
1,223
|
|
Cumulative
catch-up
|
|
|
104
|
|
|
|
41
|
|
|
|
781
|
|
|
|
154
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total income on guarantee obligation
|
|
$
|
783
|
|
|
$
|
473
|
|
|
$
|
2,721
|
|
|
$
|
1,377
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization income increased for the three and nine months
ended September 30, 2008, compared to the three and nine
months ended September 30, 2007. This increase is due to
(1) higher guarantee obligation balances in 2007, which
included significant market risk premiums, including those that
resulted in significant day one losses (i.e., where the
fair value of the guarantee obligation at issuance exceeded the
fair value of the guarantee and credit enhancement-related
assets), (2) higher cumulative
catch-up
adjustments for the three and nine months ended
September 30, 2008, and (3) higher average
balances of our PCs and Structured Securities. The cumulative
catch-up
adjustments recognized during the nine months ended
September 30, 2008 were principally due to significant
declines in home prices and, to a lesser extent, increases in
mortgage prepayment speeds related to pools of mortgage loans
issued during 2006 and 2007. These cumulative
catch-up
adjustments are recorded to provide a pattern of revenue
recognition that is more consistent with our economic release
from risk and the timing of the recognition of losses on the
pools of mortgage loans we guarantee.
Derivative
Overview
Table 9 presents the effect of derivatives on our
consolidated financial statements, including notional or
contractual amounts of our derivatives and our hedge accounting
classifications.
Table 9
Summary of the Effect of Derivatives on Selected Consolidated
Financial Statement Captions
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated Balance Sheets
|
|
|
|
September 30, 2008
|
|
|
December 31, 2007
|
|
|
|
Notional or
|
|
|
|
|
|
|
|
|
Notional or
|
|
|
|
|
|
|
|
|
|
Contractual
|
|
|
Fair Value
|
|
|
AOCI
|
|
|
Contractual
|
|
|
Fair Value
|
|
|
AOCI
|
|
Description
|
|
Amount(1)
|
|
|
(Pre-Tax)(2)
|
|
|
(Net of
Taxes)(3)
|
|
|
Amount(1)
|
|
|
(Pre-Tax)(2)
|
|
|
(Net of
Taxes)(3)
|
|
|
|
(in millions)
|
|
|
Cash flow hedges open
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
No hedge designation
|
|
|
1,632,226
|
|
|
|
5,778
|
|
|
|
|
|
|
|
1,322,881
|
|
|
|
4,790
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subtotal
|
|
|
1,632,226
|
|
|
|
5,778
|
|
|
|
|
|
|
|
1,322,881
|
|
|
|
4,790
|
|
|
|
|
|
Balance related to closed cash flow hedges
|
|
|
|
|
|
|
|
|
|
|
(3,554
|
)
|
|
|
|
|
|
|
|
|
|
|
(4,059
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subtotal
|
|
|
1,632,226
|
|
|
|
5,778
|
|
|
|
(3,554
|
)
|
|
|
1,322,881
|
|
|
|
4,790
|
|
|
|
(4,059
|
)
|
Derivative interest receivable (payable), net
|
|
|
|
|
|
|
805
|
|
|
|
|
|
|
|
|
|
|
|
1,659
|
|
|
|
|
|
Trade/settle receivable (payable), net
|
|
|
|
|
|
|
(6
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative collateral (held) posted, net
|
|
|
|
|
|
|
(4,896
|
)
|
|
|
|
|
|
|
|
|
|
|
(6,204
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
1,632,226
|
|
|
$
|
1,681
|
|
|
$
|
(3,554
|
)
|
|
$
|
1,322,881
|
|
|
$
|
245
|
|
|
$
|
(4,059
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated Statements of Income
|
|
|
|
Three Months Ended September 30,
|
|
|
Nine Months Ended September 30,
|
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
|
|
Derivative
|
|
|
Hedge
|
|
|
Derivative
|
|
|
Hedge
|
|
|
Derivative
|
|
|
Hedge
|
|
|
Derivative
|
|
|
Hedge
|
|
|
|
Gains
|
|
|
Accounting
|
|
|
Gains
|
|
|
Accounting
|
|
|
Gains
|
|
|
Accounting
|
|
|
Gains
|
|
|
Accounting
|
|
Description
|
|
(Losses)
|
|
|
Gains
(Losses)(4)
|
|
|
(Losses)
|
|
|
Gains
(Losses)(4)
|
|
|
(Losses)
|
|
|
Gains
(Losses)(4)
|
|
|
(Losses)
|
|
|
Gains
(Losses)(4)
|
|
|
|
(in millions)
|
|
|
Cash flow hedges
open(5)
|
|
$
|
|
|
|
$
|
(20
|
)
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
(16
|
)
|
|
$
|
|
|
|
$
|
|
|
No hedge
designation(5)
|
|
|
(3,080
|
)
|
|
|
|
|
|
|
(188
|
)
|
|
|
|
|
|
|
(3,210
|
)
|
|
|
|
|
|
|
(394
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
(3,080
|
)
|
|
$
|
(20
|
)
|
|
$
|
(188
|
)
|
|
$
|
|
|
|
$
|
(3,210
|
)
|
|
$
|
(16
|
)
|
|
$
|
(394
|
)
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
Notional or contractual amounts are
used to calculate the periodic settlement amounts to be received
or paid and generally do not represent actual amounts to be
exchanged. Notional or contractual amounts are not recorded as
assets or liabilities on our consolidated balance sheets.
|
(2)
|
The value of derivatives on our
consolidated balance sheets is reported as derivative assets,
net and derivative liability, net, and includes derivative
interest receivable or (payable), net, trade/settle receivable
or (payable), net and derivative cash collateral (held) or
posted, net.
|
(3)
|
Derivatives that meet specific
criteria may be accounted for as cash flow hedges. Changes in
the fair value of the effective portion of open qualifying cash
flow hedges are recorded in AOCI, net of taxes. Net deferred
gains and losses on closed cash flow hedges (i.e., where
the derivative is either terminated or redesignated) are also
included in AOCI, net of taxes, until the related forecasted
transaction affects earnings or is determined to be probable of
not occurring.
|
(4)
|
Hedge accounting gains (losses)
arise when the fair value change of a derivative does not
exactly offset the fair value change of the hedged item
attributable to the hedged risk, and is a component of other
income in our consolidated statements of income. For further
information, see NOTE 10: DERIVATIVES to our
consolidated financial statements.
|
(5)
|
For all derivatives in qualifying
hedge accounting relationships, the accrual of periodic cash
settlements is recorded in net interest income on our
consolidated statements of income and those amounts are not
included in the table. For derivatives not in qualifying hedge
accounting relationships, the accrual of periodic cash
settlements is recorded in derivative gains (losses) on our
consolidated statements of income.
|
In the first quarter of 2008, we began designating certain
derivative positions as cash flow hedges of changes in cash
flows associated with our forecasted issuances of debt
consistent with our risk management goals. In the periods
presented prior to 2008, we only elected cash flow hedge
accounting relationships for certain commitments to sell
mortgage-related securities. We expanded this hedge accounting
strategy in an effort to reduce volatility in our consolidated
statements of income. For a derivative accounted for as a cash
flow hedge, changes in fair value are reported in AOCI, net of
taxes, on our consolidated balance sheets to the extent the
hedge was effective. The ineffective portion of changes in fair
value is reported as other income on our consolidated statements
of income. We record changes in the fair value, including
periodic settlements, of derivatives not in hedge accounting
relationships as derivative gains (losses) on our consolidated
statements of income. However, in conjunction with the
conservatorship on September 6, 2008, we determined that we
can no longer assert that the associated forecasted issuances of
debt are probable of occurring and as a result, we discontinued
this hedge accounting strategy. As a result of this discontinued
hedge accounting strategy, we transferred $27.6 billion in
notional amount and $(488) million in market value from
open cash-flow hedges to closed cash-flow hedges on
September 6, 2008. See NOTE 10:
DERIVATIVES to our consolidated financial statements for
additional information about our discontinuation of derivatives
designated as cash-flow hedges.
Derivative
Gains (Losses)
Table 10 provides a summary of the notional or contractual
amounts and the gains and losses related to derivatives that
were not accounted for in hedge accounting relationships.
Derivative gains (losses) represents the change in fair value of
derivatives not accounted for in hedge accounting relationships
because the derivatives did not qualify for, or we did not elect
to pursue, hedge accounting, resulting in fair value changes
being recorded to earnings. Derivative gains (losses) also
includes the accrual of periodic settlements for derivatives
that are not in hedge accounting relationships. Although
derivatives are an important aspect of our management of
interest-rate risk, they will generally increase the volatility
of reported net income (loss), particularly when they are not
accounted for in hedge accounting relationships.
Table 10
Derivatives Not in Hedge Accounting Relationships
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Notional or
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Contractual Amount
|
|
|
Derivative Gains (Losses)
|
|
|
|
September 30,
|
|
|
Three Months Ended September 30,
|
|
|
Nine Months Ended September 30,
|
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
|
|
(in millions)
|
|
|
Call swaptions:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchased
|
|
$
|
184,022
|
|
|
$
|
262,802
|
|
|
$
|
1,824
|
|
|
$
|
1,657
|
|
|
$
|
2,522
|
|
|
$
|
(64
|
)
|
Written
|
|
|
|
|
|
|
1,000
|
|
|
|
(7
|
)
|
|
|
(16
|
)
|
|
|
14
|
|
|
|
34
|
|
Put swaptions:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchased
|
|
|
36,550
|
|
|
|
18,325
|
|
|
|
22
|
|
|
|
(70
|
)
|
|
|
(31
|
)
|
|
|
166
|
|
Written
|
|
|
6,000
|
|
|
|
1,000
|
|
|
|
154
|
|
|
|
27
|
|
|
|
64
|
|
|
|
(119
|
)
|
Receive-fixed swaps:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign-currency denominated
|
|
|
13,367
|
|
|
|
22,095
|
|
|
|
228
|
|
|
|
157
|
|
|
|
(69
|
)
|
|
|
(343
|
)
|
U.S. dollar denominated
|
|
|
316,461
|
|
|
|
259,975
|
|
|
|
2,101
|
|
|
|
3,026
|
|
|
|
4,400
|
|
|
|
285
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total receive-fixed swaps
|
|
|
329,828
|
|
|
|
282,070
|
|
|
|
2,329
|
|
|
|
3,183
|
|
|
|
4,331
|
|
|
|
(58
|
)
|
Pay-fixed swaps
|
|
|
452,633
|
|
|
|
380,370
|
|
|
|
(5,296
|
)
|
|
|
(6,513
|
)
|
|
|
(9,170
|
)
|
|
|
(2,460
|
)
|
Futures
|
|
|
245,535
|
|
|
|
109,848
|
|
|
|
(534
|
)
|
|
|
105
|
|
|
|
(41
|
)
|
|
|
54
|
|
Foreign-currency
swaps(1)
|
|
|
13,688
|
|
|
|
23,842
|
|
|
|
(1,578
|
)
|
|
|
1,155
|
|
|
|
(389
|
)
|
|
|
1,685
|
|
Forward purchase and sale commitments
|
|
|
199,811
|
|
|
|
61,800
|
|
|
|
280
|
|
|
|
185
|
|
|
|
548
|
|
|
|
114
|
|
Other(2)
|
|
|
164,159
|
|
|
|
62,159
|
|
|
|
8
|
|
|
|
(13
|
)
|
|
|
(64
|
)
|
|
|
9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subtotal
|
|
|
1,632,226
|
|
|
|
1,203,216
|
|
|
|
(2,798
|
)
|
|
|
(300
|
)
|
|
|
(2,216
|
)
|
|
|
(639
|
)
|
Accrual of periodic settlements:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Receive-fixed
swaps(3)
|
|
|
|
|
|
|
|
|
|
|
753
|
|
|
|
(66
|
)
|
|
|
1,474
|
|
|
|
(161
|
)
|
Pay-fixed swaps
|
|
|
|
|
|
|
|
|
|
|
(1,128
|
)
|
|
|
182
|
|
|
|
(2,723
|
)
|
|
|
485
|
|
Foreign-currency swaps
|
|
|
|
|
|
|
|
|
|
|
105
|
|
|
|
(5
|
)
|
|
|
263
|
|
|
|
(82
|
)
|
Other
|
|
|
|
|
|
|
|
|
|
|
(12
|
)
|
|
|
1
|
|
|
|
(8
|
)
|
|
|
3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total accrual of periodic settlements
|
|
|
|
|
|
|
|
|
|
|
(282
|
)
|
|
|
112
|
|
|
|
(994
|
)
|
|
|
245
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
1,632,226
|
|
|
$
|
1,203,216
|
|
|
$
|
(3,080
|
)
|
|
$
|
(188
|
)
|
|
$
|
(3,210
|
)
|
|
$
|
(394
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
Foreign-currency swaps are defined
as swaps in which the net settlement is based on one leg
calculated in a foreign-currency and the other leg calculated in
U.S. dollars.
|
(2)
|
Consists of basis swaps, certain
option-based contracts (including written options),
interest-rate caps, swap guarantee derivatives and credit
derivatives. Includes $27 million loss related to the
Lehman bankruptcy for both the three and nine months ended
September 30, 2008. For additional information, see
CREDIT RISKS Institutional Credit
Risk Derivative Counterparty Credit
Risk.
|
(3)
|
Includes imputed interest on
zero-coupon swaps.
|
We use receive- and pay-fixed swaps to adjust the interest-rate
characteristics of our debt funding in order to more closely
match changes in the interest-rate characteristics of our
mortgage-related assets. During the third quarter of 2008, fair
value losses on our pay-fixed swaps of $5.3 billion
contributed to an overall loss recorded for derivatives. The
losses were partially offset by gains on our receive-fixed swaps
of $2.3 billion as longer-term swap interest rates
decreased. Additionally, we use swaptions and other option-based
derivatives to adjust the characteristics of our debt in
response to changes in the expected lives of mortgage-related
assets in our retained portfolio. The gains on our purchased
call swaptions, which increased during the third quarter of
2008, compared to the third quarter of 2007, were primarily
attributable to decreasing swap interest rates and an increase
in implied volatility during the third quarter of 2008.
During the nine months ended September 30, 2008, we
recognized a larger derivative loss as compared to the nine
months ended September 30, 2007. On a
year-to-date
basis for 2008, swap interest rates declined resulting in a loss
on our pay-fixed swap positions, partially offset by gains on
our receive-fixed swaps. Additionally, the decrease in swap
interest rates on a
year-to-date
basis for 2008, combined with an increase in volatility resulted
in a gain related to our purchased call swaptions for the nine
months ended September 30, 2008.
Effective January 1, 2008, we elected the fair value option
for our foreign-currency denominated debt. As a result of this
election, foreign-currency translation gains and losses and fair
value adjustments related to our foreign-currency denominated
debt are recognized on our consolidated statements of income as
unrealized gains (losses) on foreign-currency denominated debt
recorded at fair value. Prior to January 1, 2008,
translation gains and losses on our foreign-currency denominated
debt were recorded in foreign-currency gains (losses), net and
the non-currency related changes in fair value were not
recognized. We use a combination of foreign-currency swaps and
foreign-currency denominated receive-fixed swaps to hedge the
changes in fair value of our foreign-currency denominated debt
related to fluctuations in exchange rates and
interest rates, respectively. Derivative gains (losses) on
foreign-currency swaps were $(1.6) billion and
$(389) million for the three and nine months ended
September 30, 2008, respectively, compared to
$1.2 billion and $1.7 billion for the three and nine
months ended September 30, 2007, respectively. These
amounts were offset by fair value gains (losses) related to
translation of $1.7 billion and $539 million for the
three and nine months ended September 30, 2008,
respectively, and $(1.2) billion and $(1.7) billion
for the three and nine months ended September 30, 2007,
respectively, on our foreign-currency denominated debt. In
addition, the interest-rate component of the derivative gains
(losses) of $228 million and $(69) million for the
three and nine months ended September 30, 2008,
respectively, on foreign-currency denominated receive-fixed
swaps largely offset market value adjustments gains (losses)
included in unrealized gains (losses) on foreign-currency
denominated debt recorded at fair value of $(165) million
and $145 million for the three and nine months ended
September 30, 2008, respectively. See Unrealized
Gains (Losses) on Foreign-Currency Denominated Debt Recorded at
Fair Value and NOTE 1: SUMMARY OF
SIGNIFICANT ACCOUNTING POLICIES to our consolidated
financial statements for additional information about our
election to adopt the fair value option for foreign-currency
denominated debt. See ITEM 13. FINANCIAL STATEMENTS
AND SUPPLEMENTARY DATA AUDITED CONSOLIDATED
FINANCIAL STATEMENTS AND ACCOMPANYING NOTES
NOTE 11: DERIVATIVES in our Registration Statement
for additional information about our derivatives.
Gains
(Losses) on Investment Activity
Gains (losses) on investment activity includes gains and losses
on certain assets where changes in fair value are recognized
through earnings, gains and losses related to sales, impairments
and other valuation adjustments. Table 11 summarizes the
components of gains (losses) on investment activity.
Table 11
Gains (Losses) on Investment Activity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
|
|
(in millions)
|
|
|
Gains (losses) on trading
securities(1)
|
|
$
|
(932
|
)
|
|
$
|
257
|
|
|
$
|
(2,240
|
)
|
|
$
|
302
|
|
Gains (losses) on sale of mortgage
loans(2)
|
|
|
31
|
|
|
|
19
|
|
|
|
97
|
|
|
|
39
|
|
Gains (losses) on sale of available-for-sale securities
|
|
|
287
|
|
|
|
228
|
|
|
|
540
|
|
|
|
13
|
|
Security impairments on available-for-sale securities
|
|
|
(9,106
|
)
|
|
|
(1
|
)
|
|
|
(10,217
|
)
|
|
|
(351
|
)
|
Lower-of-cost-or-fair-value adjustments
|
|
|
(20
|
)
|
|
|
(25
|
)
|
|
|
(28
|
)
|
|
|
(47
|
)
|
Gains (losses) on mortgage loans elected at fair value
|
|
|
(7
|
)
|
|
|
|
|
|
|
(7
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total gains (losses) on investment activity
|
|
$
|
(9,747
|
)
|
|
$
|
478
|
|
|
$
|
(11,855
|
)
|
|
$
|
(44
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
Include
mark-to-fair
value adjustments recorded in accordance with Emerging Issues
Task Force, or EITF,
99-20,
Recognition of Interest Income and Impairment on
Purchased Beneficial Interests and Beneficial Interests That
Continue to Be Held by a Transferor in Securitized Financial
Assets on securities classified as trading of
$(101) million and $(15) million for the three months
ended September 30, 2008 and 2007, respectively, and
$(427) million and $(18) million for the nine months
ended September 30, 2008 and 2007, respectively. Prior
period amounts have been revised to conform to the current
period presentation.
|
(2)
|
Represent gains (losses) on
mortgage loans sold in connection with securitization
transactions.
|
Gains
(Losses) on Trading Securities
We recognized net losses on trading securities for the three and
nine months ended September 30, 2008, as compared to
net gains for the three and nine months ended
September 30, 2007. On January 1, 2008, we implemented
fair value option accounting and transferred approximately
$87 billion in securities, primarily ARMs and fixed-rate
PCs, from available-for-sale securities to trading securities
significantly increasing our securities classified as trading.
The unpaid principal balance of our securities classified as
trading was approximately $116 billion at
September 30, 2008 compared to approximately
$12 billion at December 31, 2007. During the third
quarter of 2008, we sold agency securities classified as trading
securities with unpaid principal balances of $58 billion,
which generated a realized loss of $547 million. The
increased balance in our trading portfolio when compared to the
third quarter of 2007, combined with wider credit spreads, also
contributed to the losses on trading securities for the three
and nine months ended September 30, 2008. The gains
recognized during the three and nine months ended
September 30, 2007 were primarily the result of the effect
of declining interest rates on our REMIC securities classified
as trading.
Gains
(Losses) on Sale of Available-For-Sale Securities
Net gains on the sale of available-for-sale securities increased
for the third quarter of 2008, as compared to the third quarter
of 2007. During the third quarter of 2008, primarily prior to
conservatorship, we entered into structuring transactions and
sales of seasoned securities with unpaid principal balances of
$14.8 billion, primarily consisting of agency
mortgage-related securities, which generated a net gain of
$287 million. During the third quarter of 2007, we entered
into structuring transactions and sales of seasoned securities
with unpaid principal balances of $32.1 billion generating
net gains of $279 million recognized in gains (losses) on
investment activity because the securities sold had higher
coupon rates than those available in the market at the time of
sale. In addition, during the third quarter of 2007, we sold
non-mortgage-related
asset-backed securities with an unpaid principal balance of
$12 billion generating net losses of $52 million to
generate cash for more favorable investment opportunities.
Net gains on the sale of available-for-sale securities increased
for the nine months ended September 30, 2008, as compared
to the nine months ended September 30, 2007. During the
nine months ended September 30, 2008, we sold securities
with unpaid principal balances of $35 billion, primarily
consisting of agency mortgage-related securities, which
generated a net gain of $538 million. These sales occurred
principally during the earlier months of the first quarter and
prior to conservatorship during the third quarter of 2008 when
market conditions were favorable and were driven in part by our
need to maintain our mandatory target capital surplus. We were
not required to sell these securities. However, in an effort to
improve our capital position in light of the unanticipated
extraordinary market conditions that began in the latter half of
2007, we strategically selected blocks of securities to sell,
the majority of which were in a gain position. These sales
reduced the assets on our balance sheet, against which we were
required to hold capital. In addition, the net gains on these
sales increased our retained earnings, further improving our
capital position. During the nine months ended
September 30, 2007, we sold $63 billion of PCs and
Structured Securities, which generated a net gain of
$147 million.
Security
Impairments on Available-For-Sale Securities
During the third quarter of 2008 and 2007, we recorded
other-than-temporary impairments related to investments in
available-for-sale securities of $9.1 billion and
$1 million, respectively. Of the impairments recognized
during the third quarter of 2008, $8.9 billion related to
non-agency securities backed by subprime or
Alt-A and
other loans, including MTA loans, primarily due to the
combination of a more pessimistic view of future performance due
to the significant weakness of the economic environment during
the third quarter of 2008, significant declines in the valuation
of these securities and poor performance of the underlying
collateral of these securities. Also contributing to the
impairment charge was a determination that there was substantial
uncertainty surrounding the ability of two monoline bond
insurers to pay all future claims on securities which we
previously held in an unrealized loss position. In making this
determination, we considered our own analysis as well as
additional qualitative factors, such as the ability of each
monoline to access capital and to generate new business, pending
regulatory actions, ratings agency actions, security prices and
credit default swap levels traded on each monoline. We rely on
monoline bond insurance, including secondary coverage, to
provide credit protection on some of our securities held in our
mortgage-related investment portfolio as well as our
non-mortgage-related investment portfolio. Monolines are
companies that provide credit insurance principally covering
securitized assets in both the primary issuance and secondary
markets. We also recognized impairment charges of
$244 million related to our available-for-sale
non-mortgage-related securities with $10.8 billion of
unpaid principal balance, as management could no longer assert
the positive intent to hold these securities to recovery. The
decision to impair these securities is consistent with our
consideration of sales of securities from the cash and
investments portfolio as a contingent source of liquidity.
During the nine months ended September 30, 2008 and 2007,
we recorded impairments related to investments in
available-for-sale securities of $10.2 billion and
$351 million, respectively. Of the impairments recognized
during the nine months ended September 30, 2008,
$9.7 billion related to non-agency securities backed by
subprime or
Alt-A and
other loans, including MTA loans, as discussed above. Of the
remaining $534 million, the majority, $458 million,
related to impairments of our available-for-sale
non-mortgage-related securities during the nine months ended
September 30, 2008 where we did not have the intent to hold
to a forecasted recovery. During the nine months ended
September 30, 2007, security impairments on
available-for-sale securities included $348 million in
impairments attributed to agency mortgage-related securities in
an unrealized loss position that we did not have the intent to
hold to a forecasted recovery.
See CONSOLIDATED BALANCE SHEET ANALYSIS
Other-Than-Temporary Impairments for additional
information.
Unrealized
Gains (Losses) on Foreign-Currency Denominated Debt Recorded at
Fair Value
We elected the fair value option for our foreign-currency
denominated debt effective January 1, 2008. Accordingly,
foreign-currency exposure is now a component of unrealized gains
(losses) on foreign-currency denominated debt recorded at fair
value. Prior to that date, translation gains and losses on our
foreign-currency denominated debt were reported in
foreign-currency gains (losses), net in our consolidated
statements of income. We manage the foreign-currency exposure
associated with our foreign-currency denominated debt through
the use of derivatives. For the three and nine months ended
September 30, 2008, we recognized fair value gains of
$1.5 billion and $684 million, respectively, on our
foreign-currency denominated debt primarily due to the U.S.
dollar strengthening relative to the Euro. See
Derivative Gains (Losses) for
additional information about how we mitigate changes in the fair
value of our foreign-currency denominated debt by using
derivatives. See Foreign-Currency Gains (Losses),
Net and NOTE 1: SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES to our consolidated financial
statements for additional information about our adoption of
SFAS 159.
Gains
(Losses) on Debt Retirement
Gains on debt retirement were $36 million and
$312 million during the three and nine months ended
September 30, 2008, respectively, compared to gains of
$91 million and $187 million during the three and nine
months ended September 30, 2007, respectively. During the
nine months ended September 30, 2008, we recognized gains
due to the increased level of call activity, primarily involving
our debt with coupon levels that increase at pre-determined
intervals, which led to gains upon retirement and write-offs of
previously recorded interest expense.
Recoveries
on Loans Impaired upon Purchase
Recoveries on loans impaired upon purchase represent the
recapture into income of previously recognized losses on loans
purchased and provision for credit losses associated with
purchases of delinquent loans from our PCs and Structured
Securities in conjunction with our guarantee activities.
Recoveries occur when a non-performing loan is repaid in full or
when at the time of foreclosure the estimated fair value of the
acquired property, less costs to sell, exceeds the carrying
value of the loan. For impaired loans where the borrower has
made required payments that return the loan to less than
90 days delinquent, the recovery amounts are instead
accreted into interest income over time as periodic payments are
received.
The amount of impaired loans purchased into our retained
portfolio increased significantly during 2007. However, since
December 2007, when we changed our practice for optional
purchases of impaired loans, the rate of increase in the
carrying balances of these loans has slowed. See CREDIT
RISKS Mortgage Credit Risk Loans
Purchased Under Financial Guarantees for more
information. During the three months ended September 30,
2008 and 2007, we recognized recoveries on loans impaired upon
purchase of $91 million and $125 million,
respectively. During the nine months ended September 30,
2008 and 2007, we recognized recoveries on loans impaired upon
purchase of $438 million and $232 million,
respectively. Our recoveries on impaired loans decreased during
the third quarter of 2008 compared to the third quarter of 2007,
due to higher severities during the third quarter of 2008 on
those loans that proceeded to foreclosure, which reduced our
recoveries. Recoveries on impaired loans increased during the
nine months ended September 30, 2008 compared to the same
period in 2007 due to the higher average balances of these loans
within our retained portfolio and higher volume of these loans
that proceeded to foreclosure in 2008.
Foreign-Currency
Gains (Losses), Net
We manage the foreign-currency exposure associated with our
foreign-currency denominated debt through the use of
derivatives. We elected the fair value option for
foreign-currency denominated debt effective January 1,
2008. Prior to this election, gains and losses associated with
the foreign-currency exposure of our foreign-currency
denominated debt were recorded as foreign-currency gains
(losses), net in our consolidated statements of income. With the
adoption of SFAS 159, foreign-currency exposure is now a
component of unrealized gains (losses) on foreign-currency
denominated debt recorded at fair value. Because the fair value
option is prospective, prior period amounts have not been
reclassified. See Derivative Gains (Losses)
and Unrealized Gains (Losses) on Foreign-Currency
Denominated Debt Recorded at Fair Value and
NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES to our consolidated financial statements for
additional information.
For the three and nine months ended September 30, 2007, we
recognized net foreign-currency translation losses primarily
related to our foreign-currency denominated debt of
$1.2 billion and $1.7 billion, respectively, as the
U.S. dollar weakened relative to the Euro during the
period. During the same period, these losses were offset by an
increase of $1.2 billion and $1.7 billion,
respectively, in the fair value of foreign-currency-related
derivatives recorded in derivative gains (losses).
Other
Income
Other income primarily consists of resecuritization fees, trust
management income, fees associated with servicing and
technology-related products, including Loan
Prospector®
, fees related to multifamily loans (including application and
other fees) and various other fees received from mortgage
originators and servicers. Resecuritization fees are revenues we
earn primarily in connection with the issuance of Structured
Securities for which we make a REMIC election, where the
underlying collateral is provided by third parties. These fees
are also generated in connection with the creation of
interest-only and principal-only strips as well as other
Structured Securities. Trust management fees represent the fees
we earn as administrator, issuer and trustee, net of related
expenses, which prior to December 2007, were reported as due to
PC investors, a component of net interest income.
Non-Interest
Expense
Table 12 summarizes the components of non-interest expense.
Table 12
Non-Interest Expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
|
|
|
|
|
(in millions)
|
|
|
|
|
|
Administrative expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Salaries and employee benefits
|
|
$
|
133
|
|
|
$
|
216
|
|
|
$
|
605
|
|
|
$
|
656
|
|
Professional services
|
|
|
61
|
|
|
|
103
|
|
|
|
188
|
|
|
|
296
|
|
Occupancy expense
|
|
|
16
|
|
|
|
16
|
|
|
|
49
|
|
|
|
46
|
|
Other administrative expenses
|
|
|
98
|
|
|
|
93
|
|
|
|
267
|
|
|
|
275
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total administrative expenses
|
|
|
308
|
|
|
|
428
|
|
|
|
1,109
|
|
|
|
1,273
|
|
Provision for credit losses
|
|
|
5,702
|
|
|
|
1,372
|
|
|
|
9,479
|
|
|
|
2,067
|
|
REO operations expense
|
|
|
333
|
|
|
|
51
|
|
|
|
806
|
|
|
|
81
|
|
Losses on certain credit guarantees
|
|
|
2
|
|
|
|
392
|
|
|
|
17
|
|
|
|
719
|
|
Losses on loans purchased
|
|
|
252
|
|
|
|
649
|
|
|
|
423
|
|
|
|
1,129
|
|
Securities administrator loss on investment activity
|
|
|
1,082
|
|
|
|
|
|
|
|
1,082
|
|
|
|
|
|
LIHTC partnerships
|
|
|
121
|
|
|
|
111
|
|
|
|
346
|
|
|
|
354
|
|
Minority interests in earnings of consolidated subsidiaries
|
|
|
|
|
|
|
4
|
|
|
|
8
|
|
|
|
22
|
|
Other expenses
|
|
|
86
|
|
|
|
63
|
|
|
|
264
|
|
|
|
168
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total non-interest expense
|
|
$
|
7,886
|
|
|
$
|
3,070
|
|
|
$
|
13,534
|
|
|
$
|
5,813
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Administrative
Expenses
Administrative expenses decreased for the three and nine months
ended September 30, 2008, compared to the three and nine
months ended September 30, 2007, primarily due to a
reduction in our short-term performance compensation during the
third quarter of 2008 as well as a decrease in our use of
consultants throughout 2008. Since it is likely portions of our
corporate objectives for 2008 will not be met, we partially
reversed short-term performance compensation amounts during the
third quarter of 2008 that had been previously accrued. As a
percentage of the average total mortgage portfolio,
administrative expenses declined to 5.6 basis points and
6.8 basis points for the three and nine months ended
September 30, 2008, respectively, from 8.7 basis
points and 8.8 basis points for the three and nine months
ended September 30, 2007, respectively.
Provision
for Credit Losses
Our credit loss reserves reflect our best estimates of incurred
losses. Our reserve estimates for mortgage loan and guarantee
losses are based on our projections of the results of strategic
loss mitigation initiatives, including a higher rate of loan
modifications for troubled borrowers, and projections of
recoveries through repurchases by seller/servicers of defaulted
loans due to failure to follow contractual underwriting
requirements at the time of the loan origination.
Our reserve estimates also reflect our best projection of
mortgage loan defaults. However, the unprecedented deterioration
in the national housing market and the uncertainty in other
macroeconomic factors makes forecasting of default rates
increasingly imprecise.
The provision for credit losses increased significantly for the
three and nine months ended September 30, 2008, compared to
the three and nine months ended September 30, 2007,
respectively, as continued weakening in the housing market
affected our single-family mortgage portfolio. See
Table 1 Credit Statistics, Single-Family
Mortgage Portfolio for a presentation of the quarterly
trend in the deterioration of our credit statistics. For the
three and nine months ended September 30, 2008, we recorded
additional reserves for credit losses on our single-family
mortgage portfolio as a result of:
|
|
|
|
|
increased estimates of incurred losses on mortgage loans that
are expected to experience higher default rates. Our estimates
of incurred losses are higher for loans we purchased or
guaranteed in certain years, or vintages, particularly those we
purchased during 2006, 2007 and to a lesser extent 2005 and
2008. Continued deterioration of macroeconomic factors, such as
decreases in home prices and rising rates of unemployment during
2008 have negatively impacted our estimates of incurred loss,
especially for those mortgages we purchased during these years.
Our estimates of incurred loss have also increased significantly
for certain product-types, particularly
Alt-A,
adjustable-rate and interest-only mortgage products and for
loans on properties in certain states, such as California,
Florida, Nevada and Arizona;
|
|
|
|
an observed increase in delinquency rates and the percentage of
loans that transition from delinquency to foreclosure, with more
severe increases concentrated in certain regions of the
U.S. as well as loans with second lien, third-party
financing. For example, as of September 30, 2008,
single-family mortgage loans in the state of Florida comprise 7%
of our single-family mortgage portfolio; however the loans in
this state make up more than 20% of the total delinquent loans
in our single-family mortgage portfolio, based on unpaid
principal balances. Similarly, as of September 30, 2008,
approximately 14% of loans in our single-family mortgage
portfolio have second lien, third-party
|
|
|
|
|
|
financing; however we estimate that these loans comprise more
than 25% of our delinquent loans, based on unpaid principal
balances;
|
|
|
|
|
|
increases in the estimated severity of losses on a per-property
basis, net of recoveries from credit enhancements, driven in
part by declines in home sales and home prices. The states with
the largest declines in home prices and highest increases in
severity of losses include California, Florida, Nevada, Arizona,
Virginia, Georgia and Michigan;
|
|
|
|
increases in the average unpaid principal balance of delinquent
loans in our single-family mortgage portfolio. During the third
quarter of 2008, there was a significant increase in the average
size of delinquent loans, primarily attributed to our West
region, which comprised approximately 30% of our total
delinquent loans in the single-family mortgage portfolio; and
|
|
|
|
to a lesser extent, increases in counterparty exposure related
to our estimates of recoveries through repurchases by
seller/servicers of defaulted loans due to failure to follow
contractual underwriting requirements at origination and under
separate recourse agreements. During the third quarter of 2008,
several of our seller/servicers were acquired by the FDIC,
declared bankruptcy or merged with other institutions. These and
other events increase our counterparty exposure, or the
likelihood that we may bear the risk of mortgage credit losses
without the benefit of recourse to our counterparty.
|
We expect our provisions for credit losses to remain high for
the remainder of 2008 and the extent and duration that credit
losses remain high in future periods will depend on a number of
factors, including changes in property values, regional economic
conditions, third-party mortgage insurance coverage and
recoveries and the realized rate of seller/servicer repurchases.
We expect to further increase our single-family loan loss
reserves in future periods as additional losses are incurred,
particularly related to mortgages originated in 2006, 2007 and
to a lesser extent those originated in 2005 and 2008. Loans
originated during 2006 and 2007 represent approximately 35% of
the unpaid principal balance of our single-family loans
underlying our PCs and Structured Securities and 15% of the
unpaid principal balance of single-family loans that we hold in
our retained portfolio. Although the credit characteristics of
loans underlying our newly-issued guarantees during the nine
months ended September 30, 2008 have progressively
improved, we have experienced weak credit performance to date
from loans purchased in the first and second quarters of 2008.
REO
Operations Expense
The increase in REO operations expense for the three and nine
months ended September 30, 2008, as compared to the three
and nine months ended September 30, 2007, was due to
significant increases in the volume of our single-family
property foreclosures combined with declining single-family REO
property values during 2008. The decline in home prices, which
has been both rapid and dramatic in certain geographical areas,
combined with our higher REO inventory balance, resulted in an
increase in the market-based writedowns of REO, which totaled
$172 million and $404 million for the three and nine
months ended September 30, 2008, respectively. REO
operations expense also increased due to higher real estate
taxes, maintenance costs and net losses on sales experienced
during the three and nine months ended September 30, 2008
as compared to the three and nine months ended
September 30, 2007. We expect REO operations expense to
continue to increase in the remainder of 2008, as single-family
REO volume continues to increase and home prices decline.
Losses
on Certain Credit Guarantees
Losses on certain credit guarantees consist of losses recognized
upon the issuance of PCs in guarantor swap transactions. Prior
to January 1, 2008, our recognition of losses on certain
guarantee contracts occurred due to any one or a combination of
several factors, including long-term contract pricing for our
flow business, the difference in overall transaction pricing
versus pool-level accounting measurements and, less
significantly, efforts to support our affordable housing
mission. Upon adoption of SFAS 157, our losses on certain
credit guarantees in subsequent periods, if any, will generally
relate to our efforts to meet our affordable housing goals.
Effective January 1, 2008, upon the adoption of
SFAS 157, which amended FIN 45, we estimate the fair
value of our newly-issued guarantee obligations as an amount
equal to the fair value of compensation received, inclusive of
all rights related to the transaction, in exchange for our
guarantee. As a result, we no longer record estimates of
deferred gains or immediate day one losses on most
guarantees. All unamortized amounts recorded prior to
January 1, 2008 will continue to be amortized using
existing amortization methods. This change had a significant
positive impact on our financial results for the three and nine
months ended September 30, 2008. Losses on certain credit
guarantees totaled $2 million and $17 million for the
three and nine month periods ended September 30, 2008,
respectively. For the three and nine months ended
September 30, 2007, we recognized losses of
$392 million and $719 million, respectively, on
certain guarantor swap transactions entered into during the
period and we deferred gains of $204 million and
$854 million, respectively, on newly-issued guarantees
entered into during those periods.
Losses
on Loans Purchased
Losses on non-performing loans purchased from the mortgage pools
underlying PCs and Structured Securities occur when the
acquisition basis of the purchased loan exceeds the estimated
fair value of the loan on the date of purchase. Effective
December 2007, we made certain operational changes for
purchasing delinquent loans from PC pools, which significantly
reduced the volume of our delinquent loan purchases and
consequently the amount of our losses on loans purchased for the
three and nine months ended September 30, 2008. We made
these operational changes in order to better reflect our
expectations of future credit losses and in consideration of our
capital requirements. As a result of increases in delinquency
rates of loans underlying our PCs and Structured Securities and
our increasing efforts to reduce foreclosures, the number of
loan modifications increased significantly during both the three
and nine months ended September 30, 2008, as compared to
the same periods in 2007. When a loan is modified, we generally
exercise our repurchase option and hold the modified loan in our
retained portfolio. See Recoveries on Loans Impaired
upon Purchase and CREDIT RISKS
Table 46 Changes in Loans Purchased Under
Financial Guarantees for additional information about the
impacts from non-performing loans on our financial results.
During the three and nine months ended September 30, 2008,
the market-based valuation of non-performing loans continued to
be adversely affected by the expectation of higher default costs
and reduced liquidity in the single-family mortgage market.
However, our losses on loans purchased decreased 61% to
$252 million during the three months ended
September 30, 2008 compared to $649 million during the
three months ended September 30, 2007 and decreased 63% to
$423 million during the nine months ended
September 30, 2008 compared to $1.1 billion during the
nine months ended September 30, 2007. The decrease in
losses on loans purchased during the 2008 periods compared to
2007 is attributed to the declining volume of our optional
repurchases of delinquent loans underlying our guarantees.
Securities
Administrator Loss on Investment Activity
In August 2008, acting as the security administrator for a trust
which holds mortgage loan pools backing our PCs, we invested in
$1.2 billion of short-term, unsecured loans which we made
to Lehman on the trusts behalf. We refer to these
transactions as the Lehman short-term lending transactions.
These transactions were due to mature on September 15,
2008; however Lehman failed to repay these loans and the accrued
interest. On September 15, 2008, Lehman filed a
chapter 11 bankruptcy petition in the Bankruptcy Court for
the Southern District of New York. To the extent there is a loss
related to an eligible investment for the trust, we, as the
administrator are responsible for making up that shortfall.
During the third quarter of 2008, we recorded a
$1.1 billion loss to reduce the carrying amount of this
asset to our estimate of the net realizable amount on these
transactions. See Off-Balance Sheet Arrangements for
further discussion.
Income
Tax (Expense) Benefit
For the three months ended September 30, 2008 and 2007, we
reported an income tax (expense) benefit of $(8.0) billion
and $954 million, respectively. For the nine months ended
September 30, 2008 and 2007, we reported an income tax
(expense) benefit of $(6.5) billion and $1.3 billion,
respectively. Included in income tax (expense) benefit for the
three and nine months ended September 30, 2008, is a
non-cash charge of $(14.3) billion recorded during the
third quarter of 2008 in order to establish a partial valuation
allowance against our deferred tax assets. See
NOTE 12: INCOME TAXES to our consolidated
financial statements for additional information.
Segment
Earnings
Our operations consist of three reportable segments, which are
based on the type of business activities each
performs Investments, Single-family Guarantee and
Multifamily. We manage our business through these segments,
subject to the conduct of our business under the direction of
the Conservator, as discussed above under EXECUTIVE
SUMMARY Managing Our Business During
Conservatorship Our Objectives. The activities
of our business segments are described in EXECUTIVE
SUMMARY Segments. Certain activities
that are not part of a segment are included in the All Other
category; this category consists of certain unallocated
corporate items, such as remediation and restructuring costs,
costs related to the resolution of certain legal matters and
certain income tax items. We manage and evaluate performance of
the segments and All Other using a Segment Earnings approach.
Segment Earnings is calculated for the segments by adjusting net
income (loss) for certain investment-related activities and
credit guarantee-related activities. Segment Earnings differs
significantly from, and should not be used as a substitute for,
net income (loss) before cumulative effect of change in
accounting principle or net income (loss) as determined in
accordance with GAAP. There are important limitations to using
Segment Earnings as a measure of our financial performance.
Among them, our regulatory capital measures are based on our
GAAP results, as is the need to obtain funding under the
Purchase Agreement. Segment Earnings adjusts for the effects of
certain gains and losses and mark-to-fair-value items, which
depending on market circumstances, can significantly affect,
positively or negatively, our GAAP results and have in recent
periods caused us to record significant GAAP net losses. GAAP
net losses will adversely impact our GAAP stockholders
equity (deficit), as well as our need for funding under the
Purchase Agreement, regardless of results reflected in Segment
Earnings. Also, our definition of Segment Earnings may differ
from similar measures used by other companies. However, we
believe that the presentation of Segment Earnings
highlights the results from ongoing operations and the
underlying results of the segments in a manner that is useful to
the way we manage and evaluate the performance of our business.
See NOTE 16: SEGMENT REPORTING to our
consolidated financial statements for more information regarding
our segments and the adjustments used to calculate Segment
Earnings.
In managing our business, we present the operating performance
of our segments using Segment Earnings. Segment Earnings
presents our results on an accrual basis as the cash flows from
our segments are earned over time. The objective of Segment
Earnings is to present our results in a manner more consistent
with our business models. The business model for our investment
activity is one where we generally buy and hold our investments
in mortgage-related assets for the long term, fund our
investments with debt and use derivatives to minimize interest
rate risk, thus generating net interest income in line with our
return on equity objectives. We believe it is meaningful to
measure the performance of our investment business using
long-term returns, not short-term value. The business model for
our credit guarantee activity is one where we are a long-term
guarantor in the conforming mortgage markets, manage credit risk
and generate guarantee and credit fees, net of incurred credit
losses. As a result of these business models, we believe that
this accrual-based metric is a meaningful way to present our
results as actual cash flows are realized, net of credit losses
and impairments. We believe Segment Earnings provides us with a
view of our financial results that is more consistent with our
business objectives and helps us better evaluate the performance
of our business, both from period-to-period and over the longer
term.
Investments
Segment
Through our Investments segment, we seek to manage our
mortgage-related investment portfolio to generate positive
returns while maintaining a disciplined approach to
interest-rate risk and capital management. We seek to accomplish
this objective through opportunistic purchases, sales and
restructurings of mortgage assets and repurchases of
liabilities. Although we are primarily a buy-and-hold investor
in mortgage assets, we may sell assets that are no longer
expected to produce desired returns to reduce risk, respond to
capital constraints, provide liquidity or structure certain
transactions in order to improve our returns. We currently do
not plan to sell assets at a loss. We estimate our expected
investment returns using an OAS approach.
Table 13 presents the Segment Earnings of our Investments
segment.
Table 13
Segment Earnings and Key Metrics
Investments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
|
|
(dollars in millions)
|
|
|
Segment Earnings:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income
|
|
$
|
1,343
|
|
|
$
|
909
|
|
|
$
|
3,123
|
|
|
$
|
2,801
|
|
Non-interest income (loss)
|
|
|
(1,871
|
)
|
|
|
(4
|
)
|
|
|
(1,981
|
)
|
|
|
50
|
|
Non-interest expense:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Administrative expenses
|
|
|
(104
|
)
|
|
|
(125
|
)
|
|
|
(365
|
)
|
|
|
(386
|
)
|
Other non-interest expense
|
|
|
(1,089
|
)
|
|
|
(7
|
)
|
|
|
(1,105
|
)
|
|
|
(22
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total non-interest expense
|
|
|
(1,193
|
)
|
|
|
(132
|
)
|
|
|
(1,470
|
)
|
|
|
(408
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment Earnings before income taxes
|
|
|
(1,721
|
)
|
|
|
773
|
|
|
|
(328
|
)
|
|
|
2,443
|
|
Income tax expense
|
|
|
602
|
|
|
|
(270
|
)
|
|
|
115
|
|
|
|
(855
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment Earnings, net of taxes
|
|
|
(1,119
|
)
|
|
|
503
|
|
|
|
(213
|
)
|
|
|
1,588
|
|
Reconciliation to GAAP net loss:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative- and foreign-currency denominated debt-related
adjustments
|
|
|
(1,282
|
)
|
|
|
(1,719
|
)
|
|
|
(1,935
|
)
|
|
|
(3,264
|
)
|
Credit guarantee-related adjustments
|
|
|
|
|
|
|
1
|
|
|
|
|
|
|
|
2
|
|
Investment sales, debt retirements and fair value-related
adjustments
|
|
|
(7,710
|
)
|
|
|
659
|
|
|
|
(9,281
|
)
|
|
|
349
|
|
Fully taxable-equivalent adjustment
|
|
|
(103
|
)
|
|
|
(98
|
)
|
|
|
(318
|
)
|
|
|
(288
|
)
|
Tax-related
adjustments(1)
|
|
|
3,246
|
|
|
|
469
|
|
|
|
4,238
|
|
|
|
1,311
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total reconciling items, net of taxes
|
|
|
(5,849
|
)
|
|
|
(688
|
)
|
|
|
(7,296
|
)
|
|
|
(1,890
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
GAAP net loss
|
|
$
|
(6,968
|
)
|
|
$
|
(185
|
)
|
|
$
|
(7,509
|
)
|
|
$
|
(302
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Key metrics Investments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Growth:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchases of securities Mortgage-related investment
portfolio:(2)(3)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Guaranteed PCs and Structured Securities
|
|
$
|
21,938
|
|
|
$
|
47,110
|
|
|
$
|
134,536
|
|
|
$
|
103,423
|
|
Non-Freddie Mac mortgage-related securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Agency mortgage-related securities
|
|
|
12,173
|
|
|
|
5,599
|
|
|
|
46,244
|
|
|
|
10,431
|
|
Non-agency mortgage-related securities
|
|
|
22
|
|
|
|
10,187
|
|
|
|
1,906
|
|
|
|
62,740
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total purchases of securities Mortgage-related
investment portfolio
|
|
$
|
34,133
|
|
|
$
|
62,896
|
|
|
$
|
182,686
|
|
|
$
|
176,594
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Growth rate of mortgage-related investment portfolio (annualized)
|
|
|
(32.64
|
)%
|
|
|
(0.61
|
)%
|
|
|
1.07
|
%
|
|
|
0.96
|
%
|
Return:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest yield Segment Earnings basis
|
|
|
0.72
|
%
|
|
|
0.53
|
%
|
|
|
0.58
|
%
|
|
|
0.53
|
%
|
|
|
(1)
|
Excludes any allocation of the
non-cash charge related to the establishment of the partial
valuation allowance against our deferred tax asset.
|
(2)
|
Based on unpaid principal balance
and excludes mortgage-related securities traded, but not yet
settled.
|
(3)
|
Exclude single-family mortgage
loans.
|
Segment Earnings for our Investments segment decreased
$1.6 billion in the third quarter of 2008 compared to the
third quarter of 2007. For our Investments segment, Segment
Earnings non-interest income (loss) for the third quarter of
2008 includes the recognition of security impairments of
$1.9 billion that reflect expected credit principal losses
on our non-agency mortgage-related securities compared to
security impairments of $1 million in the third quarter of
2007. Security impairments that reflect expected or realized
credit principal losses are realized immediately pursuant to
GAAP and in Segment Earnings. In contrast, non-credit related
security impairments are not included in Segment Earnings.
Segment Earnings non-interest expense for the third quarter of
2008 includes a loss of $1.1 billion related to the Lehman
short-term lending transactions. Segment Earnings net interest
income increased $434 million and our Segment Earnings net
interest yield increased 19 basis points for the third
quarter of 2008 compared to the third quarter of 2007. The
increases in Segment Earnings net interest income and net
interest yield were primarily driven by both fixed-rate assets
purchased at wider spreads relative to our funding costs and the
replacement of higher cost short- and long-term debt with lower
cost debt issuances.
Segment Earnings for our Investments segment decreased
$1.8 billion in the nine months ended September 30,
2008 compared to the nine months ended September 30, 2007.
Segment Earnings for our Investments segment includes the
recognition of security impairments during the nine months ended
September 30, 2008, of $2.0 billion that reflect
expected credit principal losses on our non-agency
mortgage-related securities compared to $2 million of
security impairments recognized during the nine months ended
September 30, 2007. Segment Earnings non-interest expense
for the nine months ended September 30, 2008 includes a
loss of $1.1 billion related to the Lehman short-term
lending transactions. Segment Earnings net interest income
increased $322 million and our Segment Earnings net
interest yield increased 5 basis points to 58 basis
points for the nine months ended September 30, 2008
compared to the nine months ended September 30, 2007. These
increases were primarily due to purchases of fixed rate assets
at wider spreads relative to our funding costs as well as the
amortization of gains on certain futures positions that matured
in March 2008 and the replacement of higher cost short- and
long-term debt with lower cost debt issuances. Partially
offsetting these increases in Segment Earnings net interest
income were lower returns on floating rate securities.
In the three and the nine months ended September 30, 2008,
the annualized growth rates of our mortgage-related investment
portfolio were (32.64)% and 1.07%, respectively, compared to
(0.61%) and 0.96% for the three and nine months ended
September 30, 2007. The unpaid principal balance of our
mortgage-related investment portfolio increased from
$663.2 billion at December 31, 2007 to
$668.6 billion at September 30, 2008. The overall
increase in the unpaid principal balance of our mortgage-related
investment portfolio was primarily due to more favorable
investment opportunities for agency securities, due to liquidity
concerns in the market, during the latter half of the first
quarter and continuing into the second quarter.
Over the course of the past year, worldwide financial markets
have experienced unprecedented levels of volatility. This has
been particularly true over the latter half of the third quarter
of 2008 as market participants struggled to digest the new
government initiatives, including our conservatorship. In this
environment where demand for debt instruments weakened
considerably, the debt funding markets are sometimes frozen, and
our ability to access both the term and callable debt markets
has been limited. As a result, toward the latter part of the
third quarter and continuing into the fourth quarter, we have
relied increasingly on the issuance of shorter-term debt at
higher interest rates. While we use interest rate derivatives to
economically hedge a significant portion of our interest rate
exposure, we are exposed to risks relating to both our ability
to issue new debt when our outstanding debt matures and to the
variability in interest costs on our new issuances of debt which
directly impacts our Investments Segment earnings.
We held $57.1 billion of non-Freddie Mac agency
mortgage-related securities and $204.5 billion of
non-agency mortgage-related securities as of September 30,
2008 compared to $47.8 billion of non-Freddie Mac agency
mortgage-related securities and $233.8 billion of
non-agency mortgage-related securities as of December 31,
2007.
At September 30, 2008 and December 31, 2007, we held
investments of $79.8 billion and $101.3 billion,
respectively, of non-agency mortgage-related securities backed
by subprime loans. In addition to the contractual interest
payments, we receive substantial monthly remittances of
principal repayments on these securities, which totaled more
than $5.9 billion and $21.6 billion during the three
and nine months ended September 30, 2008, respectively,
representing a return on our investment in these securities.
These securities include significant credit enhancement,
particularly through subordination, and 80% and 100% of these
securities were investment grade at September 30, 2008 and
December 31, 2007, respectively. The unrealized losses, net
of tax, on these securities are included in AOCI and totaled
$8.8 billion and $5.6 billion at September 30,
2008 and December 31, 2007, respectively. We believe that
the declines in fair values for these securities are mainly
attributable to poor underlying collateral performance,
decreased liquidity and larger risk premiums in the mortgage
market.
We also invested in non-agency mortgage-related securities
backed by
Alt-A and
other loans in our mortgage-related investment portfolio. We
have classified these securities as
Alt-A if the
securities were labeled as
Alt-A when
sold to us or if we believe the underlying collateral includes a
significant amount of
Alt-A loans.
We have classified $46 billion and
$51.3 billion of our single-family non-agency
mortgage-related securities as
Alt-A and
other loans at September 30, 2008 and December 31,
2007, respectively. In addition to the contractual interest
payments, we receive substantial monthly remittances of
principal repayments on these securities, which totaled
$1.6 billion and $5.9 billion during the three and
nine months ended September 30, 2008, respectively,
representing a return on our investment in these securities. We
have focused our purchases on credit-enhanced, senior tranches
of these securities, which provide additional protection due to
subordination. 89% and 100% of these securities were investment
grade at September 30, 2008 and December 31, 2007,
respectively. The unrealized losses, net of tax, on these
securities are included in AOCI and totaled $5.8 billion
and $1.7 billion at September 30, 2008 and
December 31, 2007, respectively. The declines in fair
values for these securities are mainly attributable to poor
underlying collateral performance, decreased liquidity and
larger risk premiums in the mortgage market. See
CONSOLIDATED BALANCE SHEETS ANALYSIS Retained
Portfolio for additional information regarding our
mortgage-related securities.
The objectives set forth for us under our charter and
conservatorship may negatively impact our Investments segment
results. For example, the planned reduction in our retained
portfolio balance to $250 billion, through successive
annual 10% declines commencing in 2010, will cause a
corresponding reduction in our net interest income. This may
cause our Investments segment results to decline.
Single-Family
Guarantee Segment
Through our Single-family Guarantee segment, we seek to issue
guarantees that we believe offer attractive long-term returns
relative to anticipated credit costs while fulfilling our
mission to provide liquidity, stability and affordability in the
residential mortgage market. In addition, we seek to improve our
share of the total residential mortgage securitization market by
enhancing customer service and increasing the volume of business
with our customers.
Table 14 presents the Segment Earnings of our Single-family
Guarantee segment.
Table 14
Segment Earnings and Key Metrics Single-Family
Guarantee
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
|
|
(in millions)
|
|
|
Segment Earnings:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest
income(1)
|
|
$
|
52
|
|
|
$
|
181
|
|
|
$
|
187
|
|
|
$
|
528
|
|
Non-interest income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Management and guarantee income
|
|
|
883
|
|
|
|
738
|
|
|
|
2,618
|
|
|
|
2,119
|
|
Other non-interest
income(1)
|
|
|
94
|
|
|
|
27
|
|
|
|
301
|
|
|
|
77
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total non-interest income
|
|
|
977
|
|
|
|
765
|
|
|
|
2,919
|
|
|
|
2,196
|
|
Non-interest expense:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Administrative expenses
|
|
|
(164
|
)
|
|
|
(203
|
)
|
|
|
(580
|
)
|
|
|
(611
|
)
|
Provision for credit losses
|
|
|
(5,899
|
)
|
|
|
(1,417
|
)
|
|
|
(9,878
|
)
|
|
|
(2,175
|
)
|
REO operations expense
|
|
|
(333
|
)
|
|
|
(50
|
)
|
|
|
(806
|
)
|
|
|
(80
|
)
|
Other non-interest expense
|
|
|
(20
|
)
|
|
|
(18
|
)
|
|
|
(68
|
)
|
|
|
(58
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total non-interest expense
|
|
|
(6,416
|
)
|
|
|
(1,688
|
)
|
|
|
(11,332
|
)
|
|
|
(2,924
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment Earnings (loss) before income taxes
|
|
|
(5,387
|
)
|
|
|
(742
|
)
|
|
|
(8,226
|
)
|
|
|
(200
|
)
|
Income tax benefit
|
|
|
1,886
|
|
|
|
259
|
|
|
|
2,879
|
|
|
|
70
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment Earnings (loss), net of taxes
|
|
|
(3,501
|
)
|
|
|
(483
|
)
|
|
|
(5,347
|
)
|
|
|
(130
|
)
|
Reconciliation to GAAP net loss:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Credit guarantee-related adjustments
|
|
|
(1,074
|
)
|
|
|
(927
|
)
|
|
|
574
|
|
|
|
(597
|
)
|
Tax-related
adjustments(2)
|
|
|
375
|
|
|
|
325
|
|
|
|
(202
|
)
|
|
|
208
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total reconciling items, net of taxes
|
|
|
(699
|
)
|
|
|
(602
|
)
|
|
|
372
|
|
|
|
(389
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
GAAP net loss
|
|
$
|
(4,200
|
)
|
|
$
|
(1,085
|
)
|
|
$
|
(4,975
|
)
|
|
$
|
(519
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Key metrics Single-family Guarantee:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances and Growth (in billions, except rate):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average securitized balance of single-family credit guarantee
portfolio(3)
|
|
$
|
1,792
|
|
|
$
|
1,612
|
|
|
$
|
1,761
|
|
|
$
|
1,552
|
|
Issuance Single-family credit
guarantees(3)
|
|
$
|
64
|
|
|
$
|
125
|
|
|
$
|
309
|
|
|
$
|
357
|
|
Fixed-rate products Percentage of
issuances(4)
|
|
|
88.5
|
%
|
|
|
86.3
|
%
|
|
|
88.3
|
%
|
|
|
80.1
|
%
|
Liquidation rate Single-family credit guarantees
(annualized
rate)(5)
|
|
|
12.1
|
%
|
|
|
13.3
|
%
|
|
|
16.8
|
%
|
|
|
15.3
|
%
|
Credit:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Delinquency
rate(6)
|
|
|
1.22
|
%
|
|
|
0.51
|
%
|
|
|
|
|
|
|
|
|
Delinquency transition
rate(7)
|
|
|
25.4
|
%
|
|
|
15.1
|
%
|
|
|
|
|
|
|
|
|
REO inventory increase, net (number of units)
|
|
|
6,060
|
|
|
|
1,664
|
|
|
|
13,697
|
|
|
|
3,161
|
|
Single-family credit losses, in basis points (annualized)
|
|
|
27.9
|
|
|
|
3.0
|
|
|
|
19.4
|
|
|
|
2.2
|
|
Market:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Single-family mortgage debt outstanding (total U.S. market, in
billions)(8)
|
|
$
|
11,254
|
|
|
$
|
11,034
|
|
|
$
|
11,254
|
|
|
$
|
11,034
|
|
30-year
fixed mortgage
rate(9)
|
|
|
6.3
|
%
|
|
|
6.6
|
%
|
|
|
6.1
|
%
|
|
|
6.4
|
%
|
|
|
(1)
|
In connection with the use of
securitization trusts for the underlying assets of our PCs and
Structured Securities in December 2007, we began recording trust
management income in non-interest income. Trust management
income represents the fees we earn as administrator, issuer and
trustee. Previously, the benefit derived from interest earned on
principal and interest cash flows between the time they were
remitted to us by servicers and the date of distribution to our
PCs and Structured Securities holders was recorded to net
interest income.
|
(2)
|
Excludes any allocation of the
non-cash charge related to the establishment of the partial
valuation allowance against our deferred tax asset.
|
(3)
|
Based on unpaid principal balance.
|
(4)
|
Excludes fixed-rate Structured
Securities backed by non-Freddie Mac issued mortgage-related
securities.
|
(5)
|
Includes termination of long-term
standby commitments.
|
(6)
|
Represents the percentage of
single-family loans in our credit guarantee portfolio, based on
loan count, which are 90 days or more past due at period
end and excluding loans underlying Structured Transactions. See
CREDIT RISKS Mortgage Credit Risk for a
description of our Structured Transactions.
|
(7)
|
Represents the percentage of loans
that have been reported as 90 days or more delinquent,
which subsequently transitioned to REO within 12 months of
the date of delinquency. The rate does not reflect other loss
events, such as short-sales and
deed-in-lieu
transactions.
|
(8)
|
U.S. single-family mortgage debt
outstanding as of June 30, 2008 for 2008 and
September 30, 2007 for 2007. Source: Federal Reserve Flow
of Funds Accounts of the United States of America dated
September 18, 2008.
|
(9)
|
Based on Freddie Macs Primary
Mortgage Market Survey, or PMMS. Represents the national average
mortgage commitment rate to a qualified borrower exclusive of
the fees and points required by the lender. This commitment rate
applies only to conventional financing on conforming mortgages
with LTV ratios of 80% or less.
|
Segment Earnings (loss) for our Single-family Guarantee segment
declined to a loss of $(3.5) billion for the three months
ended September 30, 2008 compared to a loss of
$(483) million for the three months ended
September 30, 2007. Segment Earnings (loss) for our
Single-family Guarantee segment declined to a loss of
$(5.3) billion for the nine months ended September 30,
2008 compared to a loss of $(130) million for the nine
months ended September 30, 2007. These declines reflect an
increase in normal credit-related expenses due to higher
delinquency rates, higher volumes of non-performing loans and
foreclosures, higher severity of losses on a per-property basis
and a decline in home prices and other regional economic
conditions. The decline in Segment Earnings for this segment for
the three and nine months ended September 30, 2008 was
partially offset by an increase in Segment Earnings management
and guarantee income as compared to the three and nine months
ended September 30, 2007. The increase in Segment Earnings
management and guarantee income for this segment for the three
and nine months ended September 30, 2008 is primarily due
to higher average balances of the single-family credit guarantee
portfolio, an increase in the average fee rates shown in the
table below and higher delivery and credit fee amortization.
Amortization of upfront fees increased as a result of cumulative
catch-up
adjustments
recognized during the nine months ended September 30, 2008.
These cumulative
catch-up
adjustments result in a pattern of revenue recognition that more
is consistent with our economic release from risk and the timing
of the recognition of losses on pools of mortgage loans we
guarantee.
Table 15 below provides summary information about Segment
Earnings management and guarantee income for the Single-family
Guarantee segment. Segment Earnings management and guarantee
income consists of contractual amounts due to us related to our
management and guarantee fees as well as amortization of credit
fees.
Table 15
Segment Earnings Management and Guarantee Income
Single-Family Guarantee
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
|
|
Nine Months Ended September 30,
|
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
|
|
|
|
|
Average
|
|
|
|
|
|
Average
|
|
|
|
|
|
Average
|
|
|
|
|
|
Average
|
|
|
|
Amount
|
|
|
Rate
|
|
|
Amount
|
|
|
Rate
|
|
|
Amount
|
|
|
Rate
|
|
|
Amount
|
|
|
Rate
|
|
|
|
(dollars in millions, rates in basis points)
|
|
|
Contractual management and guarantee fees
|
|
$
|
727
|
|
|
|
16.0
|
|
|
$
|
639
|
|
|
|
15.6
|
|
|
$
|
2,142
|
|
|
|
16.0
|
|
|
$
|
1,835
|
|
|
|
15.5
|
|
Amortization of upfront fees included in other liabilities
|
|
|
156
|
|
|
|
3.4
|
|
|
|
99
|
|
|
|
2.5
|
|
|
|
476
|
|
|
|
3.5
|
|
|
|
284
|
|
|
|
2.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Segment Earnings management and guarantee income
|
|
|
883
|
|
|
|
19.4
|
|
|
|
738
|
|
|
|
18.1
|
|
|
|
2,618
|
|
|
|
19.5
|
|
|
|
2,119
|
|
|
|
18.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjustments to reconcile to consolidated GAAP:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reclassification between net interest income and management and
guarantee
fee(1)
|
|
|
53
|
|
|
|
|
|
|
|
7
|
|
|
|
|
|
|
|
147
|
|
|
|
|
|
|
|
14
|
|
|
|
|
|
Credit guarantee-related
adjustments(2)
|
|
|
(124
|
)
|
|
|
|
|
|
|
(40
|
)
|
|
|
|
|
|
|
(441
|
)
|
|
|
|
|
|
|
(240
|
)
|
|
|
|
|
Multifamily management and guarantee
income(3)
|
|
|
20
|
|
|
|
|
|
|
|
13
|
|
|
|
|
|
|
|
54
|
|
|
|
|
|
|
|
44
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Management and guarantee income, GAAP
|
|
$
|
832
|
|
|
|
|
|
|
$
|
718
|
|
|
|
|
|
|
$
|
2,378
|
|
|
|
|
|
|
$
|
1,937
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
Management and guarantee fees
earned on mortgage loans held in our retained portfolio are
reclassified from net interest income within the Investments
segment to management and guarantee fees within the
Single-family Guarantee segment.
Buy-up and
buy-down fees are transferred from the Single-family Guarantee
segment to the Investments segment.
|
(2)
|
Primarily represent credit fee
amortization adjustments.
|
(3)
|
Represents management and guarantee
income recognized related to our Multifamily segment that is not
included in our Single-family Guarantee segment.
|
For the three months ended September 30, 2008 and 2007, the
annualized growth rates of our single-family credit guarantee
portfolio were 2.2% and 18.3%, respectively. For the nine months
ended September 30, 2008 and 2007, the annualized growth
rates of our single-family credit guarantee portfolio were 7.1%
and 17.1%, respectively. Our mortgage purchase volumes are
impacted by several factors, including origination volumes,
mortgage product and underwriting trends, competition,
customer-specific behavior and contract terms. Single-family
mortgage purchase volumes from individual customers can
fluctuate significantly. Despite these fluctuations, our share
of the overall single-family mortgage origination market was
higher in the nine months ended September 30, 2008 as
compared to recent years, as mortgage originators have generally
tightened their credit standards, causing conforming mortgages
to be the predominant product in the market during this period.
As a result, we have seen improvements in the credit quality of
mortgages delivered to us in 2008. However, our purchase volume
and also our market share have significantly declined during the
third quarter of 2008.
During 2008, we implemented several increases in delivery fees,
which are paid at the time of securitization. These increases
included a 25 basis point fee assessed on all loans
purchased or guaranteed through flow-business channels, as well
as higher or new upfront fees for certain mortgages deemed to be
higher-risk based on product type, property type, loan purpose,
LTV ratio
and/or
borrower credit scores. Upfront fees are recognized in Segment
Earnings management and guarantee fee income rather than as part
of income on guarantee obligation under GAAP. Certain of our
planned increases in delivery fees that were to be implemented
in November 2008, including a 25 basis point increase in
flow-business purchases, have been cancelled. On October 3,
2008, we announced several changes to delivery fee schedules
that take effect for settlements on and after January 2,
2009, including increasing certain delivery fees based on
combinations of LTV ratios, credit scores, product types and
other characteristics. These increases in delivery fees will
have a positive impact on our results of operations; however,
the appointment of FHFA as Conservator and the
Conservators subsequent directive that we provide
increased support to the mortgage market will likely affect
future guarantee pricing decisions. The objectives set forth for
us under our charter and conservatorship may negatively impact
our Single-family Guarantee segment results. For example our
objective of assisting the mortgage market may cause us to
change our pricing strategy in our core mortgage loan purchase
or guarantee business, which may cause our Single-Family
guarantee segment results to suffer.
We have also made changes to our underwriting guidelines for
loans delivered to us for purchase or securitization in order to
reduce our credit risk exposure for new business. These changes
include reducing purchases of mortgages with LTV ratios over
95%, and limiting combinations of higher-risk characteristics in
loans we purchase, including those with reduced documentation.
In some cases, binding commitments under existing customer
contracts may delay the effective dates of underwriting
adjustments for a period of months. There has been a shift in
the composition of our new issuances during 2008 to a greater
proportion of higher-quality, fixed-rate mortgages and a
reduction in our guarantee of interest-only and
Alt-A
mortgage loans. For example,
Alt-A loans
made up approximately 18% and 22% of our mortgage purchase
volume during 2006 and 2007, respectively. Due to changes in
underwriting practices and reduced originations in the market
during 2008,
Alt-A loan
products made up approximately $25.3 billion or 8% of our
mortgage purchase volume during the nine months
ended September 30, 2008. In October 2008, we announced
that we will no longer purchase mortgages originated in reliance
on reduced documentation of income and assets and mortgages to
borrowers with credit scores below a specified minimum delivered
to us on and after February 1, 2009.
Our Segment Earnings provision for credit losses for the
Single-family Guarantee segment increased to $5.9 billion
for the three months ended September 30, 2008, compared to
$1.4 billion for the three months ended September 30,
2007. Our Segment Earnings provision for credit losses for the
Single-family Guarantee segment increased to $9.9 billion
for the nine months ended September 30, 2008, compared to
$2.2 billion for the nine months ended September 30,
2007, due to continued credit deterioration in our single-family
credit guarantee portfolio, primarily related to 2006 and 2007
loan purchases. Mortgages in our single-family credit guarantee
portfolio purchased by us in 2006 and 2007 have higher
delinquency rates, higher transition rates to foreclosure, as
well as higher loss severities on a per-property basis than our
historical experiences. Our provision for credit losses is based
on our estimate of incurred losses inherent in both our credit
guarantee portfolio and the mortgage loans in our retained
portfolio using recent historical performance, such as trends in
delinquency rates, recent charge-off experience, recoveries from
credit enhancements and other loss mitigation activities.
The delinquency rate on our single-family credit guarantee
portfolio increased to 122 basis points as of
September 30, 2008 from 65 basis points as of
December 31, 2007. Increases in delinquency rates occurred
in all product types for the three months ended
September 30, 2008, but were most significant for
interest-only,
Alt-A and
ARM mortgages. See CREDIT RISKS
Table 49 Single-Family Credit Loss
Concentration Analysis for additional delinquency
information. We expect our delinquency rates will continue to
rise in the remainder of 2008.
The impact of the weak housing market was first evident during
2007 in areas of the country where unemployment rates have been
relatively high, such as the North Central region. However, we
have also experienced significant increases in delinquency rates
and REO activity in the West, Northeast and Southeast regions
during the nine months ended September 30, 2008, compared
to the nine months ended September 30, 2007, particularly
in the states of California, Florida, Nevada and Arizona. The
West region represents approximately 30% of our REO property
acquisitions during the nine months ended September 30,
2008, based on the number of units. The highest concentration in
the West region is in the state of California. At
September 30, 2008, our REO inventory in California
represented approximately 30% of our total REO property
inventory. California has accounted for an increasing amount of
our credit losses and it comprised approximately 31% of our
total credit losses in the nine months ended September 30,
2008.
During the nine months ended September 30, 2008, our
single-family credit guarantee portfolio also continued to
experience increases in the rate at which loans transitioned
from delinquency to foreclosure. The increase in these
delinquency transition rates, compared to our historical
experience, has been progressively worse for mortgage loans
purchased by us during 2006 and 2007. This trend is, in part,
due to the increase of non-traditional mortgage loans, such as
interest-only and
Alt-A
mortgages, as well as an increase in estimated current LTV
ratios for mortgage loans originated during those years. For the
three months ended September 30, 2008, single-family
charge-offs, gross, were $1.2 billion compared to
$133 million for the three months ended September 30,
2007. Single-family charge-offs, gross, increased to
$2.4 billion for the nine months ended September 30,
2008 as compared to $340 million for the nine months ended
September 30, 2007, primarily due to the increase in the
volume of REO acquisitions as well as continued deterioration in
the national real estate market. In addition, there has also
been an increase in loss severity, or the average charge-off, on
a per property basis, during the three and nine months ended
September 30, 2008 compared to the three and nine months
ended September 30, 2007.
Multifamily
Segment
Through our Multifamily segment, we seek to manage our
investments in multifamily mortgage loans to generate positive
returns while fulfilling our mission to provide stability and
liquidity for the financing of rental housing nationwide. We
also seek to issue guarantees that we believe offer attractive
long-term returns relative to anticipated credit costs. Prior to
2008, we have not typically securitized multifamily mortgages,
because our multifamily loans are typically large, customized,
non-homogenous loans that are not as conducive to securitization
as single-family loans and the market for multifamily
securitizations is relatively illiquid. Accordingly, we
typically hold multifamily loans for investment purposes.
Beginning in 2008, we have increased our guarantee portfolio of
multifamily mortgages and we expect to further increase our
multifamily guarantee activity in the remainder of 2008, as
market conditions permit.
Table 16 presents the Segment Earnings of our Multifamily
segment.
Table 16
Segment Earnings and Key Metrics
Multifamily
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
|
|
|
|
|
(dollars in millions)
|
|
|
|
|
|
Segment Earnings:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income
|
|
$
|
120
|
|
|
$
|
88
|
|
|
$
|
293
|
|
|
$
|
305
|
|
Non-interest income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Management and guarantee income
|
|
|
20
|
|
|
|
14
|
|
|
|
54
|
|
|
|
44
|
|
Other non-interest income
|
|
|
16
|
|
|
|
7
|
|
|
|
31
|
|
|
|
16
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total non-interest income
|
|
|
36
|
|
|
|
21
|
|
|
|
85
|
|
|
|
60
|
|
Non-interest expense:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Administrative expenses
|
|
|
(37
|
)
|
|
|
(48
|
)
|
|
|
(135
|
)
|
|
|
(142
|
)
|
Provision for credit losses
|
|
|
(14
|
)
|
|
|
(16
|
)
|
|
|
(30
|
)
|
|
|
(20
|
)
|
REO operations expense
|
|
|
|
|
|
|
(1
|
)
|
|
|
|
|
|
|
(1
|
)
|
LIHTC partnerships
|
|
|
(121
|
)
|
|
|
(111
|
)
|
|
|
(346
|
)
|
|
|
(354
|
)
|
Other non-interest expense
|
|
|
(3
|
)
|
|
|
(4
|
)
|
|
|
(12
|
)
|
|
|
(16
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total non-interest expense
|
|
|
(175
|
)
|
|
|
(180
|
)
|
|
|
(523
|
)
|
|
|
(533
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment Earnings (loss) before income taxes
|
|
|
(19
|
)
|
|
|
(71
|
)
|
|
|
(145
|
)
|
|
|
(168
|
)
|
LIHTC partnerships tax benefit
|
|
|
147
|
|
|
|
129
|
|
|
|
445
|
|
|
|
402
|
|
Income tax benefit
|
|
|
7
|
|
|
|
25
|
|
|
|
51
|
|
|
|
58
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment Earnings, net of taxes
|
|
|
135
|
|
|
|
83
|
|
|
|
351
|
|
|
|
292
|
|
Reconciliation to GAAP net income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative-related adjustments
|
|
|
(10
|
)
|
|
|
(6
|
)
|
|
|
(24
|
)
|
|
|
(14
|
)
|
Credit guarantee-related adjustments
|
|
|
(2
|
)
|
|
|
1
|
|
|
|
(6
|
)
|
|
|
(1
|
)
|
Investment sales, debt retirements and fair value-related
adjustments
|
|
|
(7
|
)
|
|
|
|
|
|
|
(7
|
)
|
|
|
|
|
Tax-related
adjustments(1)
|
|
|
7
|
|
|
|
1
|
|
|
|
13
|
|
|
|
5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total reconciling items, net of taxes
|
|
|
(12
|
)
|
|
|
(4
|
)
|
|
|
(24
|
)
|
|
|
(10
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
GAAP net income
|
|
$
|
123
|
|
|
$
|
79
|
|
|
$
|
327
|
|
|
$
|
282
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Key metrics Multifamily:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances and Growth:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average balance of Multifamily loan
portfolio(2)
|
|
$
|
66,004
|
|
|
$
|
48,663
|
|
|
$
|
62,507
|
|
|
$
|
47,166
|
|
Average balance of Multifamily guarantee
portfolio(2)
|
|
|
14,087
|
|
|
|
7,698
|
|
|
|
12,878
|
|
|
|
7,838
|
|
Purchases Multifamily loan
portfolio(2)
|
|
|
5,164
|
|
|
|
3,311
|
|
|
|
13,416
|
|
|
|
8,839
|
|
Purchases Multifamily guarantee
portfolio(2)
|
|
|
845
|
|
|
|
194
|
|
|
|
4,332
|
|
|
|
320
|
|
Liquidation rate Multifamily loan portfolio
(annualized rate)
|
|
|
4.1
|
%
|
|
|
10.7
|
%
|
|
|
6.1
|
%
|
|
|
13.0
|
%
|
Credit:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Delinquency
rate(3)
|
|
|
0.01
|
%
|
|
|
0.06
|
%
|
|
|
|
|
|
|
|
|
Allowance for loan losses
|
|
$
|
87
|
|
|
$
|
45
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
Excludes any allocation of the
non-cash charge related to the establishment of the partial
valuation allowance against our deferred tax asset.
|
(2)
|
Based on unpaid principal balance.
|
(3)
|
Based on net carrying value of
mortgages 90 days or more delinquent as well as those in
the process of foreclosure and excluding Structured Transactions.
|
The multifamily mortgage market differs from the residential
single-family market in several respects. The likelihood that a
multifamily borrower will make scheduled payments on its
mortgage is a function of the ability of the property to
generate income sufficient to make those payments, which is
affected by rent levels and the percentage of available units
that are occupied. Strength in the multifamily market therefore
is affected by the balance between the supply of and demand for
rental housing (both multifamily and single-family), which in
turn is affected by employment, the number of new units added to
the rental housing supply, rates of household formation and the
relative cost of owner-occupied housing alternatives. Although
multifamily demand market fundamentals have been solid in much
of the nation, liquidity concerns and wider credit spreads have
affected institutions that participate in the multifamily market
during 2008. However, we have continued to support the
multifamily housing market during 2008 by making investments
that we believe have attractive expected returns. The objectives
set forth for us under our charter and conservatorship may
negatively impact our Multifamily segment results. For example,
our objective of assisting the mortgage market may cause us to
change our pricing strategy in our core mortgage loan purchase
or guarantee business, which may cause our Multifamily segment
results to suffer.
Segment Earnings for our Multifamily segment increased
$52 million, or 63%, for the three months ended
September 30, 2008 compared to the three months ended
September 30, 2007, primarily due to higher net interest
income and higher non-interest income. Net interest income
increased $32 million for the three months ended
September 30, 2008 compared to the three months ended
September 30, 2007, driven by a 36% increase in the average
balances of our Multifamily loan portfolio, partially offset by
lower yield maintenance fee income on declines in loan
refinancing activity. Loan purchases into the Multifamily loan
portfolio were $5.2 billion for the three months ended
September 30, 2008, a 56% increase compared to the three
months ended September 30, 2007 as we continued to provide
stability and liquidity for the financing of rental housing
nationwide. Non-interest income increased $15 million due
to an increase in management and
guarantee income and, to a lesser extent, an increase in bond
application fees for the three months ended September 30,
2008 compared to the three months ended September 30, 2007.
Segment Earnings for our Multifamily segment increased
$59 million, or 20%, for the nine months ended
September 30, 2008 compared to the nine months ended
September 30, 2007, primarily due to higher LIHTC
partnership tax benefit, higher non-interest income and lower
non-interest expense, partially offset by a decrease in net
interest income. LIHTC partnership tax benefit increased
$43 million for the nine months ended September 30,
2008 compared to the nine months ended September 30, 2007
as we continued to see the benefit from new fund investments
entered into during 2007. There have been no new LIHTC
investments in 2008. Tax benefits from LIHTC partnerships are
recognized in our Multifamily Segment Earnings apart from their
use at the corporate level. Non-interest income increased
$25 million for the nine months ended September 30,
2008 compared to the nine months ended September 30, 2007,
due to an increase in management and guarantee income and, to a
lesser extent, an increase in bond application fees.
Non-interest expense decreased $10 million for the nine
months ended September 30, 2008 compared to the nine months
ended September 30, 2007, primarily due to lower
administrative expenses and lower expenses related to LIHTC
partnerships, partially offset by an increase in provision for
credit losses for our Multifamily segment. Net interest income
of our Multifamily segment declined $12 million for the
nine months ended September 30, 2008, compared to the nine
months ended September 30, 2007 due to significantly lower
yield maintenance fee income on declines in loan refinancing
activity. Loan purchases into the Multifamily loan portfolio
were $13.4 billion for the nine months ended
September 30, 2008, a 52% increase when compared to the
nine months ended September 30, 2007. As part of the
guarantee arrangements pertaining to multifamily housing revenue
bonds, we have provided commitments to advance funds, commonly
referred to as liquidity guarantees. At
September 30, 2008, we had outstanding liquidity guarantee
advances of $307 million. See OFF-BALANCE SHEET
ARRANGEMENTS for more information about our liquidity
guarantees.
CONSOLIDATED
BALANCE SHEETS ANALYSIS
The following discussion of our consolidated balance sheets
should be read in conjunction with our consolidated financial
statements, including the accompanying notes. Also see
CRITICAL ACCOUNTING POLICIES AND ESTIMATES for more
information concerning our more significant accounting policies
and estimates applied in determining our reported financial
position.
Cash and
Investments Portfolio
We maintain a cash and investments portfolio that is important
to our financial management and our ability to provide liquidity
and stability to the mortgage market. Of the $68.6 billion
in this portfolio as of September 30, 2008,
$50.2 billion represents investments in cash and cash
equivalents. At September 30, 2008, the investments in this
portfolio also included $10.4 billion of
non-mortgage-related securities that we could sell to provide us
with an additional source of liquidity to fund our business
operations. We also use this portfolio to help manage recurring
cash flows and meet our other cash management needs. In
addition, we use the portfolio to hold capital on a temporary
basis until we can deploy it into retained portfolio investments
or credit guarantee opportunities. We may also sell the
securities in this portfolio to meet mortgage-funding needs,
provide diverse sources of liquidity or help manage the
interest-rate risk inherent in mortgage-related assets.
Credit concerns and resulting liquidity issues have greatly
affected the financial markets. The reduced liquidity in
U.S. financial markets prompted the Federal Reserve to take
several significant actions during 2008, including a series of
reductions in the discount rate totaling 3.0%. The rate
reductions by the Federal Reserve have had an impact on other
key market rates affecting our assets and liabilities, including
generally reducing the return on our cash and investments
portfolio and lowering our cost of short-term debt financing.
During the nine months ended September 30, 2008, we
increased the balance of our cash and investments portfolio by
$18 billion, primarily due to a $42 billion increase
in highly liquid shorter-term cash and cash equivalent assets
including deposits in financial institutions and commercial
paper partially offset by a $25 billion decrease in
longer-term non-mortgage-related investments including
asset-backed securities. As a result of counterparty credit
concerns during the third quarter, these deposits in financial
institutions included substantial cash balances in accounts that
did not earn a rate of return.
We recognized
other-than-temporary
impairment charges in our cash and investments portfolio of
$244 million, during the third quarter of 2008, related to
our non-mortgage-related investments with $10.8 billion of
unpaid principal balance, as management could no longer assert
the positive intent to hold these securities to recovery.
Cumulative other-than-temporary impairments taken on these
securities during 2008 were $458 million. The decision to
impair these securities is consistent with our consideration of
sales of securities from the cash and investments portfolio as a
contingent source of liquidity. We estimate that the future
expected principal and interest shortfall on these securities
will be significantly less than the impairment loss required to
be recorded under GAAP, as we expect these shortfalls to be less
than the recent fair value declines. The portion of the
impairment charges associated with these expected recoveries
will be accreted back through net interest income in future
periods. As a result of the
other-than-temporary
impairment charges recorded this quarter, there are no remaining
net unrealized losses in our non-mortgage-related investments
portfolio.
Retained
Portfolio
We are primarily a buy-and-hold investor in mortgage assets. We
invest principally in mortgage loans and mortgage-related
securities, which consist of securities issued by us, Fannie
Mae, Ginnie Mae and other financial institutions. We refer to
these investments that are recorded on our consolidated balance
sheet as our retained portfolio.
On October 9, 2008, FHFA announced that the Director of
FHFA has suspended the capital classifications of Freddie Mac
during the conservatorship, in light of the Purchase Agreement,
and that existing statutory and FHFA-directed regulatory capital
requirements will not be binding during the conservatorship.
However, under the Purchase Agreement our retained portfolio may
not exceed $850 billion as of December 31, 2009 and
then must decline by 10% per year thereafter until it reaches
$250 billion.
Table 17 provides detail regarding the mortgage loans and
mortgage-related securities in our retained portfolio.
Table 17
Characteristics of Mortgage Loans and Mortgage-Related
Securities in our Retained Portfolio
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2008
|
|
|
December 31, 2007
|
|
|
|
Fixed
|
|
|
Variable
|
|
|
|
|
|
Fixed
|
|
|
Variable
|
|
|
|
|
|
|
Rate
|
|
|
Rate
|
|
|
Total
|
|
|
Rate
|
|
|
Rate
|
|
|
Total
|
|
|
|
(in millions)
|
|
|
Mortgage loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Single-family(1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Conventional:(2)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortizing
|
|
$
|
28,696
|
|
|
$
|
806
|
|
|
$
|
29,502
|
|
|
$
|
20,461
|
|
|
$
|
1,266
|
|
|
$
|
21,727
|
|
Interest-only
|
|
|
412
|
|
|
|
780
|
|
|
|
1,192
|
|
|
|
246
|
|
|
|
1,434
|
|
|
|
1,680
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total conventional
|
|
|
29,108
|
|
|
|
1,586
|
|
|
|
30,694
|
|
|
|
20,707
|
|
|
|
2,700
|
|
|
|
23,407
|
|
RHS/FHA/VA
|
|
|
1,312
|
|
|
|
|
|
|
|
1,312
|
|
|
|
1,182
|
|
|
|
|
|
|
|
1,182
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total single-family
|
|
|
30,420
|
|
|
|
1,586
|
|
|
|
32,006
|
|
|
|
21,889
|
|
|
|
2,700
|
|
|
|
24,589
|
|
Multifamily(3)
|
|
|
63,077
|
|
|
|
5,229
|
|
|
|
68,306
|
|
|
|
53,114
|
|
|
|
4,455
|
|
|
|
57,569
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total mortgage loans
|
|
|
93,497
|
|
|
|
6,815
|
|
|
|
100,312
|
|
|
|
75,003
|
|
|
|
7,155
|
|
|
|
82,158
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
PCs and Structured
Securities:(1)(4)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Single-family
|
|
|
277,927
|
|
|
|
94,426
|
|
|
|
372,353
|
|
|
|
269,896
|
|
|
|
84,415
|
|
|
|
354,311
|
|
Multifamily
|
|
|
267
|
|
|
|
2,326
|
|
|
|
2,593
|
|
|
|
2,522
|
|
|
|
137
|
|
|
|
2,659
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total PCs and Structured Securities
|
|
|
278,194
|
|
|
|
96,752
|
|
|
|
374,946
|
|
|
|
272,418
|
|
|
|
84,552
|
|
|
|
356,970
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-Freddie Mac mortgage-related
securities:(1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Agency mortgage-related
securities:(5)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fannie Mae:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Single-family
|
|
|
21,633
|
|
|
|
34,105
|
|
|
|
55,738
|
|
|
|
23,140
|
|
|
|
23,043
|
|
|
|
46,183
|
|
Multifamily
|
|
|
652
|
|
|
|
124
|
|
|
|
776
|
|
|
|
759
|
|
|
|
163
|
|
|
|
922
|
|
Ginnie Mae:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Single-family
|
|
|
412
|
|
|
|
157
|
|
|
|
569
|
|
|
|
468
|
|
|
|
181
|
|
|
|
649
|
|
Multifamily
|
|
|
25
|
|
|
|
|
|
|
|
25
|
|
|
|
82
|
|
|
|
|
|
|
|
82
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total agency mortgage-related securities
|
|
|
22,722
|
|
|
|
34,386
|
|
|
|
57,108
|
|
|
|
24,449
|
|
|
|
23,387
|
|
|
|
47,836
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-agency mortgage-related securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Single-family:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subprime(6)
|
|
|
451
|
|
|
|
79,303
|
|
|
|
79,754
|
|
|
|
498
|
|
|
|
100,827
|
|
|
|
101,325
|
|
Alt-A and
other(7)
|
|
|
3,365
|
|
|
|
42,627
|
|
|
|
45,992
|
|
|
|
3,762
|
|
|
|
47,551
|
|
|
|
51,313
|
|
Commercial mortgage-backed securities
|
|
|
25,155
|
|
|
|
39,196
|
|
|
|
64,351
|
|
|
|
25,709
|
|
|
|
39,095
|
|
|
|
64,804
|
|
Obligations of states and political
subdivisions(8)
|
|
|
13,011
|
|
|
|
45
|
|
|
|
13,056
|
|
|
|
14,870
|
|
|
|
65
|
|
|
|
14,935
|
|
Manufactured
housing(9)
|
|
|
1,165
|
|
|
|
192
|
|
|
|
1,357
|
|
|
|
1,250
|
|
|
|
222
|
|
|
|
1,472
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total non-agency mortgage-related
securities(10)
|
|
|
43,147
|
|
|
|
161,363
|
|
|
|
204,510
|
|
|
|
46,089
|
|
|
|
187,760
|
|
|
|
233,849
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total unpaid principal balance of retained portfolio
|
|
$
|
437,560
|
|
|
$
|
299,316
|
|
|
|
736,876
|
|
|
$
|
417,959
|
|
|
$
|
302,854
|
|
|
|
720,813
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Premiums, discounts, deferred fees, impairments of unpaid
principal balances and other basis adjustments
|
|
|
|
|
|
|
|
|
|
|
(8,654
|
)
|
|
|
|
|
|
|
|
|
|
|
(655
|
)
|
Net unrealized losses on mortgage-related securities, pre-tax
|
|
|
|
|
|
|
|
|
|
|
(33,145
|
)
|
|
|
|
|
|
|
|
|
|
|
(10,116
|
)
|
Allowance for loan losses on mortgage loans
held-for-investment(11)
|
|
|
|
|
|
|
|
|
|
|
(459
|
)
|
|
|
|
|
|
|
|
|
|
|
(256
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total retained portfolio per consolidated balance sheets
|
|
|
|
|
|
|
|
|
|
$
|
694,618
|
|
|
|
|
|
|
|
|
|
|
$
|
709,786
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
Variable-rate single-family
mortgage loans and mortgage-related securities include those
with a contractual coupon rate that, prior to contractual
maturity, is either scheduled to change or is subject to change
based on changes in the composition of the underlying
collateral. Single-family mortgage loans also include mortgages
with balloon/reset provisions.
|
(2)
|
See CREDIT RISKS
Mortgage Credit Risk for information on
Alt-A and
subprime loans, which are a component of our single-family
conventional mortgage loans.
|
(3)
|
Variable-rate multifamily mortgage
loans include only those loans that, as of the reporting date,
have a contractual coupon rate that is subject to change.
|
(4)
|
For our PCs and Structured
Securities, we are subject to the credit risk associated with
the underlying mortgage loan collateral.
|
(5)
|
Agency mortgage-related securities
are generally not separately rated by nationally recognized
statistical rating organizations, but are viewed as having a
level of credit quality at least equivalent to non-agency
mortgage-related securities
AAA-rated or
equivalent.
|
(6)
|
Single-family non-agency
mortgage-related securities backed by subprime residential loans
include significant credit enhancements, particularly through
subordination. For information about how these securities are
rated, see Table 18 Investments in
Available-for-Sale Non-Agency Mortgage-Related Securities backed
by Subprime Loans,
Alt-A, MTA
and Other Loans in our Retained Portfolio,
Table 24 Ratings of Available-For-Sale
Non-Agency Mortgage-Related Securities backed by Subprime Loans
at September 30, 2008 and
Table 25 Ratings of Available-For-Sale
Non-Agency Mortgage-Related Securities backed by Subprime Loans
at September 30, 2008 and November 10, 2008.
|
(7)
|
Single-family non-agency
mortgage-related securities backed by
Alt-A and
other mortgage loans include significant credit enhancements,
particularly through subordination. For information about how
these securities are rated, see Table 18
Investments in Available-For-Sale Non-Agency Mortgage-Related
Securities backed by Subprime Loans,
Alt-A, MTA
and Other Loans in our Retained Portfolio,
Table 26 Ratings of Available-For-Sale
Non-Agency Mortgage-Related Securities backed by
Alt-A and
Other Loans at September 30, 2008 and
Table 27 Ratings of Available-For-Sale
Non-Agency Mortgage-Related Securities backed by
Alt-A and
Other Loans at September 30, 2008 and November 10,
2008.
|
(8)
|
Consist of mortgage revenue bonds.
Approximately 61% and 67% of these securities held at
September 30, 2008 and December 31, 2007,
respectively, were
AAA-rated as
of those dates, based on the lowest rating available.
|
(9)
|
At September 30, 2008 and
December 31, 2007, 32% and 34%, respectively, of
mortgage-related securities backed by manufactured housing bonds
were rated BBB− or above, based on the lowest rating
available. For the same dates, 91% and 93% of manufactured
housing bonds had credit enhancements, respectively, including
primary monoline insurance that covered 23% of the manufactured
housing bonds. At September 30, 2008 and December 31,
2007, we had secondary insurance on 60% and 72% of these bonds
that were not covered by the primary monoline insurance,
respectively. Approximately 3% and 28% of these mortgage-related
securities were backed by manufactured housing bonds
AAA-rated at
September 30, 2008 and December 31, 2007,
respectively, based on the lowest rating available.
|
(10)
|
Credit ratings for most non-agency
mortgage-related securities are designated by no fewer than two
nationally recognized statistical rating organizations.
Approximately 66% and 96% of total non-agency mortgage-related
securities held at September 30, 2008 and December 31,
2007, respectively, were
AAA-rated as
of those dates, based on the lowest rating available.
|
(11)
|
See CREDIT RISKS
Credit Loss Performance Loan Loss Reserves for
information about our allowance for loan losses on mortgage
loans held-for-investment.
|
The unpaid principal balance of our retained portfolio increased
by $16.1 billion to $736.9 billion at
September 30, 2008 compared to December 31, 2007. The
unpaid principal balance of the mortgage-related securities held
in our retained portfolio decreased by $2.1 billion during
the nine months ended September 30, 2008, while the balance
of mortgage loans increased by $18.2 billion over the same
period. Although our PCs and Structured Securities and agency
mortgage-related securities balances increased
$27.2 billion during this period, this was more than offset
by the decrease in the unpaid principal balance of our
non-agency mortgage-related securities. Non-agency
mortgage-related securities decreased $29.3 billion
primarily due to principal repayments on securities backed by
subprime and
Alt-A loans.
Included in our retained portfolio are mortgage loans with
higher risk characteristics and mortgage-related securities
backed by subprime loans and
Alt-A and
other loans. Included in our
Alt-A loans
are MTA loans.
Single-Family
Mortgage Loans Held in Our Retained Portfolio
We do not generally classify our investments in single-family
mortgage loans within our retained portfolio as either prime or
subprime; however, we recognize that there are mortgage loans in
our retained portfolio with higher risk characteristics. For
example, we estimate that there are $1.4 billion and
$1.3 billion at September 30, 2008 and
December 31, 2007, respectively, of loans with original LTV
ratios greater than 90% and credit scores, based on the rating
system scale developed by Fair, Isaac and Co., Inc., or FICO,
less than 620 at the time of loan origination. See Credit
Risks Mortgage Credit Risk for further
information.
Non-Agency
Mortgage-Related Securities Backed by Subprime
Loans
Participants in the mortgage market often characterize
single-family loans based upon their overall credit quality at
the time of origination, generally considering them to be prime
or subprime. There is no universally accepted definition of
subprime. The subprime segment of the mortgage market primarily
serves borrowers with poorer credit payment histories and such
loans typically have a mix of credit characteristics that
indicate a higher likelihood of default and higher loss
severities than prime loans. Such characteristics might include
a combination of high LTV ratios, low credit scores or
originations using lower underwriting standards such as limited
or no documentation of a borrowers income.
At September 30, 2008 and December 31, 2007, we held
investments of $79.8 billion and $101.3 billion,
respectively, of non-agency mortgage-related securities backed
by subprime loans in our retained portfolio. In addition to the
contractual interest payments, we receive substantial monthly
remittances of principal repayments on these securities, which
totaled approximately $5.9 billion and $21.6 billion
during the three and nine months ended September 30, 2008,
respectively, representing a return of our investment in these
securities. These securities include significant credit
enhancement, particularly through subordination, and 80% and
100% of these securities were investment grade at
September 30, 2008 and December 31, 2007,
respectively. Of the securities rated below investment grade by
at least one rating agency, 67% are rated as investment grade by
at least one other rating agency. We recognized impairment
losses on these securities of $1.7 billion for the three
months ended September 30, 2008. The unrealized losses, net
of tax, on these securities are included in AOCI and totaled
$8.8 billion and $5.6 billion at September 30,
2008 and December 31, 2007, respectively. We believe that
the declines in fair values for these securities are mainly
attributable to decreased liquidity and larger risk premiums in
the mortgage market.
Non-Agency
Mortgage-Related Securities Backed by
Alt-A and
Other Loans
Many mortgage market participants classify single-family loans
with credit characteristics that range between their prime and
subprime categories as
Alt-A.
Although there is no universally accepted definition of
Alt-A,
industry participants have used this classification principally
to describe loans for which the underwriting process has been
streamlined in order to reduce the documentation requirements of
the borrower or allow alternative documentation. We have
classified these securities as
Alt-A if the
securities were labeled as
Alt-A when
sold to us or if we believe the underlying collateral includes a
significant amount of
Alt-A loans.
We have classified $46.0 billion and $51.3 billion of
our single-family non-agency mortgage-related securities as
Alt-A and
other at September 30, 2008 and December 31, 2007,
respectively.
Of these securities $20.0 billion and $21.3 billion
are backed by MTA loans at September 30, 2008 and
December 31, 2007, respectively. The MTA adjustable-rate
loans that back these securities allow the borrower to select
from a choice of payments, including options that result in
negative amortization. The payment options are usually indexed
to the moving average one-year Constant Maturity Treasury rate.
The credit characteristics of these securities are similar to
our other securities backed by
Alt-A loans;
however there is significant uncertainty related to future
borrower behavior when payments recast.
In addition to the contractual interest payments, we receive
substantial monthly remittances of principal repayments on these
Alt-A and
other securities, which totaled $1.6 billion and
$5.9 billion during the three and nine months ended
September 30, 2008, respectively, representing a return of
our investment in these securities. We focused our purchases on
credit-enhanced, senior tranches of these securities, which
provide additional protection due to subordination. Of these
securities, 89% and 100% were investment grade at
September 30, 2008 and December 31, 2007,
respectively. We
recognized impairment losses on these securities of
$7.1 billion for the three months ended September 30,
2008. The unrealized losses, net of tax, on these securities are
included in AOCI and totaled $5.8 billion and
$1.7 billion at September 30, 2008 and
December 31, 2007, respectively. We believe the declines in
fair values for these securities are mainly attributable to
decreased liquidity and larger risk premiums in the mortgage
market.
Table 18 provides an analysis of investments in
available-for-sale non-agency mortgage-related securities backed
by subprime loans and
Alt-A, MTA
and other loans in our retained portfolio at September 30,
2008.
Table 18
Investments in Available-For-Sale Non-Agency Mortgage-Related
Securities backed by Subprime Loans,
Alt-A, MTA
and Other Loans in our Retained Portfolio
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of September 30, 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unpaid
|
|
|
|
|
|
Gross
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
|
|
|
|
Principal
|
|
|
Amortized
|
|
|
Unrealized
|
|
|
Collateral
|
|
|
Original
|
|
|
September 30, 2008
|
|
|
Current
|
|
|
Investment
|
|
Non-agency mortgage-related securities backed by:
|
|
Balance
|
|
|
Cost
|
|
|
Losses
|
|
|
Delinquency(1)
|
|
|
%
AAA(2)
|
|
|
% AAA
|
|
|
%
AAA(3)
|
|
|
Grade(4)
|
|
|
|
(dollars in millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subprime loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First lien
|
|
$
|
78,906
|
|
|
$
|
76,986
|
|
|
$
|
(13,475
|
)
|
|
|
35
|
%
|
|
|
100
|
%
|
|
|
48
|
%
|
|
|
37
|
%
|
|
|
74
|
%
|
Second lien
|
|
|
836
|
|
|
|
500
|
|
|
|
(80
|
)
|
|
|
11
|
%
|
|
|
100
|
%
|
|
|
|
|
|
|
|
%
|
|
|
12
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total non-agency mortgage-related securities, backed by subprime
loans
|
|
$
|
79,742
|
|
|
$
|
77,486
|
|
|
$
|
(13,555
|
)
|
|
|
34
|
%
|
|
|
100
|
%
|
|
|
47
|
%
|
|
|
36
|
%
|
|
|
73
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Alt-A and
other loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Alt-A
|
|
$
|
21,743
|
|
|
$
|
19,867
|
|
|
$
|
(4,055
|
)
|
|
|
14
|
%
|
|
|
100
|
%
|
|
|
75
|
%
|
|
|
64
|
%
|
|
|
83
|
%
|
MTA
|
|
|
19,996
|
|
|
|
15,072
|
|
|
|
(3,355
|
)
|
|
|
24
|
%
|
|
|
100
|
%
|
|
|
59
|
%
|
|
|
54
|
%
|
|
|
80
|
%
|
Other(5)
|
|
|
4,253
|
|
|
|
3,736
|
|
|
|
(1,446
|
)
|
|
|
|
|
|
|
100
|
%
|
|
|
20
|
%
|
|
|
20
|
%
|
|
|
89
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total non-agency mortgage-related securities, backed by
Alt-A, MTA
and other loans
|
|
$
|
45,992
|
|
|
$
|
38,675
|
|
|
$
|
(8,856
|
)
|
|
|
|
|
|
|
100
|
%
|
|
|
63
|
%
|
|
|
55
|
%
|
|
|
82
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
Determined based on loans that are
60 days or more past due that underlie the securities and
based on servicing data reported for September 30, 2008.
|
(2)
|
Reflects the composition of the
portfolio that was
AAA-rated as
of the date of our acquisition of the security, based on the
lowest rating available.
|
(3)
|
Reflects the
AAA-rated
composition of the securities as of November 10, 2008,
based on the lowest rating available.
|
(4)
|
Reflects the composition of these
securities with credit ratings BBB or above as of
November 10, 2008, based on unpaid principal balance and
the lowest rating available.
|
(5)
|
Includes securities backed by
FHA/VA mortgages, home-equity lines of credit and other
residential loans.
|
Table 19 summarizes amortized cost, estimated fair values
and corresponding gross unrealized gains and gross unrealized
losses for available-for-sale securities and estimated fair
values for trading securities by major security type held in our
retained portfolio.
Table 19
Available-for-Sale Securities and Trading Securities in our
Retained Portfolio
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
|
|
|
Gross
|
|
|
|
|
|
|
|
|
|
Unrealized
|
|
|
Unrealized
|
|
|
|
|
|
|
Amortized Cost
|
|
|
Gains
|
|
|
Losses
|
|
|
Fair Value
|
|
|
|
(in millions)
|
|
September 30, 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Retained portfolio:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Available-for-sale mortgage-related securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Freddie Mac
|
|
$
|
277,099
|
|
|
$
|
1,632
|
|
|
$
|
(3,977
|
)
|
|
$
|
274,754
|
|
Subprime
|
|
|
77,486
|
|
|
|
3
|
|
|
|
(13,555
|
)
|
|
|
63,934
|
|
Commercial mortgage-backed securities
|
|
|
64,383
|
|
|
|
1
|
|
|
|
(7,339
|
)
|
|
|
57,045
|
|
Alt-A and other
|
|
|
38,675
|
|
|
|
7
|
|
|
|
(8,856
|
)
|
|
|
29,826
|
|
Fannie Mae
|
|
|
40,194
|
|
|
|
243
|
|
|
|
(471
|
)
|
|
|
39,966
|
|
Obligations of states and political subdivisions
|
|
|
13,072
|
|
|
|
8
|
|
|
|
(1,635
|
)
|
|
|
11,445
|
|
Manufactured housing
|
|
|
1,030
|
|
|
|
73
|
|
|
|
(58
|
)
|
|
|
1,045
|
|
Ginnie Mae
|
|
|
381
|
|
|
|
18
|
|
|
|
(1
|
)
|
|
|
398
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total available-for-sale mortgage-related securities
|
|
$
|
512,320
|
|
|
$
|
1,985
|
|
|
$
|
(35,892
|
)
|
|
$
|
478,413
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trading mortgage-related securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Freddie Mac
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
100,484
|
|
Fannie Mae
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
17,267
|
|
Ginnie Mae
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
197
|
|
Other
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
54
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total trading mortgage-related securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
118,002
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Retained portfolio:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Available-for-sale mortgage-related securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Freddie Mac
|
|
$
|
346,569
|
|
|
$
|
2,981
|
|
|
$
|
(2,583
|
)
|
|
$
|
346,967
|
|
Subprime
|
|
|
101,278
|
|
|
|
12
|
|
|
|
(8,584
|
)
|
|
|
92,706
|
|
Commercial mortgage-backed securities
|
|
|
64,965
|
|
|
|
515
|
|
|
|
(681
|
)
|
|
|
64,799
|
|
Alt-A and other
|
|
|
51,456
|
|
|
|
15
|
|
|
|
(2,543
|
)
|
|
|
48,928
|
|
Fannie Mae
|
|
|
45,688
|
|
|
|
513
|
|
|
|
(344
|
)
|
|
|
45,857
|
|
Obligations of states and political subdivisions
|
|
|
14,783
|
|
|
|
146
|
|
|
|
(351
|
)
|
|
|
14,578
|
|
Manufactured housing
|
|
|
1,149
|
|
|
|
131
|
|
|
|
(12
|
)
|
|
|
1,268
|
|
Ginnie Mae
|
|
|
545
|
|
|
|
19
|
|
|
|
(2
|
)
|
|
|
562
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total available-for-sale mortgage-related securities
|
|
$
|
626,433
|
|
|
$
|
4,332
|
|
|
$
|
(15,100
|
)
|
|
$
|
615,665
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trading mortgage-related securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Freddie Mac
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
12,216
|
|
Fannie Mae
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,697
|
|
Ginnie Mae
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
175
|
|
Other
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total trading mortgage-related securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
14,089
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Retained portfolio:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Available-for-sale mortgage-related securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Freddie Mac
|
|
$
|
345,724
|
|
|
$
|
1,597
|
|
|
$
|
(4,879
|
)
|
|
$
|
342,442
|
|
Subprime
|
|
|
104,932
|
|
|
|
4
|
|
|
|
(1,827
|
)
|
|
|
103,109
|
|
Commercial mortgage-backed securities
|
|
|
62,189
|
|
|
|
228
|
|
|
|
(1,140
|
)
|
|
|
61,277
|
|
Alt-A and other
|
|
|
52,916
|
|
|
|
18
|
|
|
|
(1,166
|
)
|
|
|
51,768
|
|
Fannie Mae
|
|
|
46,046
|
|
|
|
313
|
|
|
|
(552
|
)
|
|
|
45,807
|
|
Obligations of states and political subdivisions
|
|
|
14,548
|
|
|
|
166
|
|
|
|
(237
|
)
|
|
|
14,477
|
|
Manufactured housing
|
|
|
1,061
|
|
|
|
140
|
|
|
|
|
|
|
|
1,201
|
|
Ginnie Mae
|
|
|
581
|
|
|
|
16
|
|
|
|
(6
|
)
|
|
|
591
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total available-for-sale mortgage-related securities
|
|
$
|
627,997
|
|
|
$
|
2,482
|
|
|
$
|
(9,807
|
)
|
|
$
|
620,672
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trading mortgage-related securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Freddie Mac
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
11,713
|
|
Fannie Mae
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,713
|
|
Ginnie Mae
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
184
|
|
Other
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total trading mortgage-related securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
13,611
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At September 30, 2008, our gross unrealized losses on
available-for-sale mortgage-related securities were
$35.9 billion. The main components of these losses are
gross unrealized losses of $29.8 billion related to
non-agency mortgage-related securities backed by subprime,
Alt-A and
other loans and commercial mortgage-backed securities. We
believe that these unrealized losses on non-agency
mortgage-related securities at September 30, 2008, were
principally a result of decreased liquidity and larger risk
premiums in the non-agency mortgage market. All securities in an
unrealized loss position are
evaluated to determine if the impairment is
other-than-temporary.
The evaluation of these securities considers all available
information, including analyses based on default, prepayment and
borrower behavior assumptions.
Other-Than-Temporary
Impairments
Of our $204.5 billion in non-agency mortgage-related
securities in our available-for-sale portfolio at
September 30, 2008, we have identified securities backed by
subprime and
Alt-A and
other loans, including MTA loans, with $21.7 billion of
unpaid principal balance that are probable of incurring a
contractual principal or interest loss due to significant recent
and sustained deterioration in the performance of the underlying
collateral of these securities, considerably more pessimistic
expectations around future performance due to the unprecedented
deterioration in economic conditions since the second quarter,
and decreased confidence in the credit enhancements related to
two primary monoline insurers where we have determined that it
is both probable a principal and interest shortfall will occur
on the insured securities and that in such a case, there is
substantial uncertainty surrounding the insurers ability
to pay all future claims. As such, we recognized impairment
losses on these securities of $8.9 billion during the third
quarter of 2008, which were determined to be
other-than-temporary. The recent deterioration has not impacted
our ability and intent to hold these securities. We estimate
that the future expected principal and interest shortfall on
these securities will be significantly less than the impairment
loss required to be recorded under GAAP. The portion of the
impairment charges associated with these expected recoveries
will be accreted back through net interest income in future
periods.
The deterioration in the mortgage market and resulting
illiquidity has caused the government to take unprecedented
action during the third quarter of 2008 to intervene. The
decline in mortgage credit performance has been most severe for
subprime loans and
Alt-A and
other loans, including MTA loans, and for the institutions
holding those assets. Many of the same global economic factors
impacting the performance of our guarantee portfolio led to a
considerably more pessimistic outlook for the performance of our
mortgage-related securities in our retained portfolio. Rising
unemployment, accelerating house price declines, tight credit
conditions, volatility in mortgage and LIBOR rates, and
weakening consumer confidence not only contributed to poor
performance during the quarter but significantly impacted our
expectations regarding future performance, both of which are
critical in assessing other-than-temporary impairments.
Furthermore, the subprime loans and
Alt-A and
other loans backing our securities have significantly greater
concentrations in the states that are undergoing the greatest
stress, such as California, Florida, Arizona and Nevada. During
the third quarter of 2008, delinquencies increased at an
accelerating pace while severities and loss rates also
deteriorated. For example, delinquencies on 2006 and 2007 MTA
loans, which accounted for the largest share of our impairments,
increased by 30% and 41%, respectively, during the quarter,
exclusive of defaulted loans leaving the pools. Additionally,
there were significant negative ratings actions and sustained
categorical asset price declines most notably in the securities
backed by
Alt-A loans
including MTA loans in our portfolio. The decline in current and
expected mortgage credit performance has also impacted the
financial strength of certain monolines, resulting in us
concluding that we could not rely on the insurance protection
provided by two of these companies. The combination of all of
these factors not only had a material, negative impact on our
view of expected performance, but also significantly reduced the
likelihood of more favorable outcomes, resulting in a
substantial increase in other-than temporary impairments.
While it is possible that under certain conditions, defaults and
severity of losses on our remaining available-for-sale
securities for which we have not recorded an impairment charge
could exceed our subordination and credit enhancement levels and
a principal or interest loss could occur, we do not believe that
those conditions were probable at September 30, 2008. Based
on our ability and intent to hold our remaining
available-for-sale securities for a sufficient time to recover
all unrealized losses and our consideration of all available
information, we have concluded that the reduction in fair value
of these securities was temporary at September 30, 2008.
These assessments require significant judgment and are subject
to change as the performance of the individual securities
changes, mortgage conditions evolve and our assessments of
future performance are updated. Furthermore, different market
participants could arrive at materially different conclusions
regarding the likelihood of various default and severity
outcomes and these differences tend to be magnified for
nontraditional products such as MTA loans.
The evaluation of unrealized losses on our available-for-sale
portfolio for other-than-temporary impairment contemplates
numerous factors. We perform an evaluation on a
security-by-security
basis considering all available information. Important factors
include the length of time and extent to which the fair value of
the security has been less than book value; the impact of
changes in credit ratings (i.e., rating agency
downgrades); our intent and ability to retain the security in
order to allow for a recovery in fair value; and an analysis of
the performance of the underlying collateral relative to its
credit enhancements using techniques that require assumptions
about future default, prepayment and borrower behavior. Implicit
in this analysis is information relevant to expected cash flows
(such as collateral performance and characteristics) that also
underlies the other impairment factors mentioned above, and we
qualitatively consider all available information when assessing
whether an impairment is other-than-temporary. The relative
importance of this information varies based on the facts and
circumstances surrounding each security, as well as the economic
environment at the time of assessment. Based on the results of
this
evaluation, if it is determined that the impairment is
other-than-temporary, the carrying value of the security is
written down to fair value, and a loss is recognized through
earnings. We consider all available information in determining
the recovery period and anticipated holding periods for our
available-for-sale securities. Because we are a portfolio
investor, we generally hold available-for-sale securities in our
retained portfolio to maturity. An important underlying factor
we consider in determining the period to recover unrealized
losses on our available-for-sale securities is the estimated
life of the security. Since our available-for-sale securities
are prepayable, the average life is far shorter than the
contractual maturity.
We have concluded that the unrealized losses included in
Table 19 are temporary since we have the ability and intent
to hold the securities to recovery. These conclusions are based
on the following analyses, which are conducted on a quarterly
basis and are subject to change as new information regarding
delinquencies, severities, timing of losses, prepayment rates
and other factors becomes available.
Freddie
Mac and Fannie Mae Securities
These securities generally fit into one of two categories:
Unseasoned Securities These securities may be
utilized for resecuritization transactions. We frequently
resecuritize agency securities, typically unseasoned
pass-through securities. In these resecuritization transactions,
we typically retain an interest representing a majority of the
cash flows, but consider the resecuritization to be a sale of
all of the securities for purposes of assessing if an impairment
is other-than-temporary. As these securities have generally been
recently acquired, they generally have coupon rates and prices
close to par, so any decline in the fair value of these agency
securities is relatively small. This means that the decline
could be recovered easily, and we expect that the recovery
period would be in the near term. Notwithstanding this, we
recognize other-than-temporary impairments on any of these
securities that are likely to be sold. This population is
identified based on our expectations of resecuritization volume
and our eligible collateral that is on hand. If any of the
securities identified as likely to be sold are in a loss
position, other-than-temporary impairment is recorded because
management cannot assert that it has the intent to hold such
securities to recovery. Any additional losses realized upon sale
result from further declines in fair value subsequent to the
balance sheet date. For securities that are not likely to be
sold, we expect to recover any unrealized losses by holding them
to maturity.
Seasoned Securities These securities are not
usually utilized for resecuritization transactions. We hold the
seasoned agency securities that are in an unrealized loss
position at least to recovery and typically to maturity. As the
principal and interest on these securities are guaranteed and we
have the ability and intent to hold these securities, any
unrealized loss will be recovered. The unrealized losses on
agency securities are primarily a result of movements in
interest rates.
Non-Agency
Mortgage-Related Securities
We believe the unrealized losses on our non-agency
mortgage-related securities are primarily a result of decreased
liquidity and larger risk premiums. With the exception of the
other-than-temporarily impaired securities discussed previously,
we have not identified any securities that were probable of
incurring a contractual principal or interest loss at
September 30, 2008. As such, and based on our ability and
intent to hold these securities for a period of time sufficient
to recover all unrealized losses, we have concluded that the
impairment of these securities was temporary.
Our review of the securities backed by subprime and
Alt-A and
other loans includes analyses of the individual securities based
on underlying collateral performance, including the
collectibility of amounts that would be recovered from primary
monoline insurers. In the case of monoline insurers, we also
consider certain qualitative factors such as the availability of
capital, generation of new business, pending regulatory action,
ratings, security prices and credit default swap levels traded
on the insurers. In order to determine whether securities are
other-than-temporarily impaired, these analyses use assumptions
about the losses likely to result from the underlying collateral
that are currently more than 60 days delinquent and then
evaluate what percentage of the remaining collateral (that are
current or less than 60 days delinquent) would have to
default to create a loss. In making these determinations, we
consider loan level information including estimated LTV ratios,
FICO scores, geographic concentrations and other loan level
characteristics. We also consider the differences between the
loan level characteristics of the performing and non-performing
loan populations. The future default rate, severity and
prepayment assumptions required to realize a loss are evaluated
for probability of occurring. If these assumptions are probable,
considering all other factors, the impairment is judged to be
other than temporary.
We perform a stress test based on the key assumptions in the
above analyses to determine whether we would receive our
contractual payments on these securities in adverse credit
environments. These tests simulate the distribution of cash
flows from the underlying loans to the securities that we hold
considering different default rate and severity assumptions. In
evaluating each scenario, we use numerous assumptions (in
addition to the default rate and severity assumptions),
including, but not limited to the timing of losses, prepayment
rates, the collectibility of excess interest and interest rates
that could materially impact the results. These tests are
performed on a
security-by-security
basis for all of our securities backed by subprime and
Alt-A and
other loans, including MTA loans.
In evaluating our non-agency mortgage-related securities backed
by subprime and
Alt-A and
other loans, including MTA loans, for other-than-temporary
impairment, we noted and specifically considered that the
percentage of securities that were
AAA-rated
and the percentage that were investment grade had decreased
since acquisition and had decreased between the latest balance
sheet date and the release of these financial statements. We
expect this trend to continue for the remainder of 2008.
Although the ratings have declined, the ratings themselves have
not been determinative that a loss is probable. According to
Standard & Poors, or S&P, a security may
withstand up to 115% of S&Ps base case loss
assumptions and still receive a BB, or below investment grade,
rating. While we consider credit ratings in our analysis, we
believe that our detailed
security-by-security
analyses provide a more consistent view of the ultimate
collectibility of contractual amounts due to us. As such, we
have other-than-temporarily impaired securities with current
ratings ranging from CCC to AAA and have determined that other
securities within the same ratings were not
other-than-temporarily impaired. However, we carefully consider
individual ratings, especially those below investment grade. See
Tables 24 through 27 for the ratings of our non-agency
mortgage-related securities backed by subprime and
Alt-A and
other loans including MTA loans.
Furthermore, we considered significant declines in fair value
since June 30, 2008 to assess if they were indicative of
potential future cash shortfalls. In this assessment, we
generally placed greater emphasis on categorical pricing
information than on individual prices. We use multiple pricing
services to price the majority of our non-agency
mortgage-related securities. We observed significant dispersion
in prices obtained from different sources. However, we carefully
consider individual and sustained price declines, placing
greater weight when dispersion is lower and less weight when
dispersion is higher. Where dispersion is higher, other factors
previously mentioned, received greater weight.
We have identified 105 uninsured securities with
$19.7 billion of unpaid principal balance that we have
judged probable of incurring a contractual principal or interest
loss due to poor performance of the underlying collateral and
more pessimistic expectations regarding future performance of
these securities. In addition, we have identified
19 securities with $2.0 billion of unpaid principal
balance with credit enhancements that included monoline
insurance where we have determined that it is not probable that
the monoline insurers will have the ability to pay all future
claims should a principal or interest shortfall occur and that
absent such coverage a principal loss is likely to occur. As
such, we recognized impairment losses on these securities of
$8.9 billion, which were determined to be
other-than-temporary during the third quarter of 2008. Our
analysis is conducted on a quarterly basis and is subject to
change as new information regarding delinquencies, severities,
loss timing, prepayments and other factors becomes available.
Our non-agency mortgage-related securities have not yet
experienced significant cumulative losses or declines in our
credit enhancement levels on most of our holdings. While it is
possible that, under certain conditions (especially given
current economic conditions), defaults and loss severities on
the remaining securities could reach or even exceed the levels
used for our stress test scenarios and a principal or interest
loss could occur on certain individual securities where the
impairment was judged to be temporary, we do not believe that
those conditions are probable as of September 30, 2008.
Additionally, for the securities where we determined that the
impairment was other-than-temporary, we estimate that the future
expected principal and interest shortfall will be significantly
less than the impairment loss required to be recorded under
GAAP, as we expect these shortfalls to be less than the recent
fair value declines. For some of these securities it is possible
that we may not realize any loss.
Hypothetical
stress test scenarios on our investments in non-agency
mortgage-related securities backed by first lien
subprime loans
For our non-agency mortgage-related securities backed by first
lien subprime loans, we use several default rate and severity
stress test scenarios, including those disclosed in
Table 20 Investments in
Available-For-Sale Non-Agency Mortgage-Related Securities Backed
by First Lien Subprime Loans. This table is designed to
give insight into potential economic losses under hypothetical
scenarios. We divided the portfolio into delinquency quartiles
and ran the most stressful default rates on the quartiles with
the highest levels of current delinquencies. Given the
combination of the significant deterioration in the economic
outlook and the poor performance of the underlying collateral,
we have increased the default and severity assumptions used in
our hypothetical stress tests. For our non-agency
mortgage-related securities backed by subprime loans except
those that were determined to be
other-than-temporarily
impaired, we currently believe that the stress and default and
severity assumptions that would indicate a potential loss are
more severe than what we currently believe are probable.
Our most severe default rate for our worst quartiles and
severity assumptions for all quartiles are 80% and 70%,
respectively, for these securities. As disclosed on
Table 20, even in our most severe stress test scenarios,
our potential losses are only 9% of our total non-agency
mortgage-related securities backed by first lien subprime loans.
However, current mortgage market conditions are unprecedented
and actual default and severity experience could differ
materially from our expectations. Furthermore, different market
participants could arrive at different conclusions regarding the
likelihood of various default and severity outcomes. Current
collateral delinquency rates presented in Table 20 averaged
35% for first lien subprime loans.
Table 20 provides the summary results of the default rate
and severity stress test scenarios for our investments in
available-for-sale non-agency mortgage-related securities backed
by first lien subprime loans at September 30, 2008. In
addition to the stress tests scenarios, Table 20 also
displays underlying collateral performance and credit
enhancement statistics, by vintage and quartile of delinquency.
Within each of these quartiles, there is a distribution of both
credit enhancement levels and delinquency performance, and
individual security performance will differ from the quartile as
a whole. Furthermore, some individual securities with lower
subordination could have higher delinquencies. The projected
economic losses presented in each stress test scenario represent
the cash losses we may experience given the related assumptions.
However, these amounts do not represent the other-than-temporary
impairment charge that would result under the given scenario.
Any other-than-temporary impairment charges would vary depending
on the fair value of the security at that point in time.
Table 20
Investments in Available-For-Sale Non-Agency Mortgage-Related
Securities Backed by First Lien Subprime Loans
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2008
|
|
|
|
|
|
Underlying Collateral Performance
|
|
Credit Enhancements Statistics
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unpaid
|
|
|
|
|
|
|
Minimum
|
|
Stress Test
Scenarios(4)
|
|
|
|
Delinquency
|
|
Principal
|
|
|
Collateral
|
|
Average Credit
|
|
Current
|
|
Default
|
|
Severity
|
|
|
Default
|
|
Severity
|
|
Acquisition Date
|
|
Quartile
|
|
Balance
|
|
|
Delinquency(1)
|
|
Enhancement(2)
|
|
Subordination(3)
|
|
Rate
|
|
55
|
|
|
70
|
|
|
Rate
|
|
55
|
|
|
70
|
|
|
|
|
|
(dollars in millions)
|
|
|
2004 & Prior
|
|
|
1
|
|
|
$
|
321
|
|
|
|
12%
|
|
|
|
51%
|
|
|
|
33%
|
|
|
|
40%
|
|
|
$
|
|
|
|
$
|
|
|
|
|
50%
|
|
|
$
|
|
|
|
$
|
11
|
|
2004 & Prior
|
|
|
2
|
|
|
|
303
|
|
|
|
18
|
|
|
|
57
|
|
|
|
22
|
|
|
|
45
|
|
|
|
|
|
|
|
|
|
|
|
55
|
|
|
|
|
|
|
|
|
|
2004 & Prior
|
|
|
3
|
|
|
|
320
|
|
|
|
21
|
|
|
|
56
|
|
|
|
18
|
|
|
|
50
|
|
|
|
|
|
|
|
1
|
|
|
|
60
|
|
|
|
1
|
|
|
|
2
|
|
2004 & Prior
|
|
|
4
|
|
|
|
326
|
|
|
|
30
|
|
|
|
64
|
|
|
|
23
|
|
|
|
55
|
|
|
|
|
|
|
|
2
|
|
|
|
65
|
|
|
|
1
|
|
|
|
8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2004 & Prior subtotal
|
|
|
|
|
|
$
|
1,270
|
|
|
|
20
|
|
|
|
57
|
|
|
|
18
|
|
|
|
|
|
|
$
|
|
|
|
$
|
3
|
|
|
|
|
|
|
$
|
2
|
|
|
$
|
21
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005
|
|
|
1
|
|
|
$
|
3,563
|
|
|
|
25
|
|
|
|
54
|
|
|
|
34
|
|
|
|
50
|
|
|
$
|
|
|
|
$
|
|
|
|
|
55
|
|
|
$
|
|
|
|
$
|
|
|
2005
|
|
|
2
|
|
|
|
3,420
|
|
|
|
33
|
|
|
|
58
|
|
|
|
38
|
|
|
|
55
|
|
|
|
|
|
|
|
|
|
|
|
60
|
|
|
|
|
|
|
|
|
|
2005
|
|
|
3
|
|
|
|
3,491
|
|
|
|
38
|
|
|
|
56
|
|
|
|
30
|
|
|
|
60
|
|
|
|
|
|
|
|
2
|
|
|
|
65
|
|
|
|
|
|
|
|
8
|
|
2005
|
|
|
4
|
|
|
|
3,482
|
|
|
|
45
|
|
|
|
52
|
|
|
|
23
|
|
|
|
65
|
|
|
|
1
|
|
|
|
12
|
|
|
|
70
|
|
|
|
3
|
|
|
|
29
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005 subtotal
|
|
|
|
|
|
$
|
13,956
|
|
|
|
35
|
|
|
|
55
|
|
|
|
23
|
|
|
|
|
|
|
$
|
1
|
|
|
$
|
14
|
|
|
|
|
|
|
$
|
3
|
|
|
$
|
37
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006
|
|
|
1
|
|
|
$
|
7,585
|
|
|
|
32
|
|
|
|
30
|
|
|
|
19
|
|
|
|
60
|
|
|
$
|
14
|
|
|
$
|
299
|
|
|
|
65
|
|
|
$
|
96
|
|
|
$
|
577
|
|
2006
|
|
|
2
|
|
|
|
7,811
|
|
|
|
38
|
|
|
|
33
|
|
|
|
20
|
|
|
|
65
|
|
|
|
17
|
|
|
|
258
|
|
|
|
70
|
|
|
|
83
|
|
|
|
576
|
|
2006
|
|
|
3
|
|
|
|
7,655
|
|
|
|
42
|
|
|
|
29
|
|
|
|
17
|
|
|
|
70
|
|
|
|
156
|
|
|
|
733
|
|
|
|
75
|
|
|
|
317
|
|
|
|
1,086
|
|
2006
|
|
|
4
|
|
|
|
7,714
|
|
|
|
50
|
|
|
|
32
|
|
|
|
16
|
|
|
|
75
|
|
|
|
194
|
|
|
|
1,019
|
|
|
|
80
|
|
|
|
430
|
|
|
|
1,451
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006 subtotal
|
|
|
|
|
|
$
|
30,765
|
|
|
|
41
|
|
|
|
31
|
|
|
|
16
|
|
|
|
|
|
|
$
|
381
|
|
|
$
|
2,309
|
|
|
|
|
|
|
$
|
926
|
|
|
$
|
3,690
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
1
|
|
|
$
|
7,424
|
|
|
|
18
|
|
|
|
31
|
|
|
|
22
|
|
|
|
55
|
|
|
$
|
|
|
|
$
|
68
|
|
|
|
60
|
|
|
$
|
11
|
|
|
$
|
270
|
|
2007
|
|
|
2
|
|
|
|
7,434
|
|
|
|
27
|
|
|
|
27
|
|
|
|
20
|
|
|
|
60
|
|
|
|
30
|
|
|
|
387
|
|
|
|
65
|
|
|
|
123
|
|
|
|
784
|
|
2007
|
|
|
3
|
|
|
|
7,601
|
|
|
|
33
|
|
|
|
29
|
|
|
|
17
|
|
|
|
65
|
|
|
|
43
|
|
|
|
556
|
|
|
|
70
|
|
|
|
154
|
|
|
|
944
|
|
2007
|
|
|
4
|
|
|
|
7,449
|
|
|
|
40
|
|
|
|
27
|
|
|
|
19
|
|
|
|
70
|
|
|
|
161
|
|
|
|
1,041
|
|
|
|
75
|
|
|
|
460
|
|
|
|
1,501
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007 subtotal
|
|
|
|
|
|
$
|
29,908
|
|
|
|
30
|
|
|
|
29
|
|
|
|
17
|
|
|
|
|
|
|
$
|
234
|
|
|
$
|
2,052
|
|
|
|
|
|
|
$
|
748
|
|
|
$
|
3,499
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total uninsured non-agency mortgage-related securities, backed
by first lien subprime loans
|
|
|
|
|
|
$
|
75,899
|
|
|
|
35
|
|
|
|
35
|
|
|
|
16
|
|
|
|
|
|
|
$
|
616
|
|
|
$
|
4,378
|
|
|
|
|
|
|
$
|
1,679
|
|
|
$
|
7,247
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-agency mortgage-related securities, backed by first lien
subprime loans with monoline bond insurance:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-investment grade monoline no
other-than-temporary impairments to date
|
|
|
|
|
|
$
|
2,594
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-investment grade monoline
other-than-temporary impairments taken
|
|
|
|
|
|
|
413
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subtotal non-agency mortgage-related securities, backed by first
lien subprime loans with monoline bond
insurance(5)
|
|
|
|
|
|
$
|
3,007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total non-agency mortgage-related securities, backed by first
lien subprime loans
|
|
|
|
|
|
$
|
78,906
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
Determined based on loans that are
60 days or more past due that underlie the securities.
Collateral delinquency percentages are calculated based on
information available from third-party financial data providers.
|
(2)
|
Consists of subordination,
financial guarantees and other credit enhancements. Does not
include the benefit of excess interest.
|
(3)
|
Reflects the current credit
enhancement of the lowest security in each quartile.
|
(4)
|
Reflects the present value of
projected economic losses based on the disclosed hypothetical
cumulative default and loss severity rates against the
outstanding collateral balance.
|
(5)
|
Represents the amount of unpaid
principal balance covered by monoline insurance coverage. This
amount does not represent the maximum amount of losses we could
recover, as the monoline insurance also covers interest.
|
Hypothetical
stress test scenarios on our investments in non-agency
mortgage-related securities backed by
Alt-A
loans
For our non-agency mortgage-related securities backed by
Alt-A loans,
we use several default rate and severity stress test scenarios,
including those disclosed in Table 21
Investments in Non-Agency Mortgage-Related Securities backed by
Alt-A
Loans. This table is designed to give insight into
potential economic losses under hypothetical scenarios. We
divided the portfolio into delinquency quartiles and ran the
most stressful default rates on the cohorts with the highest
levels of current delinquencies. Given the combination of the
significant deterioration in the economic outlook and the poor
performance of the underlying collateral, we have increased the
default and severity assumptions used in our hypothetical stress
tests. For our non-agency mortgage-related securities backed by
Alt-A loans
except those that were determined to be
other-than-temporarily
impaired, we currently believe that the stress and default and
severity assumptions that would indicate a potential loss are
more severe than what we currently believe are probable.
Our most severe default rate for our worst quartiles is 65%. Our
most severe severity assumptions for our non-agency
mortgage-related securities backed by
non-MTA and
MTA Alt-A
loans are 55% and 60%, respectively. As disclosed in
Table 21, even in our most severe stress test scenarios,
our potential losses are only 10% of our total non-agency
mortgage-related securities backed by
Alt-A loans.
However, current mortgage market conditions are unprecedented
and actual default and severity experience for
Alt-A loans
could differ materially from our expectations. Furthermore,
different market participants could arrive at materially
different conclusions regarding the likelihood of various
default and severity outcomes and these differences tend to be
magnified for nontraditional products such as
Alt-A MTA
loans. Current collateral delinquency rates presented in
Table 21 averaged 19%.
Table 21 provides the summary results of the default rate
and severity stress test scenarios for our investments in
non-agency mortgage-related securities backed by
Alt-A loans
as of September 30, 2008, including securities backed by
Alt-A MTA
loans. In addition to the stress test scenarios, Table 21
also displays underlying collateral performance and credit
enhancement statistics, by vintage and quartile of delinquency.
Within each of these quartiles, there is a distribution of both
credit enhancement levels and delinquency performance, and
individual security performance will differ from the quartile as
a whole. Furthermore, some individual securities with lower
subordination could have higher delinquencies. The projected
economic losses presented in each stress test scenario represent
the cash losses we may experience given the related assumptions.
However, these amounts do not represent the other-than-temporary
impairment charge that would result under the given scenario.
Any other-than-temporary impairment charges would vary depending
on the fair value of the security at that point in time.
Table 21
Investments in Non-Agency Mortgage-Related Securities backed by
Alt-A
Loans
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2008
|
|
|
|
|
|
|
|
|
Underlying Collateral Performance
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unpaid
|
|
|
|
|
|
|
|
|
Minimum
|
|
|
Stress Test
Scenarios(4)
|
|
|
|
Delinquency
|
|
Principal
|
|
|
Collateral
|
|
|
Average Credit
|
|
|
Current
|
|
|
Default
|
|
|
Severity
|
|
|
Default
|
|
Severity
|
|
Issuance Date
|
|
Quartile
|
|
Balance
|
|
|
Delinquency(1)
|
|
|
Enhancement(2)
|
|
|
Subordination(3)
|
|
|
Rate
|
|
|
45%
|
|
|
55%
|
|
|
Rate
|
|
45%
|
|
|
55%
|
|
|
|
|
|
(dollars in millions)
|
|
|
Non-agency mortgage-related securities, backed by uninsured
non-MTA
Alt-A loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2004 & Prior
|
|
|
1
|
|
|
$
|
1,285
|
|
|
|
2
|
%
|
|
|
10
|
%
|
|
|
6
|
%
|
|
|
15
|
%
|
|
$
|
3
|
|
|
$
|
7
|
|
|
|
20%
|
|
|
$
|
11
|
|
|
$
|
23
|
|
2004 & Prior
|
|
|
2
|
|
|
|
1,218
|
|
|
|
4
|
|
|
|
14
|
|
|
|
8
|
|
|
|
23
|
|
|
|
|
|
|
|
8
|
|
|
|
28
|
|
|
|
8
|
|
|
|
26
|
|
2004 & Prior
|
|
|
3
|
|
|
|
1,338
|
|
|
|
7
|
|
|
|
16
|
|
|
|
11
|
|
|
|
30
|
|
|
|
9
|
|
|
|
32
|
|
|
|
35
|
|
|
|
26
|
|
|
|
56
|
|
2004 & Prior
|
|
|
4
|
|
|
|
1,273
|
|
|
|
13
|
|
|
|
24
|
|
|
|
13
|
|
|
|
40
|
|
|
|
16
|
|
|
|
43
|
|
|
|
45
|
|
|
|
31
|
|
|
|
64
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2004 & Prior subtotal
|
|
|
|
|
|
$
|
5,114
|
|
|
|
7
|
|
|
|
16
|
|
|
|
6
|
|
|
|
|
|
|
$
|
28
|
|
|
$
|
90
|
|
|
|
|
|
|
$
|
76
|
|
|
$
|
169
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005
|
|
|
1
|
|
|
$
|
2,199
|
|
|
|
3
|
|
|
|
8
|
|
|
|
5
|
|
|
|
15
|
|
|
$
|
12
|
|
|
$
|
32
|
|
|
|
20
|
|
|
$
|
45
|
|
|
$
|
80
|
|
2005
|
|
|
2
|
|
|
|
2,279
|
|
|
|
8
|
|
|
|
12
|
|
|
|
6
|
|
|
|
30
|
|
|
|
69
|
|
|
|
127
|
|
|
|
35
|
|
|
|
112
|
|
|
|
186
|
|
2005
|
|
|
3
|
|
|
|
2,435
|
|
|
|
13
|
|
|
|
15
|
|
|
|
8
|
|
|
|
40
|
|
|
|
87
|
|
|
|
142
|
|
|
|
45
|
|
|
|
118
|
|
|
|
194
|
|
2005
|
|
|
4
|
|
|
|
2,023
|
|
|
|
23
|
|
|
|
22
|
|
|
|
11
|
|
|
|
50
|
|
|
|
58
|
|
|
|
94
|
|
|
|
55
|
|
|
|
76
|
|
|
|
118
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005 subtotal
|
|
|
|
|
|
$
|
8,936
|
|
|
|
12
|
|
|
|
14
|
|
|
|
5
|
|
|
|
|
|
|
$
|
226
|
|
|
$
|
395
|
|
|
|
|
|
|
$
|
351
|
|
|
$
|
578
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006
|
|
|
1
|
|
|
$
|
1,077
|
|
|
|
4
|
|
|
|
11
|
|
|
|
5
|
|
|
|
30
|
|
|
$
|
59
|
|
|
$
|
88
|
|
|
|
35
|
|
|
$
|
81
|
|
|
$
|
116
|
|
2006
|
|
|
2
|
|
|
|
1,090
|
|
|
|
12
|
|
|
|
15
|
|
|
|
5
|
|
|
|
40
|
|
|
|
154
|
|
|
|
227
|
|
|
|
45
|
|
|
|
198
|
|
|
|
282
|
|
2006
|
|
|
3
|
|
|
|
1,197
|
|
|
|
26
|
|
|
|
15
|
|
|
|
7
|
|
|
|
40
|
|
|
|
22
|
|
|
|
45
|
|
|
|
55
|
|
|
|
79
|
|
|
|
130
|
|
2006
|
|
|
4
|
|
|
|
1,035
|
|
|
|
40
|
|
|
|
13
|
|
|
|
8
|
|
|
|
50
|
|
|
|
5
|
|
|
|
30
|
|
|
|
60
|
|
|
|
44
|
|
|
|
110
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006 subtotal
|
|
|
|
|
|
$
|
4,399
|
|
|
|
20
|
|
|
|
13
|
|
|
|
5
|
|
|
|
|
|
|
$
|
240
|
|
|
$
|
390
|
|
|
|
|
|
|
$
|
402
|
|
|
$
|
638
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
1
|
|
|
$
|
813
|
|
|
|
19
|
|
|
|
7
|
|
|
|
5
|
|
|
|
30
|
|
|
$
|
26
|
|
|
$
|
40
|
|
|
|
40
|
|
|
$
|
54
|
|
|
$
|
85
|
|
2007
|
|
|
2
|
|
|
|
562
|
|
|
|
24
|
|
|
|
11
|
|
|
|
9
|
|
|
|
40
|
|
|
|
8
|
|
|
|
22
|
|
|
|
50
|
|
|
|
36
|
|
|
|
50
|
|
2007
|
|
|
3
|
|
|
|
722
|
|
|
|
28
|
|
|
|
13
|
|
|
|
6
|
|
|
|
40
|
|
|
|
7
|
|
|
|
28
|
|
|
|
55
|
|
|
|
54
|
|
|
|
89
|
|
2007
|
|
|
4
|
|
|
|
635
|
|
|
|
34
|
|
|
|
14
|
|
|
|
6
|
|
|
|
50
|
|
|
|
13
|
|
|
|
31
|
|
|
|
60
|
|
|
|
37
|
|
|
|
71
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007 subtotal
|
|
|
|
|
|
$
|
2,732
|
|
|
|
26
|
|
|
|
11
|
|
|
|
5
|
|
|
|
|
|
|
$
|
54
|
|
|
$
|
121
|
|
|
|
|
|
|
$
|
181
|
|
|
$
|
295
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Uninsured non-agency mortgage-related securities, backed by
non-MTA
Alt-A loans
subtotal
|
|
|
|
|
|
$
|
21,181
|
|
|
|
14
|
|
|
|
14
|
|
|
|
5
|
|
|
|
|
|
|
$
|
548
|
|
|
$
|
996
|
|
|
|
|
|
|
$
|
1,010
|
|
|
$
|
1,680
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-agency mortgage-related securities, backed by non-MTA
Alt-A loans
with monoline bond insurance:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Monoline no
other-than-temporary
impairments to date
|
|
|
|
|
|
$
|
562
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subtotal non-agency mortgage-related securities, backed by
non-MTA
Alt-A loans
with monoline bond
insurance(5)
|
|
|
|
|
|
$
|
562
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-agency mortgage-related securities, backed by non-MTA
Alt-A loans
subtotal
|
|
|
|
|
|
$
|
21,743
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2008
|
|
|
|
|
|
|
|
|
Underlying Collateral Performance
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unpaid
|
|
|
|
|
|
|
|
|
Minimum
|
|
|
Stress Test
Scenarios(4)
|
|
|
|
Delinquency
|
|
Principal
|
|
|
Collateral
|
|
|
Average Credit
|
|
|
Current
|
|
|
Default
|
|
Severity
|
|
|
Default
|
|
Severity
|
|
Issuance Date
|
|
Quartile
|
|
Balance
|
|
|
Delinquency(1)
|
|
|
Enhancement(2)
|
|
|
Subordination(3)
|
|
|
Rate
|
|
50%
|
|
|
60%
|
|
|
Rate
|
|
50%
|
|
|
60%
|
|
|
|
|
|
(dollars in millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-agency mortgage-related securities, backed by uninsured MTA
Alt-A loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005 & Prior
|
|
|
1
|
|
|
$
|
1,093
|
|
|
|
19
|
%
|
|
|
27
|
%
|
|
|
19
|
%
|
|
|
45%
|
|
|
$
|
7
|
|
|
$
|
39
|
|
|
|
55%
|
|
|
$
|
52
|
|
|
$
|
126
|
|
2005 & Prior
|
|
|
2
|
|
|
|
959
|
|
|
|
23
|
|
|
|
28
|
|
|
|
19
|
|
|
|
50
|
|
|
|
26
|
|
|
|
61
|
|
|
|
60
|
|
|
|
67
|
|
|
|
122
|
|
2005 & Prior
|
|
|
3
|
|
|
|
994
|
|
|
|
25
|
|
|
|
26
|
|
|
|
19
|
|
|
|
55
|
|
|
|
57
|
|
|
|
106
|
|
|
|
60
|
|
|
|
82
|
|
|
|
141
|
|
2005 & Prior
|
|
|
4
|
|
|
|
986
|
|
|
|
34
|
|
|
|
30
|
|
|
|
27
|
|
|
|
60
|
|
|
|
37
|
|
|
|
92
|
|
|
|
65
|
|
|
|
64
|
|
|
|
127
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005 & Prior subtotal
|
|
|
|
|
|
$
|
4,032
|
|
|
|
25
|
|
|
|
28
|
|
|
|
19
|
|
|
|
|
|
|
$
|
127
|
|
|
$
|
298
|
|
|
|
|
|
|
$
|
265
|
|
|
$
|
516
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006
|
|
|
1
|
|
|
$
|
1,884
|
|
|
|
22
|
|
|
|
16
|
|
|
|
8
|
|
|
|
45
|
|
|
$
|
68
|
|
|
$
|
138
|
|
|
|
55
|
|
|
$
|
163
|
|
|
$
|
261
|
|
2006
|
|
|
2
|
|
|
|
2,861
|
|
|
|
24
|
|
|
|
14
|
|
|
|
10
|
|
|
|
50
|
|
|
|
156
|
|
|
|
300
|
|
|
|
60
|
|
|
|
330
|
|
|
|
515
|
|
2006
|
|
|
3
|
|
|
|
2,188
|
|
|
|
28
|
|
|
|
22
|
|
|
|
11
|
|
|
|
55
|
|
|
|
73
|
|
|
|
159
|
|
|
|
60
|
|
|
|
123
|
|
|
|
228
|
|
2006
|
|
|
4
|
|
|
|
2,375
|
|
|
|
31
|
|
|
|
25
|
|
|
|
13
|
|
|
|
60
|
|
|
|
168
|
|
|
|
293
|
|
|
|
65
|
|
|
|
233
|
|
|
|
379
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006 subtotal
|
|
|
|
|
|
$
|
9,308
|
|
|
|
26
|
|
|
|
19
|
|
|
|
8
|
|
|
|
|
|
|
$
|
465
|
|
|
$
|
890
|
|
|
|
|
|
|
$
|
849
|
|
|
$
|
1,383
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
1
|
|
|
$
|
1,443
|
|
|
|
10
|
|
|
|
24
|
|
|
|
14
|
|
|
|
40
|
|
|
$
|
2
|
|
|
$
|
15
|
|
|
|
50
|
|
|
$
|
26
|
|
|
$
|
68
|
|
2007
|
|
|
2
|
|
|
|
1,537
|
|
|
|
17
|
|
|
|
19
|
|
|
|
7
|
|
|
|
45
|
|
|
|
43
|
|
|
|
75
|
|
|
|
55
|
|
|
|
92
|
|
|
|
163
|
|
2007
|
|
|
3
|
|
|
|
1,522
|
|
|
|
21
|
|
|
|
12
|
|
|
|
8
|
|
|
|
50
|
|
|
|
73
|
|
|
|
148
|
|
|
|
60
|
|
|
|
166
|
|
|
|
259
|
|
2007
|
|
|
4
|
|
|
|
1,403
|
|
|
|
26
|
|
|
|
34
|
|
|
|
10
|
|
|
|
55
|
|
|
|
35
|
|
|
|
74
|
|
|
|
65
|
|
|
|
80
|
|
|
|
135
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007 subtotal
|
|
|
|
|
|
$
|
5,905
|
|
|
|
19
|
|
|
|
22
|
|
|
|
7
|
|
|
|
|
|
|
$
|
153
|
|
|
$
|
312
|
|
|
|
|
|
|
$
|
364
|
|
|
$
|
625
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Uninsured non-agency mortgage-related securities, backed by MTA
Alt-A loans
subtotal
|
|
|
|
|
|
$
|
19,245
|
|
|
|
24
|
|
|
|
22
|
|
|
|
7
|
|
|
|
|
|
|
$
|
745
|
|
|
$
|
1,500
|
|
|
|
|
|
|
$
|
1,478
|
|
|
$
|
2,524
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-agency mortgage-related securities, backed by MTA
Alt-A loans
with monoline bond insurance:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Monoline no other-than-temporary impairments to date
|
|
|
|
|
|
$
|
415
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Monoline other-than-temporary impairments taken
|
|
|
|
|
|
|
336
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subtotal non-agency mortgage-related securities, backed by MTA
Alt-A loans
with monoline bond
insurance(5)
|
|
|
|
|
|
$
|
751
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-agency mortgage-related securities, backed by MTA
Alt-A loans
subtotal
|
|
|
|
|
|
$
|
19,996
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total non-agency mortgage-related securities, backed by
Alt-A loans
|
|
|
|
|
|
$
|
41,739
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
Determined based on loans that are
60 days or more past due that underlie the securities.
Collateral delinquency percentages are calculated based on
information available from third-party financial data providers.
|
(2)
|
Consists of subordination,
financial guarantees and other credit enhancements. Does not
include the benefit of excess interest.
|
(3)
|
Reflects the current credit
enhancement of the lowest security in each quartile.
|
(4)
|
Reflects the present value of
projected economic losses based on the disclosed hypothetical
cumulative default and loss severity rates against the
outstanding collateral balance.
|
(5)
|
Represents the amount of unpaid
principal balance covered by monoline insurance coverage. This
amount does not represent the maximum amount of losses we could
recover, as the monoline insurance also covers interest.
|
Commercial
mortgage-backed securities
We perform an analysis of the underlying collateral on a
security-by-security basis to determine whether we will receive
all of the contractual payments due to us. We believe the
declines in fair value are attributable to the deterioration of
liquidity and larger risk premiums in the commercial
mortgage-backed securities market consistent with the broader
credit markets and not to the performance of the underlying
collateral supporting the securities. Virtually all of these
securities are currently
AAA-rated
and the underlying collateral continues to have positive
delinquency trends and positive delinquency to credit
enhancement relationships. Since we generally hold these
securities to maturity, we have concluded that we have the
ability and intent to hold these securities to a recovery of the
unrealized losses.
Obligations
of states and political subdivisions
These investments consist of mortgage revenue bonds.
Approximately 61% and 67% of these securities held at
September 30, 2008 and December 31, 2007,
respectively, were
AAA-rated as
of those dates, based on the lowest rating available. The
unrealized losses on obligations of states and political
subdivisions are primarily a result of movements in interest
rates. We have concluded that the impairment of these securities
is temporary based on our ability and intent to hold these
securities to recovery, the extent and duration of the decline
in fair value relative to the amortized cost as well as a lack
of any other facts or circumstances to suggest that the decline
was other-than-temporary. The issuer guarantees related to these
securities have led us to conclude that any credit risk is
minimal.
Table 22 summarizes our other-than-temporary impairments
recorded by security type and the duration of the unrealized
loss prior to impairment of less than 12 months and
12 months or greater.
Table 22
Other-than-Temporary Impairments on Mortgage-Related Securities
Recorded by Gross Unrealized Loss Position
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
|
|
|
2008
|
|
|
2007
|
|
|
|
Gross Unrealized Loss Position
|
|
|
|
Less than
|
|
|
12 months
|
|
|
|
|
|
Less than
|
|
|
12 months
|
|
|
|
|
|
|
12 months
|
|
|
or greater
|
|
|
Total
|
|
|
12 months
|
|
|
or greater
|
|
|
Total
|
|
|
|
(in millions)
|
|
|
Mortgage-related securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subprime(1)
|
|
$
|
|
|
|
$
|
(1,745
|
)
|
|
$
|
(1,745
|
)
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
Alt-A and
other(1)
|
|
|
(288
|
)
|
|
|
(6,823
|
)
|
|
|
(7,111
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Manufactured
Housing(1)
|
|
|
(5
|
)
|
|
|
|
|
|
|
(5
|
)
|
|
|
(1
|
)
|
|
|
|
|
|
|
(1
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other-than-temporary impairments
|
|
$
|
(293
|
)
|
|
$
|
(8,568
|
)
|
|
$
|
(8,861
|
)
|
|
$
|
(1
|
)
|
|
$
|
|
|
|
$
|
(1
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30,
|
|
|
|
2008
|
|
|
2007
|
|
|
|
Gross Unrealized Loss Position
|
|
|
|
Less than
|
|
|
12 months
|
|
|
|
|
|
Less than
|
|
|
12 months
|
|
|
|
|
|
|
12 months
|
|
|
or greater
|
|
|
Total
|
|
|
12 months
|
|
|
or greater
|
|
|
Total
|
|
|
|
(in millions)
|
|
|
Mortgage-related securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subprime(1)
|
|
$
|
(167
|
)
|
|
$
|
(2,100
|
)
|
|
$
|
(2,267
|
)
|
|
$
|
(1
|
)
|
|
$
|
|
|
|
$
|
(1
|
)
|
Alt-A and
other(1)
|
|
|
(462
|
)
|
|
|
(6,954
|
)
|
|
|
(7,416
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Freddie Mac
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(17
|
)
|
|
|
(319
|
)
|
|
|
(336
|
)
|
Fannie Mae
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(12
|
)
|
|
|
(12
|
)
|
Obligations of state and political
subdivisions(1)
|
|
|
(58
|
)
|
|
|
(10
|
)
|
|
|
(68
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Manufactured
Housing(1)
|
|
|
(8
|
)
|
|
|
|
|
|
|
(8
|
)
|
|
|
(2
|
)
|
|
|
|
|
|
|
(2
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other-than-temporary impairments
|
|
$
|
(695
|
)
|
|
$
|
(9,064
|
)
|
|
$
|
(9,759
|
)
|
|
$
|
(20
|
)
|
|
$
|
(331
|
)
|
|
$
|
(351
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
Represent securities of
private-label or non-agency issuers.
|
During the third quarter of 2008 and 2007, we recorded
impairments related to investments in mortgage-related
securities of $8.9 billion and $1 million,
respectively. The impairments recognized during the third
quarter of 2008 related to non-agency securities backed by
subprime or
Alt-A and
other loans, including MTA loans, primarily due to the
combination of a more pessimistic view of future performance due
to the economic environment and poor performance of the
collateral underlying these securities. Securities backed by MTA
loans accounted for $11.5 billion of the $21.7 billion
of impaired unpaid principal balance and $4.9 billion of
other-than-temporary
impairment expense. Delinquencies on 2006 and 2007 vintage MTA
loans increased 30% and 41%, respectively, during the third
quarter of 2008. Securities backed by MTA loans experienced
severe and sustained price declines, with prices for this
category, on average, falling by approximately 18% in the third
quarter of 2008, which was considerably greater than the decline
experienced during the second quarter and considerably more than
other major sectors of the residential mortgage-related
securities market. The sector was also hit by substantial
downgrades during the quarter with only 59% of the population
rated AAA, versus 96% at the end of the second quarter. Due to
the combination of these factors, coupled with the deterioration
in economic conditions especially in California, Florida,
Arizona and Nevada where we have high concentrations of MTA
loans, our expectations of future performance deteriorated
materially. While there is significant uncertainty around the
future performance of these loans, our assessment of the
probability of more favorable outcomes has declined
significantly from the second quarter. The remaining securities
backed by
Alt-A loans,
excluding MTA and other loans, accounted for $4.5 billion
of impaired unpaid principal balance and $1.7 billion of
other-than-temporary
impairment expense with most (79%) coming from the 2006 and 2007
vintages. The loans backing these securities also saw
significant increases in delinquencies, material price declines,
ratings actions, and unfavorable expectations around future
performance. Securities backed by 2006 and 2007 subprime loans
accounted for the 4.9 billion of impaired unpaid principal
balance and $1.745 billion of other-than temporary
impairment expense. As with the other asset classes, a key
determinant in our conclusion that impairments were other-than
temporary was the considerable deterioration of economic
conditions and the housing market during and subsequent to the
third quarter which adversely impacted our view of future
performance. Additionally, delinquencies on the 2006 and 2007
subprime loans backing these securities increased by 11% and
20%, respectively. Additionally, credit enhancements related to
primary monoline bond insurance provided by two monoline
insurers on individual securities in an unrealized loss position
for which we have determined that it is both probable a
principal and interest shortfall will occur on the insured
securities and that in such a case there is substantial
uncertainty surrounding the insurers ability to pay all
future claims also contributed to certain of these impairments.
In making this determination, we considered our own analysis and
additional qualitative factors, such as the ability of each
monoline to access capital and to generate new business, pending
regulatory actions, ratings agency actions, security prices and
credit default swap levels traded on each monoline.
During the nine months ended September 30, 2008 and 2007,
we recorded impairments related to investments in
mortgage-related securities of $9.8 billion and
$351 million, respectively. Of the $9.8 billion in
impairments recognized during the nine months ended
September 30, 2008, $9.7 billion related to non-agency
securities backed by subprime or
Alt-A and
other loans as discussed above. Of the remaining
$76 million of impairments, $68 million related to
obligations of states and political subdivisions for which we
did not have the intent to hold to a forecasted recovery. During
the nine months ended September 30, 2007, security
impairments on available-for-sale securities included
$348 million attributed to agency mortgage-related
securities in an unrealized loss position that we did not have
the intent to hold to a forecasted recovery. Of the
$348 million, $331 million related to securities where
the duration of the unrealized loss prior to impairment was
greater than 12 months.
We rely on monoline bond insurance to provide credit protection
on some of our securities held in our mortgage-related
investment portfolio as well as our non-mortgage-related
investment portfolio. See CREDIT RISKS
Institutional Credit Risk Mortgage and Bond
Insurers and NOTE 15: CONCENTRATION OF
CREDIT AND OTHER RISKS Mortgage Lenders and
Insurers to our consolidated financial statements for
additional information regarding our credit risks to our
counterparties and how we manage them.
Table 23 shows our non-agency mortgage-related securities
covered by monoline bond insurance at September 30, 2008.
Table 23
Non-Agency Mortgage-Related Securities Covered by Monoline Bond
Insurance at September 30, 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial Guaranty
|
|
|
Syncora
|
|
|
AMBAC Assurance
|
|
|
Financial Security
|
|
|
|
|
|
|
|
|
|
Insurance Company
|
|
|
Guarantee Inc.
|
|
|
Corporation
|
|
|
Assurance Inc.
|
|
|
MBIA Insurance Corp.
|
|
|
Total
|
|
|
|
Unpaid
|
|
|
|
|
|
Unpaid
|
|
|
|
|
|
Unpaid
|
|
|
|
|
|
Unpaid
|
|
|
|
|
|
Unpaid
|
|
|
|
|
|
Unpaid
|
|
|
|
|
|
|
principal
|
|
|
Unrealized
|
|
|
principal
|
|
|
Unrealized
|
|
|
principal
|
|
|
Unrealized
|
|
|
principal
|
|
|
Unrealized
|
|
|
principal
|
|
|
Unrealized
|
|
|
principal
|
|
|
Unrealized
|
|
|
|
balance
|
|
|
losses(1)
|
|
|
balance
|
|
|
losses(1)
|
|
|
balance
|
|
|
losses(1)
|
|
|
balance
|
|
|
losses(1)
|
|
|
balance
|
|
|
losses(1)
|
|
|
balance
|
|
|
losses(1)
|
|
|
|
(in millions)
|
|
|
First lien subprime
|
|
$
|
1,352
|
|
|
$
|
226
|
|
|
$
|
238
|
|
|
$
|
|
|
|
$
|
863
|
|
|
$
|
246
|
|
|
$
|
525
|
|
|
$
|
64
|
|
|
$
|
28
|
|
|
$
|
2
|
|
|
$
|
3,006
|
|
|
$
|
538
|
|
Second lien subprime
|
|
|
379
|
|
|
|
|
|
|
|
79
|
|
|
|
|
|
|
|
70
|
|
|
|
32
|
|
|
|
|
|
|
|
|
|
|
|
26
|
|
|
|
11
|
|
|
|
554
|
|
|
|
43
|
|
Alt-A and
other
|
|
|
1,139
|
|
|
|
173
|
|
|
|
845
|
|
|
|
205
|
|
|
|
1,838
|
|
|
|
777
|
|
|
|
746
|
|
|
|
271
|
|
|
|
669
|
|
|
|
322
|
|
|
|
5,237
|
|
|
|
1,748
|
|
Manufactured Housing
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
119
|
|
|
|
12
|
|
|
|
|
|
|
|
|
|
|
|
194
|
|
|
|
26
|
|
|
|
313
|
|
|
|
38
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
2,870
|
|
|
$
|
399
|
|
|
$
|
1,162
|
|
|
$
|
205
|
|
|
$
|
2,890
|
|
|
$
|
1,067
|
|
|
$
|
1,271
|
|
|
$
|
335
|
|
|
$
|
917
|
|
|
$
|
361
|
|
|
$
|
9,110
|
|
|
$
|
2,367
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
Represent the amount of unrealized
losses at September 30, 2008 on the securities with
monoline insurance.
|
Included in Table 23 is $2.0 billion of unpaid
principal balance that was impaired due to our determination
that it was both probable that a principal and interest
shortfall would occur on the insured securities and that in such
a case there is substantial uncertainty surrounding two monoline
insurers ability to pay all future claims, as previously
discussed. For the remaining securities covered by the insurers
that may not have the ability to pay future claims we do not
currently believe that it is probable that a principal or
interest shortfall will occur on these securities. This
assessment requires significant judgment and is subject to
change as our assessments of future performance are updated.
See CREDIT RISKS Institutional Credit
Risk Mortgage and Bond Insurers for a
discussion of our expectations regarding the claims paying
abilities of these insurers and CREDIT RISKS
Table 38 Monoline Bond Insurance by
Counterparty for the ratings of these insurers as of
November 10, 2008.
Table 24 shows the ratings of available-for-sale non-agency
mortgage-related securities backed by subprime loans held at
September 30, 2008 based on their ratings as of
September 30, 2008. Tables 24, 25, 26 and 28 used the
lowest rating available for each security.
Table 24
Ratings of Available-For-Sale Non-Agency Mortgage-Related
Securities backed by Subprime Loans at September 30, 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unpaid
|
|
|
|
|
|
Gross
|
|
|
Monoline
|
|
|
|
Principal
|
|
|
Amortized
|
|
|
Unrealized
|
|
|
Insurance
|
|
Credit Rating as of September 30, 2008
|
|
Balance
|
|
|
Cost
|
|
|
Losses
|
|
|
Coverage(1)
|
|
|
|
(in millions)
|
|
|
Investment grade:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
AAA-rated
|
|
$
|
37,787
|
|
|
$
|
37,708
|
|
|
$
|
(5,376
|
)
|
|
$
|
532
|
|
Other investment grade
|
|
|
25,918
|
|
|
|
25,614
|
|
|
|
(5,133
|
)
|
|
|
1,694
|
|
Below investment grade
|
|
|
16,037
|
|
|
|
14,164
|
|
|
|
(3,046
|
)
|
|
|
1,334
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
79,742
|
|
|
$
|
77,486
|
|
|
$
|
(13,555
|
)
|
|
$
|
3,560
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
Represents the amount of unpaid
principal balance covered by monoline insurance coverage. This
amount does not represent the maximum amount of losses we could
recover, as the monoline insurance also covers interest.
|
Table 25 shows the percentage of unpaid principal balance
of non-agency mortgage-related securities at September 30,
2008 based on the ratings of available-for-sale non-agency
mortgage-related securities backed by subprime loans as of
September 30 and November 10, 2008. We estimate that
the gross unrealized losses on these securities have not changed
significantly and we continue to receive substantial monthly
remittances of principal repayments on these securities.
Table 25
Ratings of Available-For-Sale Non-Agency Mortgage-Related
Securities backed by Subprime Loans at September 30, 2008
and November 10, 2008
|
|
|
|
|
|
|
|
|
|
|
Credit Ratings as of
|
|
Percentage of Unpaid Principal Balance at September 30,
2008
|
|
September 30, 2008
|
|
|
November 10, 2008
|
|
|
Investment grade:
|
|
|
|
|
|
|
|
|
AAA-rated
|
|
|
47
|
%
|
|
|
36
|
%
|
Other investment grade
|
|
|
33
|
|
|
|
37
|
|
Below investment grade
|
|
|
20
|
|
|
|
27
|
|
|
|
|
|
|
|
|
|
|
|
|
|
100
|
%
|
|
|
100
|
%
|
|
|
|
|
|
|
|
|
|
Table 26 shows the ratings of available-for-sale non-agency
mortgage-related securities backed by
Alt-A and
other loans held at September 30, 2008 based on their
ratings as of September 30, 2008.
Table 26
Ratings of Available-for-Sale Non-Agency Mortgage-Related
Securities backed by
Alt-A and
Other Loans at September 30, 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unpaid
|
|
|
|
|
|
Gross
|
|
|
Monoline
|
|
|
|
Principal
|
|
|
|
|
|
Unrealized
|
|
|
Insurance
|
|
Credit Rating as of September 30, 2008
|
|
Balance
|
|
|
Amortized Cost
|
|
|
Losses
|
|
|
Coverage(1)
|
|
|
|
(in millions)
|
|
|
Investment grade:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
AAA-rated
|
|
$
|
29,085
|
|
|
$
|
27,209
|
|
|
$
|
(7,098
|
)
|
|
$
|
1,103
|
|
Other investment grade
|
|
|
11,932
|
|
|
|
8,453
|
|
|
|
(1,464
|
)
|
|
|
3,100
|
|
Below investment grade
|
|
|
4,975
|
|
|
|
3,013
|
|
|
|
(294
|
)
|
|
|
1,034
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
45,992
|
|
|
$
|
38,675
|
|
|
$
|
(8,856
|
)
|
|
$
|
5,237
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
Represents the amount of unpaid
principal balance covered by monoline insurance coverage. This
amount does not represent the maximum amount of losses we could
recover, as the monoline insurance also covers interest.
|
Table 27 shows the percentage of unpaid principal balance
at September 30, 2008 based on the rating of
available-for-sale non-agency mortgage-related securities backed
by Alt-A and
other loans as of September 30 and November 10, 2008.
Table 27
Ratings of Available-for-Sale Non-Agency Mortgage-Related
Securities backed by
Alt-A and
Other Loans at September 30, 2008 and November 10,
2008
|
|
|
|
|
|
|
|
|
|
|
Credit Rating as of
|
|
Percentage of Unpaid Principal Balance at September 30,
2008
|
|
September 30, 2008
|
|
|
November 10, 2008
|
|
|
Investment grade:
|
|
|
|
|
|
|
|
|
AAA-rated
|
|
|
63
|
%
|
|
|
55
|
%
|
Other investment grade
|
|
|
26
|
|
|
|
27
|
|
Below investment grade
|
|
|
11
|
|
|
|
18
|
|
|
|
|
|
|
|
|
|
|
|
|
|
100
|
%
|
|
|
100
|
%
|
|
|
|
|
|
|
|
|
|
Derivative
Assets and Liabilities, Net at Fair Value
Table 28 shows the notional or contractual amounts and fair
value for each derivative type and the maturity profile of the
derivative positions. The fair values of the derivative
positions are presented on a
product-by-product
basis, without netting by counterparty.
Table 28
Derivative Fair Values and Maturities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2008
|
|
|
|
|
|
|
|
|
|
Fair
Value(1)
|
|
|
|
Notional or
|
|
|
Total Fair
|
|
|
Less than
|
|
|
1 to 3
|
|
|
Greater than 3
|
|
|
In Excess
|
|
|
|
Contractual Amount
|
|
|
Value(2)
|
|
|
1 Year
|
|
|
Years
|
|
|
and up to 5 Years
|
|
|
of 5 Years
|
|
|
|
(dollars in millions)
|
|
|
Interest-rate swaps:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Receive-fixed:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Swaps
|
|
$
|
287,167
|
|
|
$
|
1,172
|
|
|
$
|
(8
|
)
|
|
$
|
431
|
|
|
$
|
(330
|
)
|
|
$
|
1,079
|
|
Weighted-average fixed
rate(3)
|
|
|
|
|
|
|
|
|
|
|
4.29
|
%
|
|
|
3.71
|
%
|
|
|
3.99
|
%
|
|
|
4.75
|
%
|
Forward-starting
swaps(4)
|
|
|
42,661
|
|
|
|
510
|
|
|
|
|
|
|
|
11
|
|
|
|
(15
|
)
|
|
|
514
|
|
Weighted-average fixed
rate(3)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3.57
|
%
|
|
|
4.47
|
%
|
|
|
4.98
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total receive-fixed
|
|
|
329,828
|
|
|
|
1,682
|
|
|
|
(8
|
)
|
|
|
442
|
|
|
|
(345
|
)
|
|
|
1,593
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basis (floating to floating)
|
|
|
82,205
|
|
|
|
(76
|
)
|
|
|
17
|
|
|
|
(89
|
)
|
|
|
|
|
|
|
(4
|
)
|
Pay-fixed:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Swaps
|
|
|
302,102
|
|
|
|
(5,087
|
)
|
|
|
(97
|
)
|
|
|
(530
|
)
|
|
|
(640
|
)
|
|
|
(3,820
|
)
|
Weighted-average fixed
rate(3)
|
|
|
|
|
|
|
|
|
|
|
5.08
|
%
|
|
|
3.67
|
%
|
|
|
4.41
|
%
|
|
|
4.83
|
%
|
Forward-starting
swaps(4)
|
|
|
150,531
|
|
|
|
(4,488
|
)
|
|
|
|
|
|
|
11
|
|
|
|
(29
|
)
|
|
|
(4,470
|
)
|
Weighted-average fixed
rate(3)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3.40
|
%
|
|
|
4.40
|
%
|
|
|
5.09
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total pay-fixed
|
|
|
452,633
|
|
|
|
(9,575
|
)
|
|
|
(97
|
)
|
|
|
(519
|
)
|
|
|
(669
|
)
|
|
|
(8,290
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest-rate swaps
|
|
|
864,666
|
|
|
|
(7,969
|
)
|
|
|
(88
|
)
|
|
|
(166
|
)
|
|
|
(1,014
|
)
|
|
|
(6,701
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Option-based:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Call swaptions
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchased
|
|
|
184,022
|
|
|
|
7,173
|
|
|
|
552
|
|
|
|
1,841
|
|
|
|
1,487
|
|
|
|
3,293
|
|
Put swaptions
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchased
|
|
|
36,550
|
|
|
|
1,388
|
|
|
|
71
|
|
|
|
577
|
|
|
|
278
|
|
|
|
462
|
|
Written
|
|
|
6,000
|
|
|
|
(134
|
)
|
|
|
|
|
|
|
(69
|
)
|
|
|
(65
|
)
|
|
|
|
|
Other option-based
derivatives(5)
|
|
|
66,956
|
|
|
|
1,210
|
|
|
|
(12
|
)
|
|
|
(5
|
)
|
|
|
(7
|
)
|
|
|
1,234
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total option-based
|
|
|
293,528
|
|
|
|
9,637
|
|
|
|
611
|
|
|
|
2,344
|
|
|
|
1,693
|
|
|
|
4,989
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Futures
|
|
|
245,535
|
|
|
|
(96
|
)
|
|
|
(82
|
)
|
|
|
(14
|
)
|
|
|
|
|
|
|
|
|
Foreign-currency swaps
|
|
|
13,688
|
|
|
|
3,210
|
|
|
|
296
|
|
|
|
1,610
|
|
|
|
1,002
|
|
|
|
302
|
|
Forward purchase and sale commitments
|
|
|
199,811
|
|
|
|
984
|
|
|
|
984
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Swap guarantee derivatives
|
|
|
2,838
|
|
|
|
(10
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(10
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subtotal
|
|
|
1,620,066
|
|
|
|
5,756
|
|
|
$
|
1,721
|
|
|
$
|
3,774
|
|
|
$
|
1,681
|
|
|
$
|
(1,420
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Credit derivatives
|
|
|
12,160
|
|
|
|
22
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
1,632,226
|
|
|
$
|
5,778
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
Fair value is categorized based on
the period from September 30, 2008 until the contractual
maturity of the derivative.
|
(2)
|
The value of derivatives on our
consolidated balance sheets is reported as derivative assets,
net and derivative liability, net, and includes derivative
interest receivable or (payable), net, trade/settle receivable
or (payable), net and derivative cash collateral (held) or
posted, net. Refer to CONSOLIDATED RESULTS OF
OPERATIONS Table 9 Summary of the
Effect of Derivatives on Selected Consolidated Financial
Statement Captions for reconciliation of fair value to the
amounts presented on our consolidated balance sheets as of
September 30, 2008.
|
(3)
|
Represents the notional weighted
average rate for the fixed leg of the swaps.
|
(4)
|
Represents interest-rate swap
agreements that are scheduled to begin on future dates ranging
from less than one year to ten years.
|
(5)
|
Primarily represents purchased
interest rate caps and floors, as well as written options,
including guarantees of stated final maturity of issued
Structured Securities and written call options on PCs we issued.
|
Table 29 summarizes the changes in derivative fair values.
Table 29
Changes in Derivative Fair Values
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended
|
|
|
|
September 30,(1)
|
|
|
|
2008
|
|
|
2007
|
|
|
|
(in millions)
|
|
|
Beginning balance net asset (liability)
|
|
$
|
4,790
|
|
|
$
|
7,720
|
|
Net change in:
|
|
|
|
|
|
|
|
|
Forward purchase and sale commitments
|
|
|
657
|
|
|
|
179
|
|
Credit derivatives
|
|
|
12
|
|
|
|
3
|
|
Swap guarantee derivatives
|
|
|
(6
|
)
|
|
|
|
|
Other
derivatives:(2)
|
|
|
|
|
|
|
|
|
Changes in fair value
|
|
|
(3,015
|
)
|
|
|
(754
|
)
|
Fair value of new contracts entered into during the
period(3)
|
|
|
3,258
|
|
|
|
878
|
|
Contracts realized or otherwise settled during the period
|
|
|
82
|
|
|
|
(1,089
|
)
|
|
|
|
|
|
|
|
|
|
Ending balance net asset (liability)
|
|
$
|
5,778
|
|
|
$
|
6,937
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
The value of derivatives on our
consolidated balance sheets is reported as derivative assets,
net and derivative liability, net, and includes derivative
interest receivable (payable), net, trade/settle receivable
(payable), net and derivative cash collateral (held) posted,
net. Refer to CONSOLIDATED RESULTS OF
OPERATIONS Table 9 Summary of the
Effect of Derivatives on Selected Consolidated Financial
Statement Captions for reconciliation of fair value to the
amounts presented on our consolidated balance sheets as of
September 30, 2008 and January 1, 2008. Fair value
excludes derivative interest receivable, net of
$1.8 billion, trade/settle receivable or (payable), net of
$ billion and derivative cash collateral held, net of
$8.2 billion at September 30, 2007. Fair value
excludes derivative interest receivable, net of
$2.3 billion, trade/settle receivable or (payable), net of
$ billion and derivative cash collateral held, net of
$9.5 billion at January 1, 2007.
|
(2)
|
Includes fair value changes for
interest-rate swaps, option-based derivatives, futures,
foreign-currency swaps and interest-rate caps.
|
(3)
|
Consists primarily of cash premiums
paid or received on options.
|
Table 30 provides information on our outstanding written
and purchased swaption and option premiums at September 30,
2008 and December 31, 2007, based on the original premium
receipts or payments.
Table 30
Outstanding Written and Purchased Swaption and Option
Premiums
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Original Premium
|
|
Original Weighted
|
|
|
|
|
Amount (Paid)
|
|
Average Life to
|
|
Remaining Weighted
|
|
|
Received
|
|
Expiration
|
|
Average Life
|
|
|
(dollars in millions)
|
|
Purchased:(1)
|
|
|
|
|
|
|
|
|
|
|
|
|
At September 30, 2008
|
|
$
|
(6,608
|
)
|
|
|
8.0 years
|
|
|
|
6.6 years
|
|
At December 31, 2007
|
|
$
|
(5,478
|
)
|
|
|
7.8 years
|
|
|
|
6.0 years
|
|
Written:(2)
|
|
|
|
|
|
|
|
|
|
|
|
|
At September 30, 2008
|
|
$
|
205
|
|
|
|
2.6 years
|
|
|
|
2.1 years
|
|
At December 31, 2007
|
|
$
|
87
|
|
|
|
3.0 years
|
|
|
|
2.6 years
|
|
|
|
(1)
|
Purchased options exclude callable
swaps.
|
(2)
|
Excludes written options on
guarantees of stated final maturity of Structured Securities.
|
Guarantee
Asset
See CONSOLIDATED RESULTS OF OPERATIONS
Non-Interest Income Gains (Losses) on Guarantee
Asset for a description of, and an attribution of
other changes in, the guarantee asset. Table 31 summarizes
the changes in the guarantee asset balance.
Table 31
Changes in Guarantee Asset
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended
|
|
|
|
September 30,
|
|
|
|
2008
|
|
|
2007
|
|
|
|
(in millions)
|
|
|
Beginning balance
|
|
$
|
9,591
|
|
|
$
|
7,389
|
|
Additions
|
|
|
2,177
|
|
|
|
2,646
|
|
Other(1)
|
|
|
(87
|
)
|
|
|
|
|
Components of fair value gains (losses):
|
|
|
|
|
|
|
|
|
Return of investment on guarantee asset
|
|
|
(1,382
|
)
|
|
|
(1,266
|
)
|
Changes in fair value of management and guarantee fees
|
|
|
(620
|
)
|
|
|
1,098
|
|
|
|
|
|
|
|
|
|
|
Gains (losses) on guarantee asset
|
|
|
(2,002
|
)
|
|
|
(168
|
)
|
|
|
|
|
|
|
|
|
|
Ending balance
|
|
$
|
9,679
|
|
|
$
|
9,867
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
Represents a reduction in our
guarantee asset associated with the extinguishment of our
previously issued long-term credit guarantees upon conversion
into either PCs or Structured Transactions within the same month.
|
The decrease in additions to our guarantee asset during the nine
months ended September 30, 2008 compared to the nine months
ended September 30, 2007 is primarily due to a decrease in
our overall issuance volume of our guaranteed securities. Our
issuance volume decreased during the nine months ended
September 30, 2008 as the housing market has slowed,
particularly in the third quarter of 2008.
Losses on guarantee asset increased for the nine months ended
September 30, 2008 compared to the nine months ended
September 30, 2007. The increased losses are due to a
greater decline in market valuations for interest-only mortgage
securities, which we use to value our guarantee asset in part
due a larger decrease in interest rates during the nine months
ended September 30, 2008 compared to the same period in
2007.
Real
Estate Owned, Net
We acquire residential properties in satisfaction of borrower
defaults on mortgage loans that we own or for which we have
issued our financial guarantees. The balance of our REO, net
increased substantially to $3.2 billion at
September 30, 2008 from $1.7 billion at
December 31, 2007. The increase was driven by a 95%
increase of our single-family property inventory during the nine
months ended September 30, 2008, with the most significant
amount of acquisitions in the states of California, Arizona,
Florida, Michigan, Virginia, Georgia and Nevada. REO
acquisitions in these states generally have higher average
property values due to home price appreciation prior to the more
recent decreases in home prices. See CREDIT
RISKS Credit Performance for additional
information.
Deferred
Tax Assets
Deferred tax assets and liabilities are recognized based upon
the expected future tax consequences of existing temporary
differences between the financial reporting and the tax
reporting basis of assets and liabilities using enacted
statutory tax rates. Valuation allowances are recorded to reduce
net deferred tax assets when it is more likely than not that a
tax benefit will not be realized. The realization of our net
deferred tax assets is dependent upon the generation of
sufficient taxable income or upon our intent and ability to hold
available-for-sale debt securities until the recovery of any
temporary unrealized losses. On a quarterly basis, our
management determines whether a valuation allowance is
necessary. In so doing, our management considers all evidence
currently available, both positive and negative, in determining
whether, based on the weight of that evidence, the net deferred
tax asset will be realized and whether a valuation allowance is
necessary.
Based upon a thorough evaluation of all available evidence as of
September 30, 2008, we determined that it was more likely
than not that a portion of our deferred tax assets would not be
realized due to our inability to generate sufficient taxable
income. This determination was as a result of the events and
developments that occurred during the third quarter of 2008
related to the conservatorship of the company, other recent
events in the market, and related difficulty in forecasting
future profit levels on a continuing basis. As a result, in the
third quarter of 2008, we recorded a $14.1 billion partial
valuation allowance against our net deferred tax assets of
$25.9 billion. After the valuation allowance, we had a net
deferred tax asset of $11.9 billion representing the tax
effect of unrealized losses on our available-for-sale debt
securities, which management believes is more likely than not of
being realized because of our intent and ability to hold these
securities until the unrealized losses are recovered. For
additional information, see NOTE 12: INCOME
TAXES Deferred Tax Asset to our consolidated
financial statements and CRITICAL ACCOUNTING POLICIES AND
ESTIMATES Realizability of Net Deferred Tax
Asset.
Guarantee
Obligation
See CONSOLIDATED RESULTS OF OPERATIONS
Non-Interest Income Income on Guarantee
Obligation for a description of the components of the
guarantee obligation. Table 32 summarizes the changes in
the guarantee obligation balance.
Table 32
Changes in Guarantee Obligation
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended
|
|
|
|
September 30,
|
|
|
|
2008
|
|
|
2007
|
|
|
|
(in millions)
|
|
|
Beginning balance
|
|
$
|
13,712
|
|
|
$
|
9,482
|
|
Transfer-out to the loan loss
reserve(1)
|
|
|
(15
|
)
|
|
|
(1
|
)
|
Deferred guarantee income of newly-issued guarantees
|
|
|
3,025
|
|
|
|
3,784
|
|
Other(2)
|
|
|
(127
|
)
|
|
|
|
|
Amortization income:
|
|
|
|
|
|
|
|
|
Static effective yield
|
|
|
(1,940
|
)
|
|
|
(1,223
|
)
|
Cumulative
catch-up
|
|
|
(781
|
)
|
|
|
(154
|
)
|
|
|
|
|
|
|
|
|
|
Income on guarantee obligation
|
|
|
(2,721
|
)
|
|
|
(1,377
|
)
|
|
|
|
|
|
|
|
|
|
Ending balance
|
|
$
|
13,874
|
|
|
$
|
11,888
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
Represents portions of the
guarantee obligation that correspond to incurred credit losses
reclassified to reserve for guarantee losses on PCs.
|
(2)
|
Represents a reduction in our
guarantee obligation associated with the extinguishment of our
previously issued long-term credit guarantees upon conversion
into either PCs or Structured Transactions within the same month.
|
The primary drivers affecting our guarantee obligation balances
are our credit guarantee business volumes, fair values of
performance obligations on new guarantees and liquidation rates
on the existing portfolio. On January 1, 2008, we adopted
SFAS 157, which amended FIN 45. Upon implementation of
SFAS 157, we changed the manner in which we measure the
guarantee obligation we record for all of our newly-issued
guarantees. Effective January 1, 2008, the fair value of
the
guarantee obligation for all newly-issued guarantee contracts is
measured as being equal to the total compensation received for
providing the guarantee, as a practical expedient. Therefore, we
no longer recognize losses or defer gains at the inception for
most of our guarantee contracts. However, guarantee obligations
created before January 1, 2008 were not affected by the
adoption of SFAS 157 and will continue to be subsequently
amortized into earnings using a static effective yield method.
For further information regarding accounting and measurement of
our guarantee obligation, see NOTE 1: SUMMARY OF
SIGNIFICANT ACCOUNTING POLICIES Change in Accounting
Principles in the notes to our consolidated financial
statements. This change had a significant positive impact on our
financial results for the three and nine months ended
September 30, 2008.
Deferred guarantee income of newly-issued guarantees decreased
for the nine months ended September 30, 2008, compared to
the nine months ended September 30, 2007. The decrease was
primarily a result of our change in approach to determining fair
value at initial issuance of our guarantees discussed above,
coupled with the lower volume of guarantee issuances during the
nine months ended September 30, 2008 as compared to the
nine months ended September 30, 2007. We issued
$314 billion and $357 billion of our PCs and
Structured Securities during the nine months ended
September 30, 2008 and 2007, respectively. See
CONSOLIDATED RESULTS OF OPERATIONS
Non-Interest Income Income on Guarantee
Obligation for a discussion of amortization income
related to our guarantee obligation.
Total
Stockholders Equity (Deficit)
Total stockholders equity (deficit) at September 30,
2008 reflects the following actions as a result of the Purchase
Agreement:
|
|
|
|
|
Preferred stock increased by $1 billion reflecting the
issuance of senior preferred stock to Treasury.
|
|
|
|
We issued a warrant to Treasury with an estimated value of
$2.3 billion for the purchase of our common stock
representing 79.9% of our common stock outstanding on a fully
diluted basis at the time of exercise at a price of $0.00001 per
share.
|
We issued the senior preferred stock and the warrant to Treasury
in consideration for the commitment set forth in the Purchase
Agreement, and for no other consideration. As a result, the
issuance of the senior preferred stock and warrant to Treasury
had no impact on total stockholders equity (deficit) as
the offset was to additional paid-in capital. The first dividend
on the senior preferred stock will be payable on
December 31, 2008. If we choose not to pay this dividend in
cash, the amount of the dividend payable will be added to the
aggregate liquidation preference of the senior preferred stock.
|
|
|
|
|
Without the consent of Treasury, we are restricted from making
payments to purchase or redeem our common or preferred stock as
well as paying any dividends, including preferred dividends,
other than dividends on the senior preferred stock. We did not
declare common or preferred dividends during the third quarter
of 2008.
|
Total stockholders equity (deficit) also reflects the
following actions of the Director of FHFA, as Conservator:
|
|
|
|
|
The elimination of the par value of our common stock which
resulted in the reclassification of $152 million from
common stock to additional
paid-in-capital
on our consolidated balance sheet as of September 30, 2008.
|
|
|
|
An increase in the number of common shares available for
issuance to four billion shares as of September 30,
2008.
|
See EXECUTIVE SUMMARY for additional information
regarding our Purchase Agreement with Treasury and actions taken
by FHFA, as Conservator.
Total stockholders equity (deficit) decreased
$40.5 billion during the nine months ended
September 30, 2008. This decrease was primarily a result of
a net loss of $26.3 billion during the nine months ended
September 30, 2008, a $14.5 billion net decrease in
AOCI, and $0.8 billion of common and preferred stock
dividends declared prior to conservatorship, which was partially
offset by an increase of $1.0 billion to our beginning
retained earnings as a result of the adoption of SFAS 159.
The balance of AOCI at September 30, 2008 was a net loss of
approximately $25.6 billion, net of taxes, compared to a
net loss of $11.1 billion, net of taxes, at
December 31, 2007. The increase in the net loss in AOCI was
primarily attributable to unrealized losses on our non-agency
single-family mortgage-related securities backed by subprime
loans as well as
Alt-A and
other loans, and commercial mortgage-backed securities with
changes in net unrealized losses, net of taxes, recorded in AOCI
of $12.0 billion for the nine months ended
September 30, 2008. In addition, we reclassified a net gain
of $0.9 billion, net of taxes, from AOCI to retained
earnings in adopting SFAS 159 that was partially offset by
the reclassification from AOCI to earnings of deferred losses
related to closed cash flow hedges. See Retained
Portfolio Non-agency Mortgage-related Securities
Backed by Subprime Loans and Retained
Portfolio Non-agency Mortgage-related Securities
Backed by
Alt-A and
Other Loans for more information regarding
mortgage-related securities backed by subprime loans as well as
Alt-A and
other loans.
FHFA has directed us to focus our risk and capital management
activities on maintaining a positive balance of GAAP
stockholders equity in order to reduce the likelihood that
we will need to make a draw on the Purchase Agreement. At
September 30, 2008, our liabilities exceeded our assets
under GAAP by $(13.7) billion while our stockholders
equity (deficit) totaled $(13.8) billion. The Director of
FHFA has submitted a request under the Purchase Agreement in the
amount
of $13.8 billion to Treasury. We expect to receive such
funds by November 29, 2008. If the Director of FHFA were to
determine in writing that our assets are, and have been for a
period of 60 days, less than our obligations to creditors
and others, FHFA would be required to place us into
receivership. As a result of this draw, the aggregate
liquidation preference of the senior preferred stock will
increase to $14.8 billion, and our annual aggregate
dividend payment to Treasury, at the 10% dividend rate, would
increase to $1.5 billion. If we are unable to pay such
dividend in cash in any quarter, the unpaid amount will be added
to the aggregate liquidation preference of the senior preferred
stock and the dividend rate on the unpaid liquidation preference
will increase to 12% per year.
CONSOLIDATED
FAIR VALUE BALANCE SHEETS ANALYSIS
Our consolidated fair value balance sheets include the estimated
fair values of financial instruments recorded on our
consolidated balance sheets prepared in conformity with GAAP, as
well as off-balance sheet financial instruments that represent
our assets or liabilities that are not recorded on our GAAP
consolidated balance sheets. See NOTE 14: FAIR VALUE
DISCLOSURES Table 14.4 Consolidated
Fair Value Balance Sheets to our consolidated financial
statements for our fair value balance sheets. These off-balance
sheet items predominantly consist of: (a) the unrecognized
guarantee asset and guarantee obligation associated with our PCs
issued through our guarantor swap program prior to the
implementation of FIN 45 in 2003; (b) certain
commitments to purchase mortgage loans; and (c) certain
credit enhancements on manufactured housing asset-backed
securities. The fair value balance sheets also include certain
assets and liabilities that are not financial instruments (such
as property and equipment and REO, which are included in other
assets) at their carrying value in conformity with GAAP. During
the nine months ended September 30, 2008, our fair value
results as presented in our consolidated fair value balance
sheets were affected by several improvements in our approach for
estimating the fair value of certain financial instruments. See
CRITICAL ACCOUNTING POLICIES AND ESTIMATES as well
as NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES and NOTE 14: FAIR VALUE
DISCLOSURES to our consolidated financial statements for
more information on fair values.
We use a number of financial models in the preparation of our
consolidated fair value balance sheets. See ITEM 4T.
CONTROLS AND PROCEDURES in this
Form 10-Q
and ITEM 1A. RISK FACTORS and
ITEM 2. FINANCIAL INFORMATION ANNUAL
MD&A QUANTITATIVE AND QUALITATIVE DISCLOSURES
ABOUT MARKET RISK Interest-Rate Risk and Other
Market Risks in our Registration Statement for information
concerning the risks associated with our use of these models.
Table 33 shows our summary of change in the fair value of
net assets.
Table 33
Summary of Change in the Fair Value of Net Assets
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended
|
|
|
|
September 30,
|
|
|
|
2008
|
|
|
2007
|
|
|
|
(in billions)
|
|
|
Beginning balance
|
|
$
|
12.6
|
|
|
$
|
31.8
|
|
Changes in fair value of net assets, before capital transactions
|
|
|
(54.1
|
)
|
|
|
(7.7
|
)
|
Capital transactions:
|
|
|
|
|
|
|
|
|
Dividends, share repurchases and issuances, net
|
|
|
(0.9
|
)
|
|
|
(0.3
|
)
|
|
|
|
|
|
|
|
|
|
Ending balance
|
|
$
|
(42.4
|
)
|
|
$
|
23.8
|
|
|
|
|
|
|
|
|
|
|
Discussion
of Fair Value Results
During the nine months ended September 30, 2008, the fair
value of net assets, before capital transactions, decreased by
$54.1 billion, compared to a $7.7 billion decrease
during the nine months ended September 30, 2007. See
NOTE 14: FAIR VALUE DISCLOSURES to our
consolidated financial statements for information regarding the
impact of changes in our approach for estimating the fair value
of certain financial instruments. The payment of common stock
and preferred stock dividends, net of reissuance of treasury
stock, for the nine months ended September 30, 2008 reduced
total fair value by $0.9 billion. The fair value of net
assets as of September 30, 2008 was $(42.4) billion,
compared to $12.6 billion as of December 31, 2007.
Included in the reduction of the fair value of net assets is
$19.4 billion related to our partial valuation allowance
against our deferred tax asset for the nine months ended
September 30, 2008.
Our attribution of changes in the fair value of net assets
relies on models, assumptions and other measurement techniques
that evolve over time. The following attribution of changes in
fair value reflects our current estimate of the items presented
(on a pre-tax basis) and excludes the effect of returns on
capital and administrative expenses.
During the nine months ended September 30, 2008, our
investment activities decreased fair value by approximately
$28.7 billion. This estimate includes declines in fair
value of approximately $32.2 billion attributable to net
mortgage-to-debt OAS widening. Of this amount, a reduction of
approximately $28.2 billion related to the impact of the
net mortgage-to-debt OAS widening on our portfolio of
non-agency, single-family mortgage-related asset-backed
securities with a limited, but increasing amount attributable to
the risk of future losses, as well as a decrease in negative
fair value of $11.9 billion from our preferred stock. The
reduction in fair value was partially offset by our higher core
spread income. Core spread income on
our retained portfolio is a fair value estimate of the net
current period accrual of income from the spread between
mortgage-related investments and debt, calculated on an
option-adjusted basis.
Our investment activities decreased fair value by approximately
$6.3 billion during the nine months ended
September 30, 2007. This estimate includes declines in fair
value of approximately $9.7 billion attributable to net
mortgage- to-debt OAS widening. Of this amount, approximately
$3.7 billion was related to the impact of the net
mortgage-to-debt OAS widening on our portfolio of non-agency
mortgage-related securities.
The impact of mortgage-to-debt OAS widening during the last nine
months of 2007 and the nine months ended September 30, 2008
and the resulting fair value losses increases the likelihood
that, in future periods, we will be able to recognize core
spread income at net mortgage-to-debt OAS of approximately 190
to 210 basis points in the long run, as compared to
approximately 60 to 70 basis points estimated for the nine
months ended September 30, 2007. As market conditions
change, our estimate of expected fair value gains from OAS may
also change, leading to significantly different fair value
results.
During the nine months ended September 30, 2008, our credit
guarantee activities, including our single-family whole loan
credit exposure, decreased fair value by an estimated
$17.3 billion. This estimate includes an increase in the
single-family guarantee obligation of approximately
$16.2 billion, primarily due to a declining credit
environment. This increase in the single-family guarantee
obligation includes a reduction of $7.1 billion in the fair
value of our guarantee obligation recorded on January 1,
2008, as a result of our adoption of SFAS 157.
Our credit guarantee activities decreased fair value by an
estimated $5.8 billion during the nine months ended
September 30, 2007. This estimate includes an increase in
the single-family guarantee obligation of approximately
$10.2 billion, primarily attributable to the markets
pricing of mortgage credit. This increase in the single-family
guarantee obligation was partially offset by a fair value
increase in the single-family guarantee asset of approximately
$2.5 billion and the receipt of cash primarily related to
management and guarantee fees and other
up-front
fees related to new business.
LIQUIDITY
AND CAPITAL RESOURCES
Our business activities require that we maintain adequate
liquidity to fund our operations, which may include the need to
make payments upon the maturity, redemption or repurchase of our
debt securities; purchase mortgage loans, mortgage-related
securities and other investments; make payments of principal and
interest on our debt securities and on our PCs and Structured
Securities; make net payments on derivative instruments; and pay
dividends on our senior preferred stock. See RISK
MANAGEMENT AND DISCLOSURE COMMITMENTS for a discussion of
our agreement with FHFA to maintain and periodically test a
liquidity management and contingency plan. Pursuant to this
agreement, FHFA periodically assesses the size of our liquidity
portfolio.
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 guarantee
activities;
|
|
|
|
borrowings against mortgage-related securities and other
investment securities we hold; and
|
|
|
|
sales of securities we hold.
|
The Reform Act provides the Secretary of the Treasury with
temporary authority, until December 31, 2009, to purchase
any obligations and other securities we issue under certain
circumstances.
On September 7, 2008, we entered into the Purchase
Agreement with Treasury. As consideration for Treasurys
entry into the Purchase Agreement and for no additional
consideration, we have issued senior preferred stock with an
initial aggregate liquidation preference of $1 billion to
Treasury, together with a warrant for the purchase of common
stock representing 79.9% of our common stock outstanding on a
fully diluted basis, determined as of the exercise date. The
senior preferred stock is senior to all other existing or future
issues of preferred stock, common stock or other capital stock
of Freddie Mac, and will pay quarterly cumulative dividends at a
rate of 10% per year, or 12% if, in any quarter, the dividends
are not paid in cash, until all accrued dividends have been paid
in cash. The warrant is not transferable and is exercisable in
whole or in part at any time through September 7, 2028 at a
price of $0.00001 per share. The issuance of the senior
preferred stock and warrant to Treasury had no impact on total
stockholders equity (deficit) as the initial commitment
was recorded in additional paid-in capital and had no impact on
our cash flows.
The Purchase Agreement provides that, if FHFA determines that
our liabilities exceed our assets under GAAP, Treasury will
contribute funds in an amount equal to the difference between
such liabilities and assets; a higher amount may be drawn if
Treasury and Freddie Mac mutually agree that the draw should be
increased beyond the level by which liabilities exceed assets
under GAAP. The maximum aggregate amount of funding that may be
contributed under the Purchase Agreement is $100 billion.
An amount equal to each such contribution will be added to the
aggregate liquidation preference of the senior preferred stock.
In an effort to conserve capital, on September 7, 2008,
FHFA, as Conservator, announced the elimination of dividends on
our common stock and preferred stock, excluding dividends paid
on the senior preferred stock issued to Treasury under the
Purchase Agreement.
On September 18, 2008, we entered into a Lending Agreement
with Treasury under which we may, in accordance with our
charter, as amended by the Reform Act, borrow from and pledge
collateral to Treasury. The Lending Agreement does not specify
the maturities or interest rate of loans that may be made by
Treasury under the credit facility. In a Fact Sheet regarding
the credit facility published by Treasury on September 7,
2008, Treasury indicated that loans made pursuant to the credit
facility will be for short-term durations and would in general
be expected to be for less than one month but no shorter than
one week. The Fact Sheet further indicated that the interest
rate on loans made pursuant to the credit facility ordinarily
will be based on the daily LIBOR fixed for a similar term of the
loan plus 50 basis points. Given that the interest rate we
are likely to be charged under the credit facility will be
significantly higher than the rates we have historically
achieved through the sale of unsecured debt, use of the facility
in significant amounts could have a material adverse impact on
our financial results. The Lending Agreement shall terminate on
December 31, 2009, but shall remain in effect as to any
loan outstanding on that date.
On September 19, 2008, FHFA, as Conservator, advised us of
FHFAs determination that no further common or preferred
stock dividends should be paid by our real estate investment
trust, or REIT, subsidiaries, Home Ownership Funding Corporation
and Home Ownership Funding Corporation II. Since we are the
majority owner of both the common and preferred shares of these
two REITs, this action has eliminated our access through such
dividend payments to the cash flows of the REITs.
On October 9, 2008, FHFA announced that it was suspending
capital classification of Freddie Mac during conservatorship in
light of the Purchase Agreement. FHFA will continue to closely
monitor capital levels, but the existing statutory and
FHFA-directed regulatory capital requirements will not be
binding during conservatorship. FHFA will publish relevant
capital figures (minimum capital requirement, core capital and
GAAP net worth) but does not intend to publish our critical
capital, risk-based capital or subordinated debt levels during
conservatorship.
FHFA has directed us to focus our risk and capital management
activities on maintaining a positive balance of GAAP
stockholders equity in order to reduce the likelihood that
we will need to make a draw on the Purchase Agreement with
Treasury. At September 30, 2008, our liabilities exceeded
our assets under GAAP by $(13.7) billion while our
stockholders equity (deficit) totaled
$(13.8) billion. The Director of FHFA has submitted a
request under the Purchase Agreement in the amount of
$13.8 billion to Treasury. We expect to receive such funds
by November 29, 2008. If the Director of FHFA were to
determine in writing that our assets are, and have been for a
period of 60 days, less than our obligations to creditors
and others, FHFA would be required to place us into
receivership. As a result of this draw, the aggregate
liquidation preference of the senior preferred stock will
increase to $14.8 billion, and our annual aggregate
dividend payment to Treasury, at the 10% dividend rate, would
increase to $1.5 billion. If we are unable to pay such
dividend in cash in any quarter, the unpaid amount will be added
to the aggregate liquidation preference of the senior preferred
stock and the dividend rate on the unpaid liquidation preference
will increase to 12% per year.
On October 3, 2008, the U.S. Congress passed EESA,
which among other actions, gave further authority to Treasury to
purchase or guarantee financial assets from financial
institutions in the public market. Subsequently, Treasury has
taken several unprecedented steps to bolster liquidity and
confidence in the U.S. financial markets. On
October 14, 2008, Treasury announced a plan under EESA to
increase capital in U.S. banks under which:
(a) Treasury would invest $250 billion in senior
preferred stock in financial institutions, (b) FDIC would
expand insurance of deposits in FDIC-insured institutions, with
delayed increases in the related FDIC insurance premiums and
provide a 100% guarantee for newly issued senior unsecured debt
of FDIC-insured institutions, and (c) the Federal Reserve
would expand its Commercial Paper Funding Program, or CPFF, to
provide a backstop to the market by funding commercial paper
issuances of
3-month
maturities from high-quality issuers. These actions are designed
to improve the liquidity and stability of U.S. financial
institutions, including our seller/servicers and institutional
counterparties. See Debt Securities for a discussion
of how we have been directly affected by the disruption in
corporate credit markets.
In addition, the Reform Act that became effective on
July 30, 2008, requires us to set aside in each fiscal
year, an amount equal to 4.2 basis points for each dollar
of the unpaid principal balance of total new business purchases,
and allocate or transfer such amount to HUD to (i) fund a
Housing Trust Fund established and managed by HUD and
(ii) to a Capital Magnet Fund established and managed by
Treasury. The amount of our first contribution has not yet been
determined. FHFA has the authority to suspend our allocation
upon finding that the payment would contribute to our financial
instability, cause us to be classified as undercapitalized or
prevent us from successfully completing a capital restoration
plan. We have been advised by FHFA that FHFA has temporarily
suspended the requirement to set aside or allocate funds for the
Housing Trust Fund and the Capital Magnet Fund.
Debt
Securities
Table 34 summarizes the par value of the debt securities we
issued, based on settlement dates, during the three and nine
months ended September 30, 2008 and 2007. We seek to
maintain a variety of consistent, active funding programs that
promote high-quality coverage by market makers and reach a broad
group of institutional and retail investors. By diversifying our
investor base and the types of debt securities we offer, we
believe we enhance our ability to maintain continuous access to
the debt markets under a variety of market conditions. We
repurchase or call our outstanding debt securities from time to
time to help support the liquidity and predictability of the
market for our debt securities and to manage our mix of
liabilities funding our assets.
Over the course of the past year, worldwide financial markets
have experienced almost unprecedented levels of volatility. This
has been particularly true over the latter half of the third
quarter of 2008 as market participants struggled to digest the
new government initiatives, including our conservatorship. In
this environment where demand for debt instruments weakened
considerably, the debt funding markets are sometimes frozen, and
our ability to access both the term and callable debt markets
has been limited, we have relied increasingly on the issuance of
shorter-term debt at higher interest rates. While we use
interest rate derivatives to economically hedge a significant
portion of our interest rate exposure, we are exposed to risks
relating to both our ability to issue new debt when our
outstanding debt matures and to the variability in interest
costs on our new issuances of debt.
The Purchase Agreement provides that, without the prior consent
of Treasury, we shall not increase our indebtedness to more than
110% of our indebtedness as of June 30, 2008 or become
liable for any subordinated indebtedness.
The Purchase Agreement defines indebtedness as follows:
|
|
|
|
(a)
|
all obligations for money borrowed;
|
|
|
(b)
|
all obligations evidenced by bonds, debentures, notes or similar
instruments;
|
|
|
(c)
|
all obligations under conditional sale or other title retention
agreements relating to property or assets purchased;
|
|
|
(d)
|
all obligations issued or assumed as the deferred purchase price
of property or services, other than trade accounts payable;
|
|
|
(e)
|
all capital lease obligations;
|
|
|
(f)
|
obligations, whether contingent or liquidated, in respect of
letters of credit (including standby and commercial),
bankers acceptances and similar instruments; and
|
|
|
(g)
|
any obligation, contingent or otherwise, guaranteeing or having
the economic effect of guaranteeing any indebtedness of the
types set forth in items (a) through (f) payable by us
other than mortgage guarantee obligations.
|
Based on our interpretation of this definition, we estimate that
the balance of our indebtedness at September 30, 2008 did
not exceed 110% of the balance of indebtedness at June 30,
2008.
Table 34
Debt Security Issuances by Product, at
Par Value(1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
|
|
(in millions)
|
|
|
Short-term debt:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reference
Bills®
securities and discount notes
|
|
$
|
153,553
|
|
|
$
|
134,369
|
|
|
$
|
538,468
|
|
|
$
|
392,861
|
|
Medium-term notes callable
|
|
|
1,125
|
|
|
|
775
|
|
|
|
11,255
|
|
|
|
2,975
|
|
Medium-term notes non-callable
|
|
|
|
|
|
|
100
|
|
|
|
4,500
|
|
|
|
202
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total short-term debt
|
|
|
154,678
|
|
|
|
135,244
|
|
|
|
554,223
|
|
|
|
396,038
|
|
Long-term debt:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Medium-term notes
callable(2)
|
|
|
13,444
|
|
|
|
16,394
|
|
|
|
137,552
|
|
|
|
89,734
|
|
Medium-term notes non-callable
|
|
|
1,701
|
|
|
|
3,271
|
|
|
|
39,743
|
|
|
|
24,486
|
|
U.S. dollar Reference
Notes®
securities non-callable
|
|
|
11,000
|
|
|
|
11,000
|
|
|
|
43,000
|
|
|
|
40,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total long-term debt
|
|
|
26,145
|
|
|
|
30,665
|
|
|
|
220,295
|
|
|
|
154,220
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total debt securities issued
|
|
$
|
180,823
|
|
|
$
|
165,909
|
|
|
$
|
774,518
|
|
|
$
|
550,258
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
Exclude securities sold under
agreements to repurchase and federal funds purchased, lines of
credit and securities sold but not yet purchased.
|
(2)
|
For the third quarter of 2008 and
2007, includes $2.3 billion and $145 million accounted
for as debt exchanges, respectively. For the nine months ended
September 30, 2008 and 2007, includes $9.5 billion and
$145 million accounted for as debt exchanges, respectively.
|
Subordinated
Debt
During the third quarter of 2008, we did not call or issue any
Freddie
SUBS®
securities. At both September 30, 2008 and
December 31, 2007, the balance of our subordinated debt
outstanding was $4.5 billion. Our subordinated debt in the
form of Freddie
SUBS®
securities is a component of our risk management and disclosure
commitments with FHFA. See RISK MANAGEMENT AND DISCLOSURE
COMMITMENTS for a discussion of changes affecting our
subordinated debt as a result of our placement in
conservatorship and the Purchase Agreement, and the
Conservators suspension of certain
requirements relating to Freddie Mac subordinated debt. Under
the Purchase Agreement, we may not issue subordinated debt
without Treasurys consent.
Credit
Ratings
Table 35 indicates our credit ratings as of
November 10, 2008. After FHFA placed us into
conservatorship and announced the elimination of our preferred
stock dividends in September 2008, our preferred stock ratings
were changed by three nationally recognized statistical rating
organizations.
Table 35
Freddie Mac Credit Ratings
|
|
|
|
|
|
|
|
|
Nationally Recognized Statistical
|
|
|
Rating Organization
|
|
|
Standard & Poors
|
|
Moodys
|
|
Fitch
|
|
Senior long-term
debt(1)
|
|
AAA
|
|
Aaa
|
|
AAA
|
Short-term
debt(2)
|
|
A-1+
|
|
P-1
|
|
F1+
|
Subordinated
debt(3)
|
|
A
|
|
Aa2
|
|
AA
|
Preferred
stock(4)
|
|
C
|
|
Ca
|
|
C/RR6
|
|
|
(1)
|
Consists of medium-term notes, U.S.
dollar Reference
Notes®
securities and Reference
Notes®
securities.
|
(2)
|
Consists of Reference
Bills®
securities and discount notes.
|
(3)
|
Consists of Freddie
SUBS®
securities only.
|
(4)
|
Does not include senior preferred
stock issued to Treasury.
|
A security rating is not a recommendation to buy, sell or hold
securities. It may be subject to revision or withdrawal at any
time by the assigning rating organization. Each rating should be
evaluated independently of any other rating.
Equity
Securities
See PART II ITEM 2. UNREGISTERED
SALES OF EQUITY SECURITIES AND USE OF PROCEEDS for
information about issuances of our equity securities in the
third quarter of 2008. The Purchase Agreement provides that,
without the prior consent of Treasury, we cannot issue capital
stock of any kind other than the senior preferred stock, the
warrant issued to Treasury or any shares of common stock issued
pursuant to the warrant or binding agreements in effect on the
date of the Purchase Agreement.
Cash and
Investments Portfolio
We maintain a cash and investments portfolio that is important
to our financial management and our ability to provide liquidity
and stability to the mortgage market. At September 30,
2008, the investments in this portfolio consisted of liquid
non-mortgage-related securities that we could sell to provide us
with an additional source of liquidity to fund our business
operations. We also use this portfolio to help manage recurring
cash flows and meet our other cash management needs. In
addition, we use the portfolio to hold capital on a temporary
basis until we can deploy it into retained portfolio investments
or credit guarantee opportunities. We may also sell the
securities in this portfolio to meet mortgage-funding needs,
provide diverse sources of liquidity or help manage the
interest-rate risk inherent in mortgage-related assets.
Credit concerns and resulting liquidity issues have greatly
affected the financial markets. The reduced liquidity in
U.S. financial markets prompted the Federal Reserve to take
several significant actions during 2008, including a series of
reductions in the discount rate totaling 3.0%. The rate
reductions by the Federal Reserve have had an impact on other
key market rates affecting our assets and liabilities, including
generally reducing the return on our cash and investments
portfolio and lowering our cost of short-term debt financing.
During the nine months ended September 30, 2008, we
increased the balance of our cash and investments portfolio by
$18 billion, primarily represented by a $42 billion
increase in highly liquid shorter-term cash and cash equivalent
assets including deposits in financial institutions and
commercial paper partially offset by a $25 billion decrease
in longer-term non-mortgage-related investments including
asset-backed securities. As a result of counterparty credit
concerns during the third quarter, these deposits in financial
institutions included substantial cash balances in accounts that
did not earn a rate of return.
Retained
Portfolio
Historically, our retained portfolio assets have been a
significant capital resource and a potential source of funding,
if needed. However, during the nine months ended
September 30, 2008, the market for non-agency securities
backed by subprime and
Alt-A
mortgages continued to experience a significant reduction in
liquidity and wider spreads, as investor demand for these assets
decreased. During the nine months ended September 30, 2008,
the percentages of our non-agency securities backed by subprime
mortgages that were
AAA-rated
and the total rated as investment grade, based on the lowest
rating available, decreased from 96% to 47% and from 100% to
80%, respectively. In addition, during the nine months ended
September 30, 2008, the percentages of our non-agency
securities backed by
Alt-A and
other mortgages that were
AAA-rated
and the total rated as investment grade, based on the lowest
rating available, decreased from 100% to 63% and from 100% to
89%, respectively. We expect these trends to continue in the
near future. These market conditions limit the availability of
these assets as a significant source of funds; however, we do
continue to receive substantial monthly remittances from the
underlying collateral. In addition, we have the ability and
intent to hold these securities until recovery
and, other than certain mortgage-related securities primarily
backed by subprime loans and
Alt-A and
other loans where we have already realized other-than-temporary
impairments, we do not currently expect the cash flows from
these securities to negatively impact our liquidity. See
CONSOLIDATED BALANCE SHEETS ANALYSIS Retained
Portfolio for more information.
On September 19, 2008, the Director of FHFA announced that
FHFA had directed us to provide additional funding to the
mortgage markets through the purchase of mortgage-backed
securities. This directive, however, does not supersede the
restrictions on the size of our retained portfolio under the
Purchase Agreement. Under the Purchase Agreement, our retained
portfolio as of December 31, 2009 may not exceed
$850 billion, and must decline by 10% per year thereafter
until it reaches $250 billion.
Cash
Flows
Our cash and cash equivalents increased $41.6 billion to
$50.2 billion during the nine months ended
September 30, 2008 resulting primarily from the
redesignation of commercial paper. Beginning in first quarter of
2008, all investments in commercial paper with maturities of
less than three months were entered into for working capital
purposes. Consequently, commercial paper was reclassified from
investments to cash and cash equivalents. Cash flows used for
operating activities during the nine months ended
September 30, 2008 were $7.6 billion, which primarily
reflected a reduction in cash as a result of increases in
purchases of held-for-sale mortgage loans. Cash flows provided
by investing activities for the nine months ended
September 30, 2008 were $3.2 billion, primarily due to
net cash proceeds from our available-for-sale securities
partially offset by net increases in our trading securities in
our investment portfolio. Cash flows provided by financing
activities for the nine months ended September 30, 2008
were $46.0 billion, largely attributable to proceeds from
the issuance of debt securities, net of repayments.
SFAS 159 requires the classification of trading securities
cash flows based on the purpose for which the securities were
acquired. Upon adoption of SFAS 159, effective
January 1, 2008, we classified our trading securities cash
flows as investing activities because we intend to hold these
securities for investment purposes. Prior to our adoption of
SFAS 159, we classified cash flows on all trading
securities as operating activities. As a result, the operating
and investing activities on our consolidated statements of cash
flows have been impacted by this change.
Our cash and cash equivalents increased $868 million to
$12.2 billion during the nine months ended
September 30, 2007. Cash flows used for operating
activities during the nine months ended September 30, 2007
were $714 million, which primarily reflected a net increase
in our held-for-sale mortgages and trading securities. Cash
flows provided by investing activities for the nine months ended
September 30, 2007 were $22.8 billion, primarily due
to the net proceeds on our available-for-sale securities. Cash
flows used for financing activities for the nine months ended
September 30, 2007 were $21.2 billion, largely
attributable to the net repayments of our short-term and
long-term debt.
Capital
Adequacy
The conservatorship resulted in changes to the assessment of our
capital adequacy and our management of capital. On
October 9, 2008, FHFA announced that it was suspending
capital classification of us during conservatorship in light of
the Purchase Agreement. Concurrent with this announcement, FHFA
classified us as undercapitalized as of June 30, 2008 based
on discretionary authority provided by statute. FHFA noted that
although our capital calculations as of June 30, 2008
reflected that we met the statutory and FHFA-directed
requirements for capital, the continued market downturn in July
and August of 2008 raised significant questions about the
sufficiency of our capital. Factors cited by FHFA leading to the
downgrade in our capital classification and the need for
conservatorship included (a) our accelerated safety and
soundness weaknesses, especially with regard to our credit risk,
earnings outlook and capitalization, (b) continued and
substantial deterioration in equity, debt and mortgage-related
securities market conditions, (c) our current and projected
financial performance, (d) our inability to raise capital
or issue debt according to normal practices and prices,
(e) our critical importance in supporting the
U.S. residential mortgage markets and (f) concerns
over the proportion of intangible assets as part of our core
capital.
FHFA will continue to closely monitor our capital levels, but
the existing statutory and FHFA-directed regulatory capital
requirements will not be binding during conservatorship. We will
continue to provide our regular submissions to FHFA on both
minimum and risk-based capital. FHFA will publish relevant
capital figures (minimum capital requirement, core capital, and
GAAP net worth) but does not intend to publish our critical
capital, risk-based capital or subordinated debt levels during
conservatorship. Additionally, FHFA announced it will engage in
rule-making to revise our minimum capital and risk-based capital
requirements. See NOTE 9: REGULATORY CAPITAL to
our consolidated financial statements for our minimum capital
requirement, core capital and GAAP net worth results as of
September 30, 2008.
FHFA has directed us to focus our risk and capital management on
maintaining a positive balance of GAAP stockholders equity
while returning to long-term profitability. FHFA is directing us
to manage to a positive stockholders equity position in
order to reduce the likelihood that we will need to make a draw
on the Purchase Agreement with Treasury. The Purchase Agreement
provides that, if FHFA determines as of quarter end that our
liabilities have exceeded our assets
under GAAP, Treasury will contribute funds to us in an amount
equal to the difference between such liabilities and assets; a
higher amount may be drawn if Treasury and Freddie Mac mutually
agree that the draw should be increased beyond the level by
which liabilities exceed assets under GAAP. The maximum
aggregate amount that may be funded under the Purchase Agreement
is $100 billion. At September 30, 2008, our
liabilities exceeded our assets under GAAP by
$(13.7) billion while our stockholders equity
(deficit) totaled ($13.8) billion. The Director of FHFA has
submitted a request under the Purchase Agreement in the amount
of $13.8 billion to Treasury. If the Director of FHFA were
to determine in writing that our assets are, and have been for a
period of 60 days, less than our obligations to creditors
and others, FHFA would be required to place us into
receivership. If this were to occur, we would be required to
obtain funding from Treasury pursuant to its commitment under
the Purchase Agreement in order to avoid a mandatory trigger of
receivership under the Reform Act.
The Purchase Agreement places several restrictions on our
business activities, which, in turn, affect our management of
capital. For instance, our retained portfolio may not exceed
$850 billion as of December 31, 2009 and must then
decline by 10% per year until it reaches $250 billion. We
are also unable to issue capital stock of any kind without
Treasurys prior approval, other than in connection with
the common stock warrant issued to Treasury under the Purchase
Agreement or binding agreements in effect on the date of the
Purchase Agreement. In addition, on September 7, 2008, the
Director of FHFA announced the elimination of dividends on our
common and preferred stock, excluding the senior preferred
stock, which will accrue quarterly cumulative dividends at a
rate of 10% per year or 12% in any quarter in which dividends
are not paid in cash until all dividend accruals have been paid
in cash. See EXECUTIVE SUMMARY Legislative and
Regulatory Matters for additional information regarding
covenants under the Purchase Agreement.
A variety of factors could materially affect the level and
volatility of our GAAP stockholders equity in future
periods, requiring us to make additional draws under the
Purchase Agreement. Key factors include continued deterioration
in the housing market, which could increase credit expenses;
adverse changes in interest rates, the yield curve, implied
volatility or OAS, which could increase realized and unrealized
mark-to-market losses recorded in earnings or AOCI; dividend
obligations under the Purchase Agreement; establishment of a
valuation allowance for our remaining deferred tax assets;
changes in accounting practices or standards; or changes in
business practices resulting from legislative and regulatory
developments or mission fulfillment activities or as directed by
the Conservator. At September 30, 2008, our remaining
deferred tax assets, which could be subject to a valuation
allowance in future periods, totaled $11.9 billion. In
addition, during October 2008 mortgage spreads widened
significantly, resulting in additional mark-to-market losses
included in stockholders equity (deficit). As a result of
the factors described above, it is difficult for us to manage
our stockholders equity (deficit). Thus, it may be
difficult for us to meet the objective of managing to a positive
stockholders equity (deficit).
If we need additional draws under the Purchase Agreement, this
would result in a considerably higher dividend obligation for
us. Higher dividends combined with potentially substantial
commitment fees payable to Treasury starting in 2010 and limited
flexibility to pay down capital draws will have a significant
adverse impact on our future financial position and net worth.
For additional information concerning the potential impact of
the Purchase Agreement, including taking additional large draws,
see RISK FACTORS.
Liquidity
Since early July 2008, we have experienced significant
deterioration in our access to the unsecured medium- and
long-term debt markets, and in the yields on our debt as
compared to relevant market benchmarks. Consistent demand for
our debt securities has decreased for our term debt and callable
debt, and the spreads we must pay on our new issuances of
short-term debt securities increased.
There are many factors contributing to the reduced demand for
our debt securities, including continued severe market
disruptions, market concerns about our capital position and the
future of our business (including its future profitability,
future structure, regulatory actions and agency status) and the
extent of U.S. government support for our debt securities. In
addition, the various U.S. government programs are still being
digested by market participants creating uncertainty as to
whether competing obligations of other companies are more
attractive investments than our debt securities.
As noted above, due to our limited ability to issue long-term
debt, we have relied increasingly on short-term debt to fund our
purchases of mortgage assets and to refinance maturing debt. As
a result, we are required to refinance our debt on a more
frequent basis, exposing us to an increased risk of insufficient
demand, increasing interest rates and adverse credit market
conditions. It is unclear when these market conditions will
reverse allowing us access to the longer term debt markets. For
information on the risks posed by our current market challenges
see Part II Item 1A Risk
Factors.
CREDIT
RISKS
Our total mortgage portfolio is subject primarily to two types
of credit risk: institutional credit risk and mortgage credit
risk. Our cash and investments portfolio is primarily subject to
institutional credit risk. Institutional credit risk is the risk
that a counterparty that has entered into a business contract or
arrangement with us will fail to meet its obligations. Mortgage
credit risk is the risk that a borrower will fail to make timely
payments on a mortgage or security we own or guarantee. We
are exposed to mortgage credit risk on our total mortgage
portfolio because we either hold the mortgage assets or have
guaranteed mortgages in connection with the issuance of a PC,
Structured Security or other borrower performance commitment.
Mortgage and credit market conditions deteriorated in the second
half of 2007 and have continued to deteriorate throughout 2008,
especially in the third quarter. Factors negatively affecting
the mortgage and credit markets in recent months include:
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|
|
lower levels of liquidity in institutional credit markets;
|
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|
|
wider credit spreads;
|
|
|
|
rating agency downgrades of mortgage-related securities or
counterparties;
|
|
|
|
increases in unemployment;
|
|
|
|
declines in home prices nationally;
|
|
|
|
higher incidence of institutional insolvencies; and
|
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|
|
higher levels of foreclosures and delinquencies, particularly
with respect to non-traditional and subprime mortgage loans.
|
Institutional
Credit Risk
Our primary institutional credit risk exposure arises from
agreements with:
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|
|
derivative and lending counterparties;
|
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|
|
mortgage seller/servicers;
|
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|
|
mortgage insurers;
|
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|
|
issuers, guarantors or third-party providers of credit
enhancements (including bond insurers); and
|
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|
mortgage investors.
|
A significant failure to perform by a major entity in one of
these categories could have a material adverse effect on our
retained portfolio, cash and investments portfolio or credit
guarantee activities. The recent challenging market conditions
have adversely affected, and are expected to continue to
adversely affect, the liquidity and financial condition of a
number of our counterparties. Many of our counterparties have
experienced ratings downgrades or liquidity constraints and
other counterparties may also experience these concerns. The
weakened financial condition and liquidity position of some of
our counterparties may adversely affect their ability to perform
their obligations to us, or the quality of the services that
they provide to us. Consolidation in the industry could further
increase our exposure to individual counterparties or to the
overall market. In addition, any efforts we take to reduce
exposure to financially weakened counterparties could result in
increased exposure among a smaller number of institutions. As
discussed herein, we recognized losses during the three and nine
months ended September 30, 2008 as a result of
institutional counterparties that have failed to pay us or for
which we have substantial uncertainty regarding their ability to
perform on their obligations to us. The failure of any other of
our primary counterparties to meet their obligations to us could
have additional material adverse effects on our results of
operations and financial condition.
Investments in our retained portfolio expose us to institutional
credit risk on non-Freddie Mac mortgage-related securities to
the extent that servicers, issuers, guarantors or third parties
providing credit enhancements become insolvent or do not
perform. Our non-Freddie Mac mortgage-related securities
portfolio consists of both agency and non-agency
mortgage-related securities. Agency securities present minimal
institutional credit risk due to the prevailing view that these
securities have a credit quality at least equivalent to
non-agency securities rated AAA (based on S&P or equivalent
rating scale of other nationally recognized statistical rating
organizations). We seek to manage institutional credit risk on
non-Freddie Mac mortgage-related securities by only purchasing
securities that meet our investment guidelines and performing
ongoing analysis to evaluate the creditworthiness of the issuers
and servicers of these securities and the bond insurers that
guarantee them. See CONSOLIDATED BALANCE SHEETS
ANALYSIS Table 17 Characteristics
of Mortgage Loans and Mortgage-Related Securities in our
Retained Portfolio for more information on non-Freddie Mac
securities within our retained portfolio.
Institutional credit risk also arises from the potential
insolvency or non-performance of issuers or guarantors of
investments held in our cash and investments portfolio.
Instruments in this portfolio are investment grade at the time
of purchase and primarily short-term in nature, thereby
substantially mitigating institutional credit risk in this
portfolio. We regularly evaluate these investments to determine
if any impairment in fair value requires an impairment loss
recognition in earnings, warrants divestiture or requires a
combination of both.
During the third quarter of 2008, we recorded a loss of
$1.1 billion on investment transactions related to the
Lehman short-term lending transactions. In addition, we had
trading relationships or otherwise conducted business with
Lehman and several of it affiliates. We are currently evaluating
other sources of exposure and potential claims that we may have
with
respect to Lehman and its affiliates. See Derivative
Counterparty Credit Risk and Our
Customers Mortgage Seller/Servicers for
additional information about our exposure to Lehman and its
affiliates.
Derivative
Counterparty Credit Risk
Table 36 summarizes our exposure to counterparty credit
risk in our derivatives, which represents the net positive fair
value of derivative contracts, related accrued interest and
collateral held by us from our counterparties, after netting by
counterparty as applicable (i.e., net amounts due to us
under derivative contracts).
Table 36
Derivative Counterparty Credit Exposure
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|
|
|
|
|
|
|
|
September 30, 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted Average
|
|
|
|
|
|
|
Notional or
|
|
|
Total
|
|
|
Exposure,
|
|
|
Contractual
|
|
|
|
|
Number of
|
|
Contractual
|
|
|
Exposure at
|
|
|
Net of
|
|
|
Maturity
|
|
Collateral Posting
|
Rating(1)
|
|
Counterparties(2)
|
|
Amount
|
|
|
Fair
Value(3)
|
|
|
Collateral(4)
|
|
|
(in years)
|
|
Threshold
|
|
|
(dollars in millions)
|
|
AAA
|
|
|
1
|
|
|
$
|
750
|
|
|
$
|
|
|
|
$
|
|
|
|
|
6.3
|
|
|
Mutually agreed upon
|
AA+
|
|
|
1
|
|
|
|
23,354
|
|
|
|
370
|
|
|
|
64
|
|
|
|
4.6
|
|
|
$10 million or less
|
AA
|
|
|
7
|
|
|
|
561,879
|
|
|
|
2,588
|
|
|
|
843
|
|
|
|
6.3
|
|
|
$10 million or less
|
AA
|
|
|
8
|
|
|
|
413,118
|
|
|
|
2,494
|
|
|
|
226
|
|
|
|
5.2
|
|
|
$10 million or less
|
A+
|
|
|
4
|
|
|
|
59,365
|
|
|
|
10
|
|
|
|
|
|
|
|
5.8
|
|
|
$1 million or less
|
A
|
|
|
3
|
|
|
|
87,300
|
|
|
|
943
|
|
|
|
|
|
|
|
5.7
|
|
|
$1 million or less
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subtotal(5)
|
|
|
24
|
|
|
|
1,145,766
|
|
|
|
6,405
|
|
|
|
1,133
|
|
|
|
5.8
|
|
|
|
Other
derivatives(6)
|
|
|
|
|
|
|
283,811
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Forward purchase and sale commitments
|
|
|
|
|
|
|
199,811
|
|
|
|
1,797
|
|
|
|
1,797
|
|
|
|
|
|
|
|
Swap guarantee derivatives
|
|
|
|
|
|
|
2,838
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total derivatives
|
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|
|
|
|
$
|
1,632,226
|
|
|
$
|
8,202
|
|
|
$
|
2,930
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2007
|
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|
|
|
|
|
|
|
|
|
|
|
|
Weighted Average
|
|
|
|
|
|
|
Notional or
|
|
|
Total
|
|
|
Exposure,
|
|
|
Contractual
|
|
|
|
|
Number of
|
|
Contractual
|
|
|
Exposure at
|
|
|
Net of
|
|
|
Maturity
|
|
Collateral Posting
|
Rating(1)
|
|
Counterparties(2)
|
|
Amount
|
|
|
Fair
Value(3)
|
|
|
Collateral(4)
|
|
|
(in years)
|
|
Threshold
|
|
|
(dollars in millions)
|
|
AAA
|
|
|
2
|
|
|
$
|
1,173
|
|
|
$
|
174
|
|
|
$
|
174
|
|
|
|
3.4
|
|
|
Mutually agreed upon
|
AA+
|
|
|
3
|
|
|
|
181,439
|
|
|
|
941
|
|
|
|
|
|
|
|
4.4
|
|
|
$10 million or less
|
AA
|
|
|
9
|
|
|
|
465,563
|
|
|
|
1,324
|
|
|
|
38
|
|
|
|
5.3
|
|
|
$10 million or less
|
AA
|
|
|
6
|
|
|
|
160,678
|
|
|
|
2,230
|
|
|
|
29
|
|
|
|
5.8
|
|
|
$10 million or less
|
A+
|
|
|
5
|
|
|
|
170,330
|
|
|
|
1,696
|
|
|
|
5
|
|
|
|
6.1
|
|
|
$1 million or less
|
A
|
|
|
2
|
|
|
|
35,391
|
|
|
|
239
|
|
|
|
18
|
|
|
|
5.7
|
|
|
$1 million or less
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subtotal(5)
|
|
|
27
|
|
|
|
1,014,574
|
|
|
|
6,604
|
|
|
|
264
|
|
|
|
5.4
|
|
|
|
Other
derivatives(6)
|
|
|
|
|
|
|
234,343
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Forward purchase and sale commitments
|
|
|
|
|
|
|
72,662
|
|
|
|
465
|
|
|
|
465
|
|
|
|
|
|
|
|
Swap guarantee derivatives
|
|
|
|
|
|
|
1,302
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total derivatives
|
|
|
|
|
|
$
|
1,322,881
|
|
|
$
|
7,069
|
|
|
$
|
729
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
We use the lower of S&P and
Moodys ratings to manage collateral requirements. In this
table, the rating of the legal entity is stated in terms of the
S&P equivalent.
|
(2)
|
Based on legal entities. Affiliated
legal entities are reported separately.
|
(3)
|
For each counterparty, this amount
includes derivatives with a net positive fair value (recorded as
derivative assets, net), including the related accrued interest
receivable/payable (net) and trade/settle fees.
|
(4)
|
Total Exposure at Fair Value less
collateral held as determined at the counterparty level.
|
(5)
|
Consists of over-the-counter, or
OTC, derivative agreements for interest-rate swaps, option-based
derivatives (excluding certain written options),
foreign-currency swaps and purchased interest-rate caps. Certain
prior period written options within subtotal that were
previously reported as a component of other derivatives have
been reclassified to conform to the current period presentation.
|
(6)
|
Consists primarily of
exchange-traded contracts, certain written options and certain
credit derivatives. Written options do not present counterparty
credit exposure, because we receive a one-time up-front premium
in exchange for giving the holder the right to execute a
contract under specified terms, which generally puts us in a
liability position.
|
As indicated in Table 36, approximately 82% of our
counterparty credit exposure for OTC interest-rate swaps,
certain option-based derivatives and foreign-currency swaps was
collateralized at September 30, 2008. An entity affiliated
with Lehman was our counterparty in certain derivative
transactions. Upon Lehmans bankruptcy filing, we
terminated the transactions and requested payment of the
settlement amount, which the entity failed to pay. We then
exercised our right to seize collateral previously posted by the
entity in connection with the transactions. The collateral was
insufficient to cover the settlement amount, leaving a shortfall
of approximately $30 million. During the third quarter of
2008, we recorded a $27 million reduction to our derivative
assets which represents an estimate of the probable loss on this
transaction.
The increase in our exposure at September 30, 2008 was due
to interest rate movements on September 30, 2008. We
request and post collateral on the subsequent business day based
upon the prior days ending derivative position by
counterparty. Therefore there is always a one business day lag
from our exposure to when the collateral is posted to us. Our
derivative counterparties posted the necessary collateral on
October 1, 2008 mitigating our period end exposure.
Additionally, as indicated in Table 36, the total exposure
to our forward purchase and sale commitments of
$1.8 billion at September 30, 2008 was
uncollateralized. Because the typical maturity of our forward
purchase and sale commitments is less than 60 days and they
are generally settled through a clearinghouse, we do not require
master netting and collateral agreements for the counterparties
of these commitments. However, we monitor the credit
fundamentals of the counterparties to our forward purchase and
sale commitments on an ongoing basis to ensure that they
continue to meet our internal risk-management standards.
Our
Customers Mortgage Seller/Servicers
We acquire a significant portion of our mortgage loans from
several large lenders. These lenders, or seller/servicers, are
among the largest mortgage loan originators in the U.S. We are
exposed to institutional credit risk arising from the insolvency
or non-performance by our mortgage seller/servicers, including
non-performance of their repurchase obligations arising from the
representations and warranties made to us for loans they
underwrote and sold to us. The credit risk associated with
servicing relates to whether we could transfer the applicable
servicing rights to a successor servicer and recover amounts
owed to us by the defaulting servicer in the event the
defaulting servicer does not fulfill its responsibilities. We
believe that the value of those servicing rights generally would
provide us with significant protection against our exposure to a
seller/servicers failure to perform its repurchase
obligations. We have contingency procedures in place that are
intended to provide for a timely transfer of current servicing
information in the event one of our major counterparties is no
longer able to fulfill its servicing responsibilities. However,
due to the significant size of the mortgage-servicing portfolios
of some of our major customers relative to the servicing
capacity of the market, the failure of one of our major
servicers could adversely affect our ability to conduct
operations in a timely manner.
In July 2008, Bank of America Corporation completed its
acquisition of Countrywide Financial Corp., and together these
companies subsidiaries accounted for 23% of our mortgage
guarantee issuance volume during the nine months ended
September 30, 2008. Due to the strain on the mortgage
finance industry during the third quarter of 2008, several more
of our significant seller/servicers have been adversely affected
and have undergone dramatic changes in their ownership or
financial condition. GMAC Mortgage, LLC, a subsidiary of
Residential Capital LLC, or ResCap, is one of our
seller/servicers and comprised approximately 3.5% of our
mortgage purchase volume for the nine months ended
September 30, 2008. ResCap has recently made several
announcements about its weakened financial condition and concern
regarding its ability to continue operations in the short-term.
In September 2008, Washington Mutual Bank, which accounted for
7% of our single-family mortgage purchase volume during the nine
months ended September 30, 2008, was closed by the Office
of Thrift Supervision and the FDIC was named receiver and all of
its deposits, assets and certain liabilities of its banking
operations were acquired by JPMorgan Chase Bank, NA.
JPMorgan Chase has asserted that, as successor servicer of
mortgages for us and formerly serviced by Washington Mutual,
JPMorgan Chase will not be responsible for Washington
Mutuals existing and future obligations to repurchase
mortgages sold to us by Washington Mutual and later found to be
inconsistent with representations and warranties made at the
time of sale. We have informed JPMorgan Chase that we are
unwilling to consent to it being successor servicer unless it
assumes the Washington Mutual repurchase obligations. Chase Home
Finance LLC, a subsidiary of JPMorgan Chase, is also a
significant seller/servicer and provided 9% of our single-family
mortgage purchase volume during the nine months ended
September 30, 2008. In addition, Wachovia Corporation, the
parent of our customers Wachovia Bank, N.A. and Wachovia
Mortgage, FSB, which together accounted for 2% of our
single-family mortgage purchase volume during the nine months
ended September 30, 2008, agreed to be acquired by Wells
Fargo & Company in September 2008. Wells Fargo Bank,
N.A., a subsidiary of Wells Fargo & Company, is also
one of our significant seller/servicers and accounted for 20% of
our single-family mortgage purchase volume during the nine
months ended September 30, 2008. Although there are some
unresolved issues with our servicing arrangements, we are
monitoring these developments and are working to ensure that our
servicing agreements, in accordance with their terms, will not
be adversely affected. Similarly, in cases where we have
mortgage purchase commitments, or flow contracts in
place with both of the merged parties, the agreements continue
until their stated expiration date. See NOTE 15:
CONCENTRATION OF CREDIT AND OTHER RISKS to our
consolidated financial statements for additional information on
our mortgage seller/servicers and our mortgage credit risks.
Under our agreements with our mortgage seller/servicers, we have
the right to request that the seller/servicers repurchase
mortgages sold to us if those mortgages do not comply with those
agreements. As a result, our seller/servicers repurchase
mortgages sold to us, or indemnify us against losses on those
mortgages, whether we subsequently securitized the loans or held
them in our retained portfolio. During the nine months ended
September 30, 2008 and 2007, the aggregate unpaid principal
balance of single-family mortgages repurchased by our
seller/servicers (without regard to year of original purchase)
was approximately $1.2 billion and $442 million,
respectively. When a seller/servicer repurchases a mortgage that
is securitized by us, our related guarantee asset and obligation
are extinguished similar to any other form of liquidation event
for our PCs. However, when we exercise our recourse provisions
due to misrepresentation by the seller for loans that have
already been repurchased by us under our performance guarantee,
we remove the carrying value of our related mortgage asset and
recognize recoveries on loans impaired upon purchase.
Lehman services single-family loans for us. We have potential
exposure to Lehman for servicing-related obligations due to us,
including mortgage repurchase obligations, which is currently
estimated to be approximately $558 million. In July 2008,
IndyMac Bancorp, Inc. announced that the FDIC had been made a
conservator of the bank, and we also have potential exposure to
IndyMac for servicing-related obligations, including repurchase
obligations, which we currently estimate to be
$726 million. Our estimate of probable losses for exposure
to seller/servicers for their repurchase obligations to us is
considered as part of our estimate for our provision for credit
losses as of September 30, 2008. The estimates of potential
exposure are higher than our estimates for probable loss as we
consider the range of possible outcomes as well as the passage
of time, which can change the indicators of incurred, or
probable losses. Our current estimates of potential exposure to
Lehman and IndyMac have increased since September 30, 2008.
We also consider the estimated value of related mortgage
servicing rights in determining our estimates of probable loss,
which reduce our potential exposures. We believe we have
adequately provided for these exposures in our loan loss
reserves at September 30, 2008; however, our actual losses
may exceed our estimates.
Mortgage
and Bond Insurers
We have institutional credit risk relating to the potential
insolvency or non-performance of mortgage and bond insurers that
insure mortgages and securities we purchase or guarantee. We
manage this risk by establishing eligibility standards for
mortgage insurers and by regularly monitoring our exposure to
individual mortgage and bond insurers. Our monitoring includes
regularly performing analyses of the estimated financial
capacity of these insurers under different adverse economic
conditions. We also monitor the insurers credit ratings,
as provided by nationally recognized statistical rating
organizations, and we periodically review the methods used by
those organizations. Recently, many of our large insurers have
been downgraded by nationally recognized statistical rating
organizations. We periodically perform
on-site
reviews of mortgage insurers to monitor compliance with our
eligibility requirements and to evaluate their management and
control practices. In addition, state insurance authorities
regulate insurers.
Although we monitor the financial strength of our mortgage and
bond insurers, we also place emphasis on the analysis of ratings
agencies to evaluate claims paying ability and the capital
strength of the firms. As a guarantor, we remain responsible for
the payment of principal and interest if a mortgage insurer
fails to meet its obligations to reimburse us for claims. If any
of our mortgage insurers that provides credit enhancement fails
to fulfill its obligation, the result could be increased
credit-related costs and a possible reduction in the fair values
associated with our PCs or Structured Securities. Table 37
presents our exposure to mortgage insurers, excluding bond
insurance, as of September 30, 2008.
Table 37
Mortgage Insurance by Counterparty
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2008
|
|
|
|
S&P Credit
|
|
S&P Credit
|
|
Primary
|
|
|
Pool
|
|
|
Maximum
|
|
Counterparty Name
|
|
Rating(1)
|
|
Rating
Outlook(1)
|
|
Insurance(2)
|
|
|
Insurance(2)
|
|
|
Exposure(3)
|
|
|
|
|
|
|
|
(dollars in billions)
|
|
|
Mortgage Guaranty Insurance Corp. (MGIC)
|
|
|
A
|
|
|
|
Negative
|
|
|
$
|
60
|
|
|
$
|
53
|
|
|
$
|
16
|
|
Radian Guaranty Inc.
|
|
|
BBB+
|
|
|
|
Negative
|
|
|
|
41
|
|
|
|
25
|
|
|
|
12
|
|
Genworth Mortgage Insurance Corporation
|
|
|
AA−
|
|
|
|
Negative
|
|
|
|
42
|
|
|
|
1
|
|
|
|
11
|
|
PMI Mortgage Insurance Co. (PMI)
|
|
|
A−
|
|
|
|
Negative
|
|
|
|
31
|
|
|
|
4
|
|
|
|
8
|
|
United Guaranty Residential Insurance Co. (UGRI)
|
|
|
A−
|
|
|
|
Negative
|
|
|
|
32
|
|
|
|
1
|
|
|
|
8
|
|
Republic Mortgage Insurance (RMIC)
|
|
|
A+
|
|
|
|
Negative
|
|
|
|
27
|
|
|
|
5
|
|
|
|
7
|
|
Others(4)
|
|
|
|
|
|
|
|
|
|
|
18
|
|
|
|
5
|
|
|
|
4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
$
|
251
|
|
|
$
|
94
|
|
|
$
|
66
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
Latest rating available as of
November 10, 2008.
|
(2)
|
Represents the amount of unpaid
principal balance at the end of the period for single-family
mortgages in our retained portfolio and backing our issued PCs
and Structured Securities covered by the respective insurance
type.
|
(3)
|
Represents the remaining
contractual limit for reimbursement of losses of principal
incurred on the aggregate policies of both primary and pool
insurance. These amounts are based on our gross coverage without
regard to netting of coverage that may exist on some of the
related mortgages for double-coverage under both types of
insurance.
|
(4)
|
No remaining counterparty
represents greater than 10% of our total maximum exposure.
|
For our exposure to mortgage insurers, we evaluate the recovery
from these insurance policies for mortgage loans in our retained
portfolio as well as loans underlying our PCs and Structured
Securities as part of the estimate of our provision for credit
losses. To date, downgrades of insurer financial strength
ratings and our evaluation of remediation plans provided by our
mortgage insurance counterparties have not significantly
affected our provision for credit loss; however, we have
reflected expectations of unrecoverable claims in our fair value
estimates of our guarantee obligation during the nine months
ended September 30, 2008.
We received proceeds of $418 million and $220 million
during the nine months ended September 30, 2008 and 2007,
respectively, from our primary and pool mortgage insurance
policies for recovery of losses on our single-family loans. We
also received proceeds of $13 million and $57 million
for the nine months ended September 30, 2008 and 2007,
respectively, from mortgage insurers on sales of single-family
properties previously covered by insurance on the related
foreclosed loans. We had outstanding receivables from mortgage
insurers, net of associated reserves, of $617 million and
$233 million as of
September 30, 2008 and December 31, 2007,
respectively, related to amounts claimed on foreclosed
properties. Based upon currently available information, we
expect that most of our mortgage insurance counterparties
possess adequate financial strength and capital to meet their
obligations to us for the near term. On June 19, 2008,
Triad Guaranty Insurance Corporation, or Triad, which is
included in Others in Table 37 above, announced
that it would cease issuing new insurance business effective
July 15, 2008. We informed our customers that mortgages
with commitments of insurance from Triad dated after
July 14, 2008 are not eligible for sale to us. For an
insurer to be designated by us as Freddie Mac-approved insurer,
the company must be rated by at least two of the following three
rating agencies S&P, Moodys, and Fitch,
and must not receive a rating less than AA− /Aa3 by any
listed rating agency. We reviewed the remediation plans for
returning to
AA-rated
status provided by each of MGIC, Radian Guaranty Inc. and PMI
after their downgrades below AA. We have determined, based on
those plans, to continue to treat their eligibility as if they
were a Freddie Mac-approved insurer. RMIC has submitted a
remediation plan, which we are evaluating. On September 15,
2008, UGRI, a subsidiary of American International Group, Inc.,
was downgraded below the
AA-category
by one rating agency and has submitted a remediation plan, which
we are evaluating.
We principally have exposure to monoline bond insurers when we
purchase a security with insurance owned by the trust issuing
the security, referred to as primary monoline insurance. For
this type of exposure, our potential losses are reflected
through declines in the fair value of the security. We evaluate
the recovery from these insurance policies as part of our
impairment analysis for securities within our retained
portfolio. We recognized significant impairment losses during
the second and third quarters of 2008 on certain of these
securities covered by our monoline bond insurers. See
CONSOLIDATED BALANCE SHEET ANALYSIS Retained
Portfolio for more information on our impairment analysis
of securities covered by monoline bond insurance. We also have
exposure to monolines when we purchase additional credit
protection (i.e., insurance) directly from the monolines
to mitigate a portion of the credit risk on certain of our
non-agency mortgage-related securities in our retained
portfolio. Table 38 presents our coverage amounts of
monoline bond insurance, including primary and secondary
coverage, for securities held in our retained portfolio and
non-mortgage-related investments in our cash and investments
portfolio, on a combined basis.
Table 38
Monoline Bond Insurance by Counterparty
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2008
|
|
|
|
S&P Credit
|
|
S&P Credit
|
|
Coverage
|
|
|
Percent
|
|
Counterparty Name
|
|
Rating(1)
|
|
Rating
Outlook(1)
|
|
Outstanding(2)
|
|
|
of Total
|
|
|
|
|
|
|
|
(dollars in billions)
|
|
|
Ambac Assurance Corporation
|
|
|
AA
|
|
|
|
Negative
|
|
|
$
|
6
|
|
|
|
36
|
%
|
FGIC
|
|
|
BB
|
|
|
|
Credit watch negative
|
|
|
|
4
|
|
|
|
20
|
|
MBIA Insurance Corp.
|
|
|
AA
|
|
|
|
Negative
|
|
|
|
4
|
|
|
|
21
|
|
Financial Security Assurance Inc.
|
|
|
AAA
|
|
|
|
Credit watch negative
|
|
|
|
3
|
|
|
|
15
|
|
Others(3)
|
|
|
|
|
|
|
|
|
|
|
1
|
|
|
|
8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
$
|
18
|
|
|
|
100
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
Latest rating available as of
November 10, 2008.
|
(2)
|
Represents the contractual limit
for reimbursement of losses incurred on non-agency
mortgage-related securities held in our retained portfolio and
non-mortgage securities in our cash and investment portfolio.
|
(3)
|
No remaining counterparty
represents greater than 10% of our total coverage outstanding.
|
In accordance with our risk management policies we will continue
to actively monitor the financial strength of our mortgage and
bond insurers in this challenging market environment. In the
event one or more of our mortgage or bond insurers were to
become insolvent it is possible that we would not collect all of
our claims from the affected insurer and it may impact our
ability to recover certain unrealized losses on our retained
portfolio or recoveries associated with credit losses in our
guaranteed PCs and Structured Securities. To date, no mortgage
or bond insurer has failed to meet its obligations to us.
Mortgage
Credit Risk
Mortgage credit risk is primarily influenced by the credit
profile of the borrower on the mortgage, the features of the
mortgage itself, the type of property securing the mortgage and
the general economic environment. To manage our mortgage credit
risk, we focus on three key areas: underwriting requirements and
quality control standards; portfolio diversification; and
portfolio management activities, including loss mitigation and
the use of credit enhancements.
All mortgages that we purchase for our retained portfolio or
that we guarantee have an inherent risk of default. We seek to
manage the underlying risk by adequately pricing for the risk we
assume using our underwriting and quality control processes. Our
underwriting process evaluates mortgage loans using several
critical risk characteristics, such as credit score, LTV ratio
and occupancy type.
Mortgage
Market Background
We have been affected by deteriorating conditions in the
single-family housing and mortgage markets during 2007 and 2008.
We believe these conditions have, in part, been exacerbated by
changes in underwriting standards by financial
institutions that resulted in originations of mortgage loans in
recent years to less credit-worthy borrowers than in the past.
Financial institutions significantly increased mortgage lending
and securitization of both subprime and
Alt-A
mortgage products, and these loans comprised a much larger
amount of origination and securitization issuance volumes during
2006 and 2007. The exposure to mortgage credit risk for a number
of financial institutions also increased with the expanding use
of leverage as well as mortgage credit and derivative products.
We believe these products, such as credit default swaps, or CDS,
and collateralized debt obligations, or CDO, obscure the
distribution of risk among market participants. Moreover, the
complexity of such instruments made the overall risk exposure of
the financial institutions using them less transparent. We
believe concerns about counterparties with significant exposures
associated with these instruments further reduced transaction
volumes and new issuances of non-agency mortgage-related
securities during 2008.
The table below illustrates the size of mortgage origination and
securitization activities in the market during these years
relative to our own market participation. We have not presented
CDS or CDO market statistics, since there is no reliable data
that illustrates these exposures and we have not significantly
participated in the market for these products. See
Table 36 Derivative Counterparty Credit
Exposure and ITEM 3. QUANTITATIVE AND
QUALITATIVE DISCLOSURES ABOUT MARKET RISK for additional
information on credit guarantee derivatives.
Table 39
Mortgage Market Share Comparison
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended
|
|
|
Full-year
|
|
|
Full-year
|
|
|
|
September 30, 2008
|
|
|
2007
|
|
|
2006
|
|
|
|
(in billions)
|
|
|
Market Data all market participants:
|
|
|
|
|
|
|
|
|
|
|
|
|
Total mortgage
originations(1)
|
|
$
|
1,235
|
|
|
$
|
2,430
|
|
|
$
|
2,980
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-agency security
issuance(2)
|
|
|
|
|
|
|
|
|
|
|
|
|
Backed-by subprime mortgage
loans(3)
|
|
$
|
2
|
|
|
$
|
219
|
|
|
$
|
483
|
|
Backed-by other mortgage
loans(4)
|
|
|
9
|
|
|
|
430
|
|
|
|
585
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
11
|
|
|
$
|
649
|
|
|
$
|
1,068
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Freddie Mac Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchases of single-family loans and non-agency securities for
our total mortgage portfolio:
|
|
|
|
|
|
|
|
|
|
|
|
|
Single-family mortgage loan
purchases(5)
|
|
$
|
310
|
|
|
$
|
466
|
|
|
$
|
351
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Private-label mortgage-related security
purchases(6)
|
|
|
2
|
|
|
|
74
|
|
|
|
117
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
Source: Inside Mortgage Finance
estimates of originations of single-family first- and second
liens dated October 31, 2008.
|
(2)
|
Source: Inside Mortgage Finance
estimates dated October 31, 2008. Based on unpaid principal
balance of securities issued.
|
(3)
|
Consists of loans categorized as
subprime based solely on the credit score of the borrower at the
time of origination.
|
(4)
|
Includes securities backed by loans
above the conforming loan limits,
Alt-A loans,
and home equity second liens.
|
(5)
|
Consists of purchases of mortgage
loans for our retained portfolio as well as those loans that
back our PCs and Structured Securities. See
Table 54 Total Mortgage Portfolio
Activity Detail for further information.
|
(6)
|
Excludes our purchases of
securities used for issuance of guarantees in our Structured
Transactions.
|
As shown above, single-family mortgage loan purchases for our
total mortgage portfolio comprised approximately 12%, 19% and
25% of total mortgage originations during full-year 2006,
full-year 2007, and the nine months ended September 30,
2008, respectively. The composition of private-label, or
non-agency, mortgage security issuance backed by subprime
mortgages, increased significantly in the market during 2006 and
2007. As shown above, our purchases of non-agency
mortgage-related securities for our retained portfolio
represented approximately 11% of the total issuance of these
securities in the market during both 2006 and 2007,
respectively. During the nine months ended September 30,
2008, the market for new issuances of non-agency mortgage
securities has been nearly non-existent.
As a result of greater variability in underwriting standards
during 2006 and 2007, the deterioration in mortgage performance
has also varied considerably across different market segments.
Our credit exposure in our single-family mortgage portfolio,
which is made up of the mortgage loans that we own or have
guaranteed, is primarily in conforming prime and
Alt-A
mortgage loans. Our single-family mortgage portfolio is
generally subject to more consistent underwriting standards and
thus, our portfolio has performed better relative to most market
participants and market segments. Several macro-economic factors
have also deteriorated during 2008, which has affected the
performance of all types of mortgage loans. Consequently both
prime and non-prime borrowers have been affected by the
compounding pressures on household wealth caused by declines in
home values, significant declines in the stock market, rising
rates of unemployment and increasing food and energy prices.
Table 40 shows the performance of our single-family
mortgage portfolio during 2008 as compared to industry averages.
Table 40
Mortgage Performance Comparison
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of
|
|
|
09/30/2008
|
|
06/30/2008
|
|
03/31/2008
|
|
12/31/2007
|
|
09/30/2007
|
|
Delinquency rate:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Freddie Macs single-family mortgage
portfolio(1)
|
|
|
1.22
|
%
|
|
|
0.93
|
%
|
|
|
0.77
|
%
|
|
|
0.65
|
%
|
|
|
0.51
|
%
|
Industry prime
loans(2)
|
|
|
N/A
|
|
|
|
2.35
|
|
|
|
1.99
|
|
|
|
1.67
|
|
|
|
1.31
|
|
Industry subprime
loans(2)
|
|
|
N/A
|
|
|
|
17.85
|
|
|
|
16.42
|
|
|
|
14.44
|
|
|
|
11.38
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months Ended
|
|
|
09/30/2008
|
|
06/30/2008
|
|
03/31/2008
|
|
12/31/2007
|
|
09/30/2007
|
|
Foreclosures starts
ratio(3):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Freddie Macs single-family mortgage
portfolio(1)
|
|
|
0.36
|
%
|
|
|
0.31
|
%
|
|
|
0.30
|
%
|
|
|
0.24
|
%
|
|
|
0.18
|
%
|
Industry prime
loans(2)
|
|
|
N/A
|
|
|
|
0.67
|
|
|
|
0.54
|
|
|
|
0.41
|
|
|
|
0.37
|
|
Industry subprime
loans(2)
|
|
|
N/A
|
|
|
|
4.70
|
|
|
|
4.06
|
|
|
|
3.44
|
|
|
|
3.12
|
|
|
|
(1)
|
Excludes our Structured
Transactions and mortgages covered under long-term standby
commitment agreements and is based on the number of loans
90 days or more past due, as well as those in the process
of foreclosure. See CREDIT RISKS Credit
Performance Delinquencies for further
information on the delinquency rates of our single-family
mortgage portfolio excluding Structured Transactions.
|
(2)
|
Source: Mortgage Bankers
Associations National Delinquency Survey representing the
total of first lien single-family loans in the survey
categorized as prime or subprime, respectively. Excludes FHA and
VA loans. Data was not yet available for the third quarter of
2008.
|
(3)
|
Represents the ratio of the number
of loans that entered the foreclosure process during the
respective quarter divided by the number of loans in the
portfolio at the end of the quarter.
|
Underwriting
and quality control standards
We use a process of delegated underwriting for the single-family
mortgages we purchase or securitize. In this process, we provide
originators with a series of mortgage underwriting standards and
unless we waive these standards, the originators represent and
warrant to us that the mortgages sold to us meet these
requirements. We subsequently review a sample of these loans
and, if we determine that any loan is not in compliance with our
contractual standards, we may require the seller/servicer to
repurchase that mortgage or make us whole in the event of a
default. In response to the changes in the residential mortgage
market during the last year, we made changes to our underwriting
guidelines in 2008, with which our single-family
seller/servicers must comply for loans delivered to us for
purchase or securitization. These changes will result in
significantly reducing purchases of mortgages with LTV ratios
over 95%, and limiting combinations of higher-risk
characteristics in loans we purchase, including those with
reduced documentation. We announced additional changes to our
guidelines in October 2008 that are effective for our purchases
on or after January 2, 2009. We have also reduced maximum
LTV ratios for certain cash-out refinance and investment
property mortgages to 90% or less, depending on the number of
units in the property and the presence of secondary financing.
In some cases, binding commitments under existing customer
contracts may delay the effective dates of certain underwriting
adjustments. While the impact of these changes has yet to be
fully realized, we expect that they will improve the credit
profile of the mortgages that are delivered to us going forward.
In response to market needs, the Economic Stimulus Act of 2008
temporarily increased the conforming loan limit in certain
high-cost areas for single-family mortgages originated from
July 1, 2007 through December 31, 2008. The new loan
limits are applicable to high cost areas only and are the higher
of the 2008 conforming loan limit ($417,000) or 125% of the HUD
determined area median house price, not to exceed $729,750, for
a 1-unit
property. We have specified certain credit requirements for
loans we will accept in this category, including but not limited
to; (a) limitations in certain volatile home price markets,
(b) required borrower documentation of income and assets,
(c) limits on cash-out refinancing amounts and (d) a
maximum original LTV ratio of 90%. We began purchasing and
securitizing conforming-jumbo mortgages in April 2008. Our
purchases of these loans into our total mortgage portfolio for
the three months ended September 30, 2008 have totaled
$207 million in unpaid principal balance. We have
experienced increased competition in the mortgage finance market
with respect to this product. Given market conditions and
competition especially from FHA, we do not anticipate purchasing
significant amounts of conforming jumbo product in 2008.
The Reform Act, which was passed in July 2008, allows increases
in our single-family conforming loan limits, beginning
January 1, 2009 based on changes in the new housing price
index established by FHFA. Consistent with existing guidance,
any decreases in this index would be accumulated and would
offset any future increases in the housing price index so that
loan limits do not decrease from year-to-year. In high-cost
areas where 115% of the median home price exceeds
the otherwise applicable conforming loan limit the
Reform Act increases the loan limits to the lesser of
(i) 115% of the median house price or (ii) 150% of the
conforming loan limit, currently $625,500. The high-cost
provisions on loan limits become effective January 1, 2009
when the temporary authority for purchases of high-cost loans
granted by the Economic Stimulus Act of 2008 expires. In
November 2008, FHFA announced that the conforming loan limit for
the GSEs will remain at the current level of $417,000 for 2009
with higher limits in certain cities and counties.
Table 41 provides characteristics of our single-family
mortgage loans purchased during the three and nine months ended
September 30, 2008 and 2007, and of our single-family
mortgage portfolio at September 30, 2008 and
December 31, 2007.
Table 41
Characteristics of Single-Family Mortgage
Portfolio(1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchases During
|
|
|
Purchases During
|
|
|
|
|
|
|
the Three Months
|
|
|
the Nine Months
|
|
|
Portfolio at
|
|
|
|
Ended September 30,
|
|
|
Ended September 30,
|
|
|
September 30,
|
|
|
December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
Original LTV Ratio
Range(2)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
£
60%
|
|
|
24
|
%
|
|
|
20
|
%
|
|
|
24
|
%
|
|
|
19
|
%
|
|
|
22
|
%
|
|
|
22
|
%
|
> 60% 70%
|
|
|
14
|
|
|
|
13
|
|
|
|
16
|
|
|
|
14
|
|
|
|
16
|
|
|
|
16
|
|
> 70% 80%
|
|
|
41
|
|
|
|
45
|
|
|
|
40
|
|
|
|
51
|
|
|
|
46
|
|
|
|
47
|
|
> 80% 90%
|
|
|
12
|
|
|
|
9
|
|
|
|
11
|
|
|
|
7
|
|
|
|
8
|
|
|
|
8
|
|
> 90% 100%
|
|
|
9
|
|
|
|
13
|
|
|
|
9
|
|
|
|
9
|
|
|
|
8
|
|
|
|
7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
100
|
%
|
|
|
100
|
%
|
|
|
100
|
%
|
|
|
100
|
%
|
|
|
100
|
%
|
|
|
100
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average original LTV ratio
|
|
|
72
|
%
|
|
|
73
|
%
|
|
|
71
|
%
|
|
|
73
|
%
|
|
|
72
|
%
|
|
|
71
|
%
|
Estimated
Current LTV Ratio
Range(3)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
£
60%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
36
|
%
|
|
|
41
|
%
|
> 60% 70%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
14
|
|
|
|
15
|
|
> 70% 80%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
19
|
|
|
|
19
|
|
> 80% 90%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
14
|
|
|
|
15
|
|
> 90% 100%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
8
|
|
|
|
7
|
|
> 100%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
9
|
|
|
|
3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
100
|
%
|
|
|
100
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average estimated current LTV ratio
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
68
|
%
|
|
|
63
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
³
740
|
|
|
56
|
%
|
|
|
43
|
%
|
|
|
53
|
%
|
|
|
42
|
%
|
|
|
46
|
%
|
|
|
45
|
%
|
700 739
|
|
|
22
|
|
|
|
22
|
|
|
|
22
|
|
|
|
23
|
|
|
|
23
|
|
|
|
23
|
|
660 699
|
|
|
14
|
|
|
|
18
|
|
|
|
15
|
|
|
|
19
|
|
|
|
17
|
|
|
|
18
|
|
620 659
|
|
|
6
|
|
|
|
11
|
|
|
|
7
|
|
|
|
10
|
|
|
|
9
|
|
|
|
9
|
|
< 620
|
|
|
2
|
|
|
|
6
|
|
|
|
3
|
|
|
|
6
|
|
|
|
4
|
|
|
|
4
|
|
Not available
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1
|
|
|
|
1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
100
|
%
|
|
|
100
|
%
|
|
|
100
|
%
|
|
|
100
|
%
|
|
|
100
|
%
|
|
|
100
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average credit score
|
|
|
738
|
|
|
|
719
|
|
|
|
733
|
|
|
|
719
|
|
|
|
724
|
|
|
|
723
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchase
|
|
|
55
|
%
|
|
|
48
|
%
|
|
|
39
|
%
|
|
|
46
|
%
|
|
|
40
|
%
|
|
|
40
|
%
|
Cash-out refinance
|
|
|
25
|
|
|
|
27
|
|
|
|
32
|
|
|
|
32
|
|
|
|
30
|
|
|
|
30
|
|
Other refinance
|
|
|
20
|
|
|
|
25
|
|
|
|
29
|
|
|
|
22
|
|
|
|
30
|
|
|
|
30
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
100
|
%
|
|
|
100
|
%
|
|
|
100
|
%
|
|
|
100
|
%
|
|
|
100
|
%
|
|
|
100
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property Type
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1 unit
|
|
|
97
|
%
|
|
|
97
|
%
|
|
|
97
|
%
|
|
|
97
|
%
|
|
|
97
|
%
|
|
|
97
|
%
|
2-4 units
|
|
|
3
|
|
|
|
3
|
|
|
|
3
|
|
|
|
3
|
|
|
|
3
|
|
|
|
3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
100
|
%
|
|
|
100
|
%
|
|
|
100
|
%
|
|
|
100
|
%
|
|
|
100
|
%
|
|
|
100
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Occupancy Type
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Primary residence
|
|
|
88
|
%
|
|
|
90
|
%
|
|
|
89
|
%
|
|
|
90
|
%
|
|
|
91
|
%
|
|
|
91
|
%
|
Second/vacation home
|
|
|
6
|
|
|
|
5
|
|
|
|
5
|
|
|
|
5
|
|
|
|
5
|
|
|
|
5
|
|
Investment
|
|
|
6
|
|
|
|
5
|
|
|
|
6
|
|
|
|
5
|
|
|
|
4
|
|
|
|
4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
100
|
%
|
|
|
100
|
%
|
|
|
100
|
%
|
|
|
100
|
%
|
|
|
100
|
%
|
|
|
100
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
Purchases and ending balances are
based on the unpaid principal balance of the single-family
mortgage portfolio excluding Structured Securities backed by
Ginnie Mae certificates and certain Structured Transactions.
Structured Transactions with ending balances of $3 billion
at September 30, 2008 and $6 billion at
December 31, 2007 are excluded since these securities are
backed by non-Freddie Mac issued securities for which the loan
characteristics data was not available.
|
(2)
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Original LTV ratios are calculated
as the amount of the mortgage we guarantee including the
credit-enhanced portion, divided by the lesser of the appraised
value of the property at time of mortgage origination or the
mortgage borrowers purchase price. Second liens not owned
or guaranteed by us are excluded from the LTV ratio calculation.
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(3)
|
Current market values are estimated
by adjusting the value of the property at origination based on
changes in the market value of homes since origination.
Estimated current LTV ratio range is not applicable to purchases
we made during 2008, includes the credit-enhanced portion of the
loan and excludes any secondary financing by third parties.
Including secondary financing, the total LTV ratios above 90%
were 14% at both September 30, 2008 and December 31,
2007, respectively.
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(4)
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Credit score data is as of mortgage
loan origination and is based on FICO scores.
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Our charter requires that single-family mortgages with LTV
ratios above 80% at the time of purchase be covered by one or
more of the following: (a) mortgage insurance for mortgage
amounts above the 80% threshold; (b) a sellers
agreement to repurchase or replace any mortgage upon default; or
(c) retention by the seller of at least a 10% participation
interest in the mortgages. In addition, we employ other types of
credit enhancements, including pool insurance, indemnification
agreements, collateral pledged by lenders and subordinated
security structures. As shown in the table above, the percentage
of borrowers
with estimated current LTV ratios greater than 100% has
increased from 3% at December 31, 2007 to 9% of our
single-family mortgage portfolio as of September 30, 2008.
As estimated current LTVs increase, the borrowers equity
in the home decreases, which negatively affects the
borrowers ability to refinance or to sell the property and
purchase a less expensive home or move to a rental property. For
borrowers with estimated current LTV greater than 100%, the
borrower has negative equity and thus is also more likely to
default than other borrowers, regardless of his or her financial
condition. For the approximately 31% and 25% of single-family
mortgage loans with greater than 80% estimated current LTV
ratios, the borrowers had a weighted average credit score at
origination of 711 and 708 at September 30, 2008 and
December 31, 2007, respectively.
Portfolio
Product Diversification
Product mix affects the credit risk profile of single-family
loans within our total mortgage portfolio. In general,
15-year
amortizing fixed-rate mortgages exhibit the lowest default rate
among the types of mortgage loans we securitize and purchase,
due to the accelerated rate of principal amortization on these
mortgages and the credit profiles of borrowers who seek and
qualify for them. Conversely, interest-only and certain
adjustable-rate mortgages typically default at a higher rate
than fixed-rate mortgages, although default rates for different
types of ARMs may vary.
The primary mortgage products comprising the single-family
mortgage loans in our retained portfolio and our issued PCs and
Structured Securities portfolio are conventional first lien,
fixed-rate mortgage loans. Single-family amortizing long-term
fixed-rate mortgages comprised approximately 81% of
single-family mortgage loans in our retained portfolio and loans
underlying our issued PCs and Structured Securities at both
September 30, 2008 and December 31, 2007. We did not
purchase any second lien mortgage loans for our retained
portfolio during the nine months ended September 30, 2008
and 2007 and these loans constituted less than 0.1% of those
underlying our PCs and Structured Securities portfolio as of
September 30, 2008. However, during the past several years,
there was a rapid proliferation of mortgage products designed to
address a variety of borrower and lender needs, including issues
of affordability, and reduced income documentation requirements.
While features of these products have been on the market for
some time, their prevalence in our total mortgage portfolio
increased through mid-2007 before beginning to decline as the
market began producing a greater proportion of fixed-rate,
amortizing mortgage products. See
ITEM 1. BUSINESS REGULATION AND
SUPERVISION Office of Federal Housing Enterprise
Oversight Guidance on Non-traditional Mortgage
Product Risks and Subprime Lending and
ITEM 1A. RISK FACTORS Legal and
Regulatory Risks in our Registration Statement for more
information on these products.
Structured
Transactions
We also issue certain Structured Securities to third parties in
exchange for non-Freddie Mac mortgage-related securities. The
non-Freddie Mac mortgage-related securities use collateral
transferred to trusts that were specifically created for the
purpose of issuing the securities. We refer to this type of
Structured Security as a Structured Transaction. Structured
Transactions can generally be segregated into two different
types. In the first type, we purchase only the senior tranches
from a non-Freddie Mac senior-subordinated securitization, place
these senior tranches into a securitization trust, provide a
guarantee of the principal and interest of the senior tranches,
and issue the Structured Transaction. For other Structured
Transactions, we purchase non-Freddie Mac single-class, or
pass-through, securities, place them in a securitization trust,
guarantee the principal and interest, and issue the Structured
Transaction. In the first type of Structured Transaction, the
senior tranches we purchase as collateral for the Structured
Transactions benefit from credit protections from the related
subordinated tranches, which we do not purchase. Additionally,
there are other credit enhancements and structural features
retained by the seller, such as excess interest or
overcollateralization, which provide credit protection to our
interests, and reduce the likelihood that we will have to
perform under our guarantee. Structured Transactions backed by
pass-through securities do not benefit from structural or other
credit enhancement protections. In exchange for providing our
guarantee on Structured Transactions, we may receive a
management and guarantee fee.
Higher
Risk Combinations
Combining certain loan characteristics often can indicate a
higher degree of credit risk. For example, single-family
mortgages with both high LTV ratios and borrowers who have lower
credit scores typically experience higher rates of delinquency,
default and credit losses. However, our participation in these
categories generally helps us meet our affordable housing goals.
As of September 30, 2008, approximately 1% of mortgage
loans in our single-family mortgage portfolio were made to
borrowers with credit scores below 620 and had first lien,
original LTV ratios, greater than 90% at the time of mortgage
origination. In addition, as of September 30, 2008, 4% of
Alt-A
single-family loans we own or have guaranteed were made to
borrowers with credit scores below 620 at mortgage origination.
In prior years, as home prices increased, many borrowers used
second liens at the time of purchase to reduce the LTV ratio on
first lien mortgages. Including this secondary financing by
third parties, we estimate that the percentage of first lien
loans we own or have guaranteed that have total original LTV
ratios above 90% was approximately 14% at both
September 30, 2008 and December 31, 2007.
Subprime
Loans
Participants in the mortgage market often characterize
single-family loans based upon their overall credit quality at
the time of origination, generally considering them to be prime
or subprime. There is no universally accepted definition of
subprime. The subprime segment of the mortgage market primarily
serves borrowers with poorer credit payment histories and such
loans typically have a mix of credit characteristics that
indicate a higher likelihood of default and higher loss
severities than prime loans. Such characteristics might include
a combination of high LTV ratios, low credit scores or
originations using lower underwriting standards such as limited
or no documentation of a borrowers income. The subprime
market helps certain borrowers by broadening the availability of
mortgage credit. While we have not historically characterized
the single-family loans underlying our PCs and Structured
Securities as either prime or subprime, we do monitor the amount
of loans we have guaranteed with characteristics that indicate a
higher degree of credit risk (see Higher Risk
Combinations for further information). In addition, we
estimate that approximately $6 billion of security
collateral underlying our Structured Transactions at both
September 30, 2008 and December 31, 2007 were
classified as subprime, based on our classification that they
are also higher-risk loan types.
We categorize non-agency securities as subprime generally if
they were labeled as such at the time we purchase them. At
September 30, 2008 and December 31, 2007, we held
investments of approximately $80 billion and
$101 billion, respectively, of non-agency mortgage-related
securities backed by subprime loans. These securities include
significant credit enhancement, particularly through
subordination, and 80% and 100% of these securities were
investment grade at September 30, 2008 and
December 31, 2007, respectively. During 2008, the credit
characteristics of these securities have experienced significant
and rapid declines accelerating in the third quarter of 2008.
See CONSOLIDATED BALANCE SHEET ANALYSIS
Retained Portfolio for further discussion and our
evaluation of these securities for impairment.
On July 8, 2008, the American Securitization Forum, or ASF,
working with various constituency groups as well as
representatives of U.S. federal government agencies,
updated the Streamlined Foreclosure and Loss Avoidance Framework
for Securitized Subprime ARM Loans, or the ASF Framework, which
the ASF originally issued in 2007. The ASF Framework provides
guidance for servicers to streamline borrower evaluation
procedures and to facilitate the use of foreclosure and loss
prevention efforts in an attempt to reduce the number of
U.S. subprime residential mortgage borrowers who might
default during 2008 because the borrowers cannot afford the
increased payments after the interest rate is reset, or
adjusted, on their mortgage loans. The ASF Framework is focused
on subprime, first-lien ARMs that have an initial fixed interest
rate period of 36 months or less, are included in
securitized pools, were originated between January 1, 2005
and July 31, 2007, and have an initial interest rate reset
date between January 1, 2008 and July 31, 2010
(defined as Subprime ARM Loans within the ASF
Framework). Under the ASF Framework, Subprime ARM Loans are
divided into the following segments:
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Segment 1 those where the borrowers are expected to
refinance their loans if they are unable or unwilling to meet
their reset payment obligations;
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Segment 2 those where the borrowers are unlikely to
be able to refinance into any readily available mortgage
product. Criteria to categorize these loans include a credit
score less than 660 and other criteria that would otherwise make
the loan FHA ineligible.
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Segment 3 those where the borrowers are unlikely to
be able to refinance into any readily available mortgage product
and the servicer is expected to pursue available loss mitigation
actions.
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As of September 30, 2008, approximately $18 million of
mortgage loans that back our PCs and Structured Securities meet
the qualifications of segment 2, Subprime ARM Loan.
However, we have not applied the approach in the ASF Framework
and it has not had any impact on the off-balance sheet treatment
of our PCs and Structured Securities that hold loans meeting the
related Subprime ARM Loan criteria. Our loss mitigation approach
for Subprime ARM Loans under the ASF Framework is the same as
any other delinquent loan underlying our PCs and Structured
Securities. Refer to Loss Mitigation Activities
below, and ITEM 2. FINANCIAL
INFORMATION ANNUAL MD&A CREDIT
RISKS Mortgage Credit Risk Loss
Mitigation Activities in our Registration Statement
for a description of our approach to loss mitigation activity.
Alt-A
Loans
Many mortgage market participants classify single-family loans
with credit characteristics that range between their prime and
subprime categories as
Alt-A
because these loans have a combination of characteristics of
each category or may be underwritten with lower or alternative
documentation requirements relative to a full documentation
mortgage loan. Although there is no universally accepted
definition of
Alt-A,
industry participants have used this classification principally
to describe loans for which the underwriting process has been
streamlined in order to reduce the documentation requirements of
the borrower or allow alternative documentation.
We principally acquire single-family mortgage loans originated
as Alt-A
from our traditional lenders that largely specialize in
originating prime mortgage loans. These lenders typically
originate
Alt-A loans
as a complementary product
offering and generally follow an origination path similar to
that used for their prime origination process. In determining
our Alt-A
exposure in loans underlying our single-family mortgage
portfolio, we have classified mortgage loans as
Alt-A if the
lender that delivers them to us has classified the loans as
Alt-A, or if
the loans had reduced documentation requirements, which indicate
that the loan should be classified as
Alt-A. We
estimate that approximately $187 billion, or 10%, of loans
underlying our guaranteed PCs and Structured Securities at
September 30, 2008 were classified as
Alt-A
mortgage loans. In addition, we estimate that approximately
$2 billion, or approximately 6%, of our investments in
single-family mortgage loans in our retained portfolio were
classified as
Alt-A loans
as of September 30, 2008. For all of these
Alt-A loans
combined, the average credit score was 724, and the estimated
current average LTV ratio, based on our first-lien exposure, was
79%. The delinquency rate for these
Alt-A loans
was 4.10% and 1.86% at September 30, 2008 and
December 31, 2007, respectively. We implemented several
changes in our underwriting and eligibility criteria in 2008 to
reduce our acquisition of certain higher-risk loan products,
including
Alt-A loans.
As a result, there are approximately $15 billion of
single-family
Alt-A
mortgage loans in our retained portfolio and underlying our PCs
and Structured Securities as of September 30, 2008 that
were originated in 2008 as compared to $59 billion as of
September 30, 2007 that were originated in 2007.
We also invest in non-agency mortgage-related securities backed
by single-family
Alt-A loans
in our retained portfolio. We have classified these securities
as Alt-A if
the securities were labeled as
Alt-A when
sold to us or if we believe the underlying collateral includes a
significant amount of
Alt-A loans.
A total of $42 billion and $51 billion of our
single-family non-agency mortgage-related securities were backed
by Alt-A and
other mortgage loans at September 30, 2008 and
December 31, 2007, respectively. We have focused our
purchases on credit-enhanced, senior tranches of these
securities, which provide additional protection due to
subordination. Of these securities, 89% and 100% were investment
grade at September 30, 2008 and December 31, 2007,
respectively. We estimate that a significant portion of the
declines in fair values for most of these securities have been
due to poor underlying collateral performance, decreased
liquidity and larger risk premiums in the mortgage market. See
CONSOLIDATED BALANCE SHEET ANALYSIS Retained
Portfolio for discussion of our evaluation of these
securities for impairment.
Credit
Enhancements
At September 30, 2008 and December 31, 2007, our
credit-enhanced mortgages and mortgage-related securities
represented approximately 18% and 17% of the $1,934 billion
and $1,819 billion, respectively, unpaid principal balance
of our total mortgage portfolio, excluding non-Freddie Mac
mortgage-related securities, our Structured Transactions and
that portion of issued Structured Securities that is backed by
Ginnie Mae Certificates. We exclude non-Freddie Mac
mortgage-related securities because they expose us primarily to
institutional credit risk. We exclude that portion of Structured
Securities backed by Ginnie Mae Certificates because the
incremental credit risk to which we are exposed is considered
insignificant. Although many of our Structured Transactions are
credit enhanced, we present the credit enhancement coverage
information separately in the table below due to the use of
subordination in many of the securities structures. See
CONSOLIDATED BALANCE SHEETS ANALYSIS Retained
Portfolio for additional information on credit enhancement
coverage of our investments in non-Freddie Mac mortgage-related
securities.
Primary mortgage insurance is the most prevalent type of credit
enhancement protecting our single-family mortgage portfolio,
including those underlying our PCs and Structured Securities,
and is typically provided on a loan-level basis. As of
September 30, 2008 and December 31, 2007, in
connection with the single-family mortgage portfolio, excluding
the loans that are underlying Structured Transactions, the
maximum amount of losses we could recover under primary mortgage
insurance, excluding reimbursement of expenses, was
$59.7 billion and $51.9 billion, respectively.
Other prevalent types of credit enhancement that we use are
lender recourse and indemnification agreements (under which we
may require a lender to reimburse us for credit losses realized
on mortgages), as well as pool insurance. Pool insurance
provides insurance on a pool of loans up to a stated aggregate
loss limit. In addition to a pool-level loss coverage limit,
some pool insurance contracts may have limits on coverage at the
loan level. At September 30, 2008 and December 31,
2007, in connection with the single-family mortgage portfolio,
excluding the loans that are underlying Structured Transactions,
the maximum amount of losses we could recover under lender
recourse and indemnification agreements was $11.4 billion
and $12.1 billion, respectively; and at both dates, we had
$3.8 billion in pool insurance. See Institutional
Credit Risk Mortgage and Bond Insurers
and Mortgage Seller/Servicers for further
discussion about our mortgage loan insurers and seller/servicers.
Other forms of credit enhancements on single-family mortgage
loans include government guarantees, collateral (including cash
or high-quality marketable securities) pledged by a lender,
excess interest and subordinated security structures. At both
September 30, 2008 and December 31, 2007, in
connection with the single-family mortgage portfolio, excluding
the loans that are underlying Structured Transactions, the
maximum amount of losses we could recover under other forms of
credit enhancements was $0.5 billion. Table 42
provides information on credit enhancements and credit
performance for our Structured Transactions.
Table 42
Credit Enhancement, or CE, and Credit Performance of
Single-Family Structured
Transactions(1)
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Unpaid Principal Balance
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Credit
Losses(4)
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at September 30,
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Average CE
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Delinquency
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Nine Months Ended September 30,
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Structured Transaction Type
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2008
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2007
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Coverage(2)
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Rate(3)
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2008
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2007
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(in millions)
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(in millions)
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Pass-through
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$
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19,093
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(5)
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$
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13,401
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(5)
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%
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1.82%
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$
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40
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$
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1
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Overcollateralization
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5,313
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6,828
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19%
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17.26%
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2
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Total Structured Single-Family Transactions
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$
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24,406
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$
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20,229
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4%
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6.28%
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$
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42
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$
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1
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(1)
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Structured Transactions are a type of Structured Security where
we issue our guarantee in a securitization using private-label,
or non-Freddie Mac issued securities, as collateral. We issue
two types of Structured Transactions, those using securities
with senior/subordinated structures as well as other forms of
credit enhancements, which represent the amount of protection
against financial loss, and those without such structures which
we categorize as a pass-through transaction. Credit enhancement
percentages for each category are calculated based on
information available from third-party financial data providers
and exclude certain loan-level credit enhancements, such as
private mortgage insurance, that may also afford additional
protection to us.
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(2)
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Average credit enhancement represents a weighted-average
coverage percentage, is based on unpaid principal balances and
includes overcollateralization and subordination at
September 30, 2008.
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(3)
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Based on the number of loans that are past due 90 days or
more, or in the process of foreclosure at September 30,
2008.
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(4)
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Represents the total of our guaranteed payments that has
exceeded the remittances of the underlying collateral and
includes amounts charged-off during the period. Charge-offs are
the amount of contractual principal balance that has been
discharged in order to satisfy the mortgage and extinguish our
guarantee.
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(5)
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Includes $1.9 billion and $2.2 billion at
September 30, 2008 and 2007, respectively, that are
securitized FHA/VA loans, for which those agencies provide
recourse for 100% of qualifying losses associated with the loan.
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The delinquency rates associated with single-family Structured
Transactions categorized as pass-through structures have
increased significantly during 2008. Although our credit losses
to date have not been significant, we have increased our
provision for credit losses on these guarantees during the three
and nine months ended September 30, 2008. Our credit losses
on Structured Transactions during the nine months ended
September 30, 2008 are principally related to option ARM
loans underlying several of these transactions. Our loan loss
reserves associated with pass-through Structured Transactions
issued prior to January 1, 2008, in relation to the
outstanding UPB of these transactions were approximately 3.9%
and 1.3% as of September 30, 2008 and December 31,
2007, respectively. We are actively monitoring the credit
performance of the loans underlying these Structured
Transactions, particularly those originated during 2006 and
2007, and we will continue to work with the servicers of these
loans on their loss mitigation efforts in the remainder of 2008.
We may also use credit enhancements to mitigate risk of loss on
certain multifamily mortgages and revenue bonds, generally those
without recourse to the borrower. At September 30, 2008 and
December 31, 2007, in connection with multifamily loans as
well as PCs and Structured Securities backed by multifamily
mortgage loans, excluding the loans that are underlying
Structured Transactions, we had maximum coverage of
$3.0 billion and $1.2 billion, respectively.
Loss
Mitigation Activities
Loss mitigation activities are a key component of our strategy
for managing and resolving troubled assets and lowering credit
losses. Our single-family loss mitigation strategy emphasizes
early intervention in delinquent mortgages and providing
alternatives to foreclosure. Other single-family loss mitigation
activities include providing our single-family servicers with
default management tools designed to help them manage
non-performing loans more effectively and support fulfillment of
our mission by assisting borrowers in retaining homeownership.
Foreclosure alternatives are intended to reduce the number of
delinquent mortgages that proceed to foreclosure and,
ultimately, mitigate our total credit losses by reducing or
eliminating a portion of the costs related to foreclosed
properties and avoiding the credit loss in REO. In August 2008
we implemented a plan to maximize the efforts of our servicers
to execute foreclosure alternatives that included: (a) an
increase in fee compensation paid to servicers for each
repayment plan, loan modification or pre-foreclosure sale
executed, (b) extending the time period for foreclosures in
order to have an opportunity to negotiate repayment plans and
loan modifications in states with relatively fast foreclosure
processes, and (c) expanding our guidelines on the types of
loans eligible and conditions required for loan modification,
making alternatives available for a larger number of loans,
including those previously modified. Table 43 presents our
single-family foreclosure alternative volumes for the three and
nine months ended September 30, 2008 and 2007,
respectively.
Table 43
Single-Family Foreclosure
Alternatives(1)
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Three Months Ended
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Nine Months Ended
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September 30,
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September 30,
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2008
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2007
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2008
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2007
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(number of loans)
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Repayment plans
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10,270
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8,771
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33,348
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28,874
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Loan modifications
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8,456
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1,752
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17,389
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5,833
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Forbearance agreements
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828
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673
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2,430
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2,476
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Pre-foreclosure sales
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1,911
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504
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3,994
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1,438
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Foreclosure alternatives
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21,465
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11,700
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57,161
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38,621
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(1)
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Based on the single-family mortgage
portfolio, excluding non-Freddie Mac mortgage-related
securities, Structured Transactions and that portion of
Structured Securities that is backed by Ginnie Mae Certificates.
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Repayment plans are generally agreements completed with the
borrower outside of the original mortgage loan agreement which
allow for the borrower to separately repay all past due amounts,
including nominal interest. Loan modifications include either:
(a) those that result in a concession to the borrower,
which are situations in which we do not expect to recover the
full original principal or interest due under the original loan
terms, or (b) those that do not result in a concession to
the borrower, such as adding the past due amounts to the balance
of the loan or extending the term. The majority of our loan
modifications for the three and nine months ended
September 30, 2008 are those in which we have agreed to add
the past due amounts to the balance of the loan. Due to the
higher rates of delinquency in loans underlying our
single-family PCs, we are increasing our use of loan
modifications and pre-foreclosure sales in 2008 as compared to
2007. During the third quarter of 2008, in order to accelerate
our loss mitigation efforts we implemented a trial program to
proactively offer modifications on some of the delinquent loans
underlying our PCs that we identified using certain criteria
that indicate they are more likely to proceed to foreclosure.
This trial modification program did not follow our typical
modification process, where we evaluate the borrowers
capacity to meet the modified terms by reviewing qualifications
such as income and other indebtedness.
Large-scale loss mitigation programs through the use of
modifications that freeze or reduce the interest rate and
sometimes reduce the principal balance of a troubled
borrowers loan have become increasingly prevalent in the
market. For example, in October 2008, Bank of America
Corporation announced a program for modifications of certain
subprime and option arm loans originated by Countrywide
Financial Corporation prior to December 31, 2007. In
October 2008, the FHA implemented a significant program under
the HOPE for Homeowners Program, or H4H, that enables
refinancing of mortgages originated prior to January 1,
2008 for borrowers meeting certain criteria. On
November 11, 2008, our Conservator announced a broad-based
program, involving Fannie Mae, the FHA, FHFA, Freddie Mac and
twenty-seven seller/servicer partners, to offer a fast-track
loan modification to certain troubled borrowers. We will begin
offering loan modifications to troubled borrowers on
December 15, 2008 under this program. Such borrowers may be
eligible for modifications that would reduce the borrowers
monthly payment by capitalizing past due payments, reducing
interest rates, extending mortgage terms, forbearing principal
payments, or a combination of these options. We have not yet
estimated whether the program will significantly increase our
volume of loan modifications, because the success of the program
is dependent on the success of efforts to obtain qualifying
information from eligible delinquent borrowers. The resulting
modified loans are intended to provide these borrowers with an
affordable monthly payment, defined as one where the
borrowers monthly payment is no more than 38% of the
households monthly gross income. This streamlined
modification program offers another alternative and complements
existing loss modification programs we utilize to avoid
foreclosures.
In addition, as part of the EESA, FHFA, as Conservator, is
required to implement a mitigation program for delinquent
mortgage loans within our total mortgage portfolio in order to
maximize assistance for homeowners and encourage our servicers
to take advantage of H4H to mitigate foreclosures. FHFA must
develop and begin implementing a plan 60 days after the
date of enactment. We cannot predict the content of the plan
that FHFA may implement.
Credit
Performance
Delinquencies
We report single-family delinquency rate information based on
the number of loans that are 90 days or more past due and
those in the process of foreclosure. For multifamily loans, we
report delinquency rates based on net carrying values of
mortgage loans 90 days or more past due and those in the
process of foreclosure. Mortgage loans whose contractual terms
have been modified under agreement with the borrower are not
counted as delinquent for purposes of reporting delinquency
rates if the borrower is less than 90 days delinquent under
the modified terms. We include all the single-family loans that
we own and those that are collateral for our PCs and Structured
Securities for which we actively manage the credit risk.
Consequently, we exclude that portion of our Structured
Securities that are backed by Ginnie Mae Certificates and our
Structured Transactions. We exclude Structured Securities backed
by Ginnie Mae Certificates because these securities do not
expose us to meaningful amounts of credit risk due to the
guarantee provided on these securities by the
U.S. government. We exclude Structured Transactions from
the delinquency rates of our single-family mortgage portfolio
because these are backed
by non-Freddie Mac securities and consequently, we do not
service the underlying loans and do not perform primary loss
mitigation. Many of these securities are significantly credit
enhanced through subordination and are not representative of the
loans for which we have primary, or first loss, exposure.
Structured Transactions represented approximately 1% of our
total mortgage portfolio at both September 30, 2008 and
December 31, 2007. See NOTE 5: MORTGAGE LOANS
AND LOAN LOSS RESERVES Table 5.6
Delinquency Performance to our consolidated financial
statements for the delinquency performance of our single-family
and multifamily mortgage portfolios, including Structured
Transactions. Table 44 presents regional single-family
delinquency rates for non-credit enhanced loans, excluding those
underlying our Structured Transactions.
Table 44
Single-Family Delinquency Rates, excluding
Structured Transactions By
Region(1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2008
|
|
|
December 31, 2007
|
|
|
|
Percent of
|
|
|
|
|
|
Percent of
|
|
|
|
|
|
|
Unpaid Principal
|
|
|
Delinquency
|
|
|
Unpaid Principal
|
|
|
Delinquency
|
|
|
|
Balance(2)
|
|
|
Rate
|
|
|
Balance(2)
|
|
|
Rate
|
|
|
Northeast(1)
|
|
|
24
|
%
|
|
|
0.69
|
%
|
|
|
24
|
%
|
|
|
0.39
|
%
|
Southeast(1)
|
|
|
18
|
|
|
|
1.31
|
|
|
|
18
|
|
|
|
0.59
|
|
North
Central(1)
|
|
|
19
|
|
|
|
0.72
|
|
|
|
20
|
|
|
|
0.48
|
|
Southwest(1)
|
|
|
13
|
|
|
|
0.46
|
|
|
|
13
|
|
|
|
0.32
|
|
West(1)
|
|
|
26
|
|
|
|
1.08
|
|
|
|
25
|
|
|
|
0.42
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
100
|
%
|
|
|
|
|
|
|
100
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total non-credit-enhanced all regions
|
|
|
|
|
|
|
0.87
|
|
|
|
|
|
|
|
0.45
|
|
Total credit-enhanced all regions
|
|
|
|
|
|
|
2.75
|
|
|
|
|
|
|
|
1.62
|
|
Total single-family mortgage portfolio, excluding Structured
Transactions
|
|
|
|
|
|
|
1.22
|
|
|
|
|
|
|
|
0.65
|
|
|
|
(1)
|
Presentation of non-credit-enhanced
delinquency rates with the following regional designation: West
(AK, AZ, CA, GU, HI, ID, MT, NV, OR, UT, WA); Northeast (CT, DE,
DC, MA, ME, MD, NH, NJ, NY, PA, RI, VT, VA, WV); North Central
(IL, IN, IA, MI, MN, ND, OH, SD, WI); Southeast (AL, FL, GA, KY,
MS, NC, PR, SC, TN, VI); and Southwest (AR, CO, KS, LA, MO, NE,
NM, OK, TX, WY).
|
(2)
|
Based on mortgage loans in our
retained portfolio and total guaranteed PCs and Structured
Securities issued, excluding that portion of Structured
Securities that is backed by Ginnie Mae Certificates.
|
During 2007 and continuing in the nine months ended
September 30, 2008, home prices have declined broadly
across the U.S. In some geographical areas, particularly in the
West and North Central regions and Florida, these declines have
been combined with increased rates of unemployment and weakness
in home sales, which has resulted in significant increases in
delinquency rates throughout the nine months ended
September 30, 2008. These increases in delinquency rates
have been more severe in the Southeast, West and Northeast
regions for the nine months ended September 30, 2008,
particularly in the states of California, Florida, Nevada and
Arizona. For example, as of September 30, 2008,
single-family loans in the state of Florida comprise 7% of our
single-family mortgage portfolio; however, this state makes up
more than 20% of the delinquent loans in our single-family
mortgage portfolio, based on unpaid principal balances.
Increases in delinquency rates occurred in all product types
during the nine months ended September 30, 2008, but were
most significant for interest-only,
Alt-A and
ARM mortgage loans. Delinquency rates for interest-only and
option ARM products, which together represented approximately
10% of our total single-family mortgage portfolio at
September 30, 2008, increased to 4.10% and 5.38% at
September 30, 2008, respectively, compared with 2.03% and
2.24% at December 31, 2007, respectively. In support of our
servicers who are increasing their efforts to assist troubled
borrowers avoid foreclosure, we announced in July 2008 that we
have extended the timeframe for completion of the foreclosure
process in certain states. In addition, many states, including
Florida, already have relatively long foreclosure processes. The
extension of our loss mitigation efforts as well as longer
process timeframes of certain states experiencing significant
home price declines has, in part, caused our delinquency rates
to increase more severely in 2008. Until economic conditions
moderate and fundamentals of the housing market improve, we
expect our delinquency rates to continue to rise.
Performing
and Non-Performing Assets
We have classified single-family loans in our total mortgage
portfolio that are past due for 90 days or more (seriously
delinquent) or whose contractual terms have been modified as a
troubled debt restructuring due to the financial difficulties of
the borrower as non-performing assets. Similarly, multifamily
loans are classified as non-performing assets if they are
90 days or more past due (seriously delinquent), if
collectibility of principal and interest is not reasonably
assured based on an individual loan level assessment, or if
their contractual terms have been modified due to financial
difficulties of the borrower. Table 45 provides detail of
performing and non-performing assets within our total mortgage
portfolio.
Table 45
Performing and Non-Performing
Assets(1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2008
|
|
|
|
|
|
|
Non-Performing Assets
|
|
|
|
|
|
|
|
|
|
Less Than
|
|
|
|
|
|
|
|
|
|
Performing
|
|
|
90 Days
|
|
|
Seriously
|
|
|
|
|
|
|
Assets(2)
|
|
|
Past
Due(3)
|
|
|
Delinquent(4)
|
|
|
Total
|
|
|
|
(in millions)
|
|
|
Mortgage loans in the retained portfolio
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Multifamily
|
|
$
|
68,013
|
|
|
$
|
52
|
|
|
$
|
|
|
|
$
|
68,065
|
|
Multifamily troubled debt restructurings
|
|
|
|
|
|
|
241
|
|
|
|
|
|
|
|
241
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subtotal, mortgage loans in our retained portfolio, multifamily
|
|
|
68,013
|
|
|
|
293
|
|
|
|
|
|
|
|
68,306
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Single-family
|
|
|
21,160
|
|
|
|
|
|
|
|
1,034
|
|
|
|
22,194
|
|
Single-family loans purchased under financial
guarantees(5)
|
|
|
4,206
|
|
|
|
|
|
|
|
2,529
|
|
|
|
6,735
|
|
Single-family troubled debt restructurings
|
|
|
|
|
|
|
2,330
|
|
|
|
747
|
|
|
|
3,077
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subtotal, mortgage loans in our retained portfolio, single-family
|
|
|
25,366
|
|
|
|
2,330
|
|
|
|
4,310
|
|
|
|
32,006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subtotal, mortgage loans in our retained portfolio
|
|
|
93,379
|
|
|
|
2,623
|
|
|
|
4,310
|
|
|
|
100,312
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Guaranteed PCs and Structured Securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Multifamily(6)
|
|
|
14,463
|
|
|
|
51
|
|
|
|
12
|
|
|
|
14,526
|
|
Single-family(6)
|
|
|
1,770,159
|
|
|
|
|
|
|
|
23,369
|
|
|
|
1,793,528
|
|
Structured Securities backed by non-Freddie Mac mortgage-related
securities(7)
|
|
|
24,048
|
|
|
|
|
|
|
|
2,306
|
|
|
|
26,354
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subtotal, guaranteed PCs and Structured Securities
|
|
|
1,808,670
|
|
|
|
51
|
|
|
|
25,687
|
|
|
|
1,834,408
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
REO, net
|
|
|
|
|
|
|
|
|
|
|
3,224
|
|
|
|
3,224
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Totals
|
|
$
|
1,902,049
|
|
|
$
|
2,674
|
|
|
$
|
33,221
|
|
|
$
|
1,937,944
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2007
|
|
|
|
|
|
|
Non-Performing Assets
|
|
|
|
|
|
|
|
|
|
Less Than
|
|
|
|
|
|
|
|
|
|
Performing
|
|
|
90 Days
|
|
|
Seriously
|
|
|
|
|
|
|
Assets(2)
|
|
|
Past
Due(3)
|
|
|
Delinquent(4)
|
|
|
Total
|
|
|
|
(in millions)
|
|
|
Mortgage loans in the retained portfolio
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Multifamily
|
|
$
|
57,295
|
|
|
$
|
|
|
|
$
|
3
|
|
|
$
|
57,298
|
|
Multifamily troubled debt restructurings
|
|
|
|
|
|
|
264
|
|
|
|
7
|
|
|
|
271
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subtotal, mortgage loans in our retained portfolio, multifamily
|
|
|
57,295
|
|
|
|
264
|
|
|
|
10
|
|
|
|
57,569
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Single-family
|
|
|
13,591
|
|
|
|
|
|
|
|
698
|
|
|
|
14,289
|
|
Single-family loans purchased under financial
guarantees(5)
|
|
|
2,399
|
|
|
|
|
|
|
|
4,602
|
|
|
|
7,001
|
|
Single-family troubled debt restructurings
|
|
|
|
|
|
|
2,690
|
|
|
|
609
|
|
|
|
3,299
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subtotal, mortgage loans in our retained portfolio, single-family
|
|
|
15,990
|
|
|
|
2,690
|
|
|
|
5,909
|
|
|
|
24,589
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subtotal, mortgage loans in our retained portfolio
|
|
|
73,285
|
|
|
|
2,954
|
|
|
|
5,919
|
|
|
|
82,158
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Guaranteed PCs and Structured Securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Multifamily(6)
|
|
|
10,607
|
|
|
|
51
|
|
|
|
|
|
|
|
10,658
|
|
Single-family(6)
|
|
|
1,700,543
|
|
|
|
|
|
|
|
6,141
|
|
|
|
1,706,684
|
|
Structured Securities backed by non-Freddie Mac mortgage-related
securities(7)
|
|
|
19,846
|
|
|
|
|
|
|
|
1,645
|
|
|
|
21,491
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subtotal, guaranteed PCs and Structured Securities
|
|
|
1,730,996
|
|
|
|
51
|
|
|
|
7,786
|
|
|
|
1,738,833
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
REO, net
|
|
|
|
|
|
|
|
|
|
|
1,736
|
|
|
|
1,736
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Totals
|
|
$
|
1,804,281
|
|
|
$
|
3,005
|
|
|
$
|
15,441
|
|
|
$
|
1,822,727
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
Balances exclude mortgage loans and
mortgage-related securities traded, but not yet settled. For PCs
and Structured Securities, the balance reflects reported
security balances and not unpaid principal of the underlying
mortgage loans. Mortgage loans held in our retained portfolio
reflect the unpaid principal balances of the loan.
|
(2)
|
Consists of single-family and
multifamily loans that are less than 90 days past due and
not classified as a troubled debt restructuring.
|
(3)
|
Includes single-family loans that
were previously reported as seriously delinquent and for which
the original loan terms have been modified.
|
(4)
|
Consists of loans 90 days or
more delinquent as well as those in the process of foreclosure,
at period end. Delinquency status does not apply to REO;
however, REO is included in non-performing assets.
|
(5)
|
Represent those loans purchased
from the mortgage pools underlying our PCs, Structured
Securities or long-term standby agreements due to the
borrowers delinquency. Once we purchase a loan under our
financial guarantee, it is placed on non-accrual status as long
as it remains greater than 90 days past due.
|
(6)
|
Excludes our Structured Securities
that we classify separately as Structured Transactions.
|
(7)
|
Consist of our single-family and
multifamily Structured Transactions and that portion of
Structured Securities that is backed by Ginnie Mae Certificates.
However, all Structured Securities backed by Ginnie Mae
Certificates are shown as performing assets regardless of
payment status.
|
The amount of our non-performing assets increased 95% during the
nine months ended September 30, 2008, to approximately
$35.9 billion, from $18.4 billion at December 31,
2007, due to continued deterioration in single-family housing
market fundamentals which led to significant increases in the
delinquency rate and delinquency transition rates during the
nine months ended September 30, 2008 as compared to rates
in 2007. The delinquency transition rate is the percentage of
delinquent loans that proceed to foreclosure or are modified as
troubled debt restructurings. The changes in both delinquency
rates and delinquency transition rates, as compared to our
historical experience, have been progressively worse for loans
originated in 2006 and 2007. These trends are, in part, due to
our greater purchase volume of interest-only and
Alt-A
mortgages during those years. Interest-only and
Alt-A
mortgage loans are also concentrated in the West region. The
West region comprised 26% of the unpaid principal balances of
our single-family mortgage portfolio as of
September 30, 2008, but accounted for approximately 30% of
new REO acquisitions during the nine months ended
September 30, 2008. Florida is the state with the highest
number of delinquencies in our single-family mortgage portfolio
as of September 30, 2008, although these have not yet
evidenced themselves in REO acquisitions due to the longer
duration of Floridas foreclosure process. The balance of
our REO, net, increased 86% during the nine months ended
September 30, 2008. Loans originated in 2006 and 2007,
interest-only and
Alt-A loans
and loans in the West and North Central regions have also been
affected by certain macro-economic factors, such as significant
increases in unemployment rates and declines in home prices.
Until nationwide home prices return to historical appreciation
rates and selected regional economies improve, we expect further
increases in our non-performing assets.
Loans
Purchased Under Financial Guarantees
As securities administrator, we are required to purchase a
mortgage loan from a mortgage pool if a court of competent
jurisdiction or a federal government agency, duly authorized to
oversee or regulate our mortgage purchase business, determines
that our purchase of the mortgage was unauthorized and a cure is
not practicable without unreasonable effort or expense, or if
such a court or government agency requires us to repurchase the
mortgage. Additionally, we are required to purchase all
convertible ARMs when the borrower exercises the option to
convert the interest rate from an adjustable rate to a fixed
rate; and in the case of balloon/reset loans, shortly before the
mortgage reaches its scheduled balloon reset date. For the nine
months ended September 30, 2008 and 2007, we repurchased
$1.7 billion and $297 million, respectively, of such
convertible ARMs and balloon/reset loans, which increased in
2008 due to higher volumes of convertible ARM loans securitized
in the last three years.
As guarantor, we also have the right to purchase mortgages that
back our PCs and Structured Securities (other than Structured
Transactions) from the underlying loan pools when they are
significantly past due. This right to repurchase collateral is
known as our repurchase option. Through November 2007, our
general practice was to purchase the mortgage loans out of PCs
after the loans became 120 days delinquent. Effective
December 2007, we no longer automatically purchase loans from PC
pools once they become 120 days delinquent, but rather, we
purchase and effectively liquidate the loans from PCs when:
(a) the loans are modified; (b) foreclosure sales
occur; (c) the loans have been delinquent for
24 months; or (d) the loans have been 120 days
delinquent and the cost of guarantee payments to PC holders,
including advances of interest at the PC coupon, exceeds the
expected cost of holding the nonperforming mortgage in our
retained portfolio. Consequently, we purchased fewer impaired
loans under our repurchase option for the three and nine months
ended September 30, 2008 as compared to the three and nine
months ended September 30, 2007. We record at fair value
loans that we purchase in connection with our performance under
our financial guarantees and record losses on loans purchased on
our consolidated statements of income in order to reduce our net
investment in acquired loans to their fair value.
Table 46 presents activities related to loans purchased
under financial guarantees for the three and nine months ended
September 30, 2008 and 2007.
Table 46
Changes in Loans Purchased Under Financial
Guarantees(1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
|
|
|
2008
|
|
|
2007
|
|
|
|
Unpaid
|
|
|
Purchase
|
|
|
Loan Loss
|
|
|
Net
|
|
|
Unpaid
|
|
|
Purchase
|
|
|
Loan Loss
|
|
|
Net
|
|
|
|
Principal Balance
|
|
|
Discount
|
|
|
Reserves
|
|
|
Investment
|
|
|
Principal Balance
|
|
|
Discount
|
|
|
Reserves
|
|
|
Investment
|
|
|
|
(in millions)
|
|
|
Beginning balance
|
|
$
|
6,099
|
|
|
$
|
(1,386
|
)
|
|
$
|
(6
|
)
|
|
$
|
4,707
|
|
|
$
|
4,716
|
|
|
$
|
(621
|
)
|
|
$
|
(2
|
)
|
|
$
|
4,093
|
|
Purchases of loans
|
|
|
1,248
|
|
|
|
(385
|
)
|
|
|
|
|
|
|
863
|
|
|
|
2,615
|
|
|
|
(794
|
)
|
|
|
|
|
|
|
1,821
|
|
Provision for credit losses
|
|
|
|
|
|
|
|
|
|
|
(50
|
)
|
|
|
(50
|
)
|
|
|
|
|
|
|
|
|
|
|
(11
|
)
|
|
|
(11
|
)
|
Principal repayments
|
|
|
(183
|
)
|
|
|
68
|
|
|
|
1
|
|
|
|
(114
|
)
|
|
|
(368
|
)
|
|
|
51
|
|
|
|
|
|
|
|
(317
|
)
|
Troubled debt
restructurings(2)
|
|
|
(57
|
)
|
|
|
17
|
|
|
|
|
|
|
|
(40
|
)
|
|
|
(157
|
)
|
|
|
32
|
|
|
|
|
|
|
|
(125
|
)
|
Foreclosures, transferred to REO
|
|
|
(372
|
)
|
|
|
116
|
|
|
|
1
|
|
|
|
(255
|
)
|
|
|
(715
|
)
|
|
|
122
|
|
|
|
1
|
|
|
|
(592
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending balance
|
|
$
|
6,735
|
|
|
$
|
(1,570
|
)
|
|
$
|
(54
|
)
|
|
$
|
5,111
|
|
|
$
|
6,091
|
|
|
$
|
(1,210
|
)
|
|
$
|
(12
|
)
|
|
$
|
4,869
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30,
|
|
|
|
2008
|
|
|
2007
|
|
|
|
Unpaid
|
|
|
Purchase
|
|
|
Loan Loss
|
|
|
Net
|
|
|
Unpaid
|
|
|
Purchase
|
|
|
Loan Loss
|
|
|
Net
|
|
|
|
Principal Balance
|
|
|
Discount
|
|
|
Reserves
|
|
|
Investment
|
|
|
Principal Balance
|
|
|
Discount
|
|
|
Reserves
|
|
|
Investment
|
|
|
|
(in millions)
|
|
|
Beginning balance
|
|
$
|
7,001
|
|
|
$
|
(1,767
|
)
|
|
$
|
(2
|
)
|
|
$
|
5,232
|
|
|
$
|
2,983
|
|
|
$
|
(220
|
)
|
|
$
|
|
|
|
$
|
2,763
|
|
Purchases of loans
|
|
|
2,394
|
|
|
|
(630
|
)
|
|
|
|
|
|
|
1,764
|
|
|
|
6,263
|
|
|
|
(1,392
|
)
|
|
|
|
|
|
|
4,871
|
|
Provision for credit losses
|
|
|
|
|
|
|
|
|
|
|
(55
|
)
|
|
|
(55
|
)
|
|
|
|
|
|
|
|
|
|
|
(13
|
)
|
|
|
(13
|
)
|
Principal repayments
|
|
|
(693
|
)
|
|
|
207
|
|
|
|
1
|
|
|
|
(485
|
)
|
|
|
(1,074
|
)
|
|
|
118
|
|
|
|
|
|
|
|
(956
|
)
|
Troubled debt
restructurings(2)
|
|
|
(85
|
)
|
|
|
24
|
|
|
|
|
|
|
|
(61
|
)
|
|
|
(482
|
)
|
|
|
70
|
|
|
|
|
|
|
|
(412
|
)
|
Foreclosures, transferred to REO
|
|
|
(1,882
|
)
|
|
|
596
|
|
|
|
2
|
|
|
|
(1,284
|
)
|
|
|
(1,599
|
)
|
|
|
214
|
|
|
|
1
|
|
|
|
(1,384
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending balance
|
|
$
|
6,735
|
|
|
$
|
(1,570
|
)
|
|
$
|
(54
|
)
|
|
$
|
5,111
|
|
|
$
|
6,091
|
|
|
$
|
(1,210
|
)
|
|
$
|
(12
|
)
|
|
$
|
4,869
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
Consist of seriously delinquent
loans purchased in performance of our financial guarantees and
in accordance with Statement of Position
No. 03-3,
Accounting for Certain Loans or Debt Securities
Acquired in a Transfer, or
SOP 03-3.
|
(2)
|
Consist of loans that have
transitioned into troubled debt restructurings during the stated
period. This excludes modifications involving capitalization, or
addition, of past due amounts to the balance of the loan to
return to current status during 2008.
|
The unpaid principal balance of non-performing loans that have
been purchased under our financial guarantees and that have not
been modified under troubled debt restructurings decreased
approximately 4% for the nine months ended September 30,
2008. For the nine months ended September 30, 2008, we
purchased approximately $2.4 billion in unpaid principal
balances of these loans with a fair value at acquisition of
$1.8 billion. The volume of these repurchases has
significantly decreased in the nine months ended
September 30, 2008, due to our change in repurchase
practice in December 2007. However, there was $17.8 billion
unpaid principal balance of loans remaining in our PCs and
Structured Securities as of September 30, 2008 that were
greater than 120 days past due for which we have not
exercised our repurchase option.
The loans acquired under our financial guarantees for the nine
months ended September 30, 2008 added $630 million of
purchase discount, which consists of $207 million that was
previously recorded on our consolidated balance sheets as loan
loss reserve or guarantee obligation and $423 million of
losses on loans purchased as shown on our consolidated
statements of income for the nine months ended
September 30, 2008. We expect that we will continue to
incur losses on the purchase of non-performing loans in 2008.
However, the volume and severity of these losses is dependent on
many factors, including the effects of our change in practice
for repurchases, regional changes in home prices and the volume
of home sales.
Recoveries on loans impaired upon purchase represent the
recapture into income of previously recognized losses on loans
purchased and provision for credit losses associated with
purchases of delinquent loans from our PCs and Structured
Securities in conjunction with our guarantee activities.
Recoveries occur when a non-performing loan is repaid in full or
when at the time of foreclosure the estimated fair value of the
acquired property, less costs to sell, exceeds the carrying
value of the loan. During the nine months ended
September 30, 2008 and 2007, we recognized recoveries on
loans impaired upon purchase of $438 million and
$232 million, respectively. For impaired loans where the
borrower has made required payments that return the loan to less
than 90 days past due, the basis adjustments are accreted into
interest income over time as periodic payments are received.
As of September 30, 2008, the cure rate for non-performing
loans that we purchased out of PCs during 2008, 2007 and 2006
was approximately 74%, 41% and 56%, respectively. The cure rate
is the percentage of non-performing loans purchased with or
without modification from PCs under our financial guarantee that
have returned to performing status or have been paid off,
divided by the total non-performing loans purchased from PCs
under our financial guarantee. A modified mortgage loan is
classified as performing to the extent it is 90 days or
less past due. We believe, based on our historical experience
with 2006 and 2007 purchases, as well as our access to credit
enhancement remedies, that we will continue to recognize
recoveries in 2008 on impaired loans purchased during 2007 and
2006. Our cure rate for non-performing loans purchased out of
PCs during the nine months ended September 30, 2008 is not
directly comparable to prior year rates due to
the impact of our operational changes for purchasing delinquent
loans made in December 2007. As a result of these operational
changes, we have principally purchased impaired loans from our
PC pools that have been modified, while most delinquent loans
have remained in the PCs throughout the loss mitigation and
foreclosure process. As a result, we began purchasing fewer
loans and an increasing number of foreclosed single-family
properties out of PC pools during the nine months ended
September 30, 2008 as compared to the same period in 2007.
As of September 30, 2008, our cure rates for 2007
delinquent loan purchases reflect a higher rate of these loans
remaining delinquent when compared to the status of 2006
impaired loan purchases. We believe that these cure rate
statistics reflect both the lag effect inherent in delinquent
loans as well as the poorer performance of loans that were
originated during 2007. In July 2008, consistent with most
mortgage investors and servicers, we extended the timeframe to
complete the foreclosure process and expanded our use of loan
modifications and other alternatives to avoid borrower
foreclosures and reduce defaults. Consequently, we believe that
the balance of our repurchased loans remaining delinquent will
continue to decline since these loans do not fully reflect our
current modification efforts because of the significant lag
between the time a loan is purchased from our PCs and the
conclusion of the loan resolution process. We have extensively
increased our mitigation activity, including modifications where
we agree to reduce interest on the loan, or to add delinquent
amounts to the balance of the loan to bring the borrower
current. However, these recent efforts only partially offset the
volume of our delinquent loan repurchases in 2008.
As discussed above, beginning in December 2007, we significantly
decreased our purchases of delinquent loans from our PCs.
Although this action decreased the number of loans we purchase
it had no effect on our loss mitigation efforts nor our ultimate
credit losses and cure rates. However, this will continue to
have significant impacts to our cure rate statistics for the
loans we purchase under financial guarantees in 2008, because
loans that in prior years would have been purchased from the
pools after a serious delinquency will now generally remain in
the pools until the loans reperform, are modified or are
foreclosed. During 2008, other loans for which foreclosure sales
occur or that have been delinquent for 24 months are
purchased from the pools at dates generally later than before.
Table 47 provides detail by region for REO activity. Our
REO activity consists almost entirely of single-family
residential properties. Consequently, our regional REO
acquisition trends generally follow a pattern that is similar
to, but lags, that of regional delinquency trends of the
single-family mortgages underlying our PCs and Structured
Securities.
Table 47
REO Activity by
Region(1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
|
|
(number of units)
|
|
|
REO Inventory
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Beginning property inventory
|
|
|
22,029
|
|
|
|
10,260
|
|
|
|
14,394
|
|
|
|
8,785
|
|
Properties acquired by region:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Northeast
|
|
|
1,485
|
|
|
|
644
|
|
|
|
4,062
|
|
|
|
1,532
|
|
Southeast
|
|
|
3,231
|
|
|
|
1,276
|
|
|
|
7,828
|
|
|
|
3,386
|
|
North Central
|
|
|
3,994
|
|
|
|
2,376
|
|
|
|
10,576
|
|
|
|
6,591
|
|
Southwest
|
|
|
1,617
|
|
|
|
951
|
|
|
|
4,452
|
|
|
|
2,848
|
|
West
|
|
|
5,556
|
|
|
|
658
|
|
|
|
11,314
|
|
|
|
1,199
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total properties acquired
|
|
|
15,883
|
|
|
|
5,905
|
|
|
|
38,232
|
|
|
|
15,556
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Properties disposed by region:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Northeast
|
|
|
(1,121
|
)
|
|
|
(354
|
)
|
|
|
(2,743
|
)
|
|
|
(1,036
|
)
|
Southeast
|
|
|
(2,304
|
)
|
|
|
(993
|
)
|
|
|
(5,663
|
)
|
|
|
(2,896
|
)
|
North Central
|
|
|
(2,708
|
)
|
|
|
(1,901
|
)
|
|
|
(7,648
|
)
|
|
|
(5,517
|
)
|
Southwest
|
|
|
(1,343
|
)
|
|
|
(831
|
)
|
|
|
(3,757
|
)
|
|
|
(2,602
|
)
|
West
|
|
|
(2,344
|
)
|
|
|
(170
|
)
|
|
|
(4,723
|
)
|
|
|
(374
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total properties disposed
|
|
|
(9,820
|
)
|
|
|
(4,249
|
)
|
|
|
(24,534
|
)
|
|
|
(12,425
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending property inventory
|
|
|
28,092
|
|
|
|
11,916
|
|
|
|
28,092
|
|
|
|
11,916
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
See Table 44
Single-Family Delinquency Rates, excluding
Structured Transactions By Region for a
description of these regions.
|
Our REO property inventories increased 95% during the nine
months ended September 30, 2008 reflecting the impact of
the weakening single-family housing market, particularly in the
North Central, West, Northeast and Southeast regions. The impact
of a national decline in single-family home prices and a
decrease in the volume of home sales activity during 2008
lessened the alternatives to foreclosure for homeowners exposed
to temporary deterioration in their financial condition.
Increases in our single-family REO acquisitions have been most
significant in the states of California, Arizona, Michigan,
Virginia, Florida and Nevada. The mortgage loans in these states
have had higher average loan balances due to home price
appreciation of the last several years, prior to the most recent
decreases in home prices. The West region represents
approximately 30% of the new REO acquisitions during the nine
months ended September 30, 2008, and based on the number of
units, the highest concentration in that region is in the state
of California. At September 30, 2008, our REO
inventory in California was approximately 30% of our total REO
inventory. California has accounted for an increasing amount of
our credit losses and approximately 34% of our total credit
losses in the three months ended September 30, 2008.
Although the composition of interest-only and
Alt-A loans
in our single-family mortgage portfolio was approximately 9% at
December 31, 2007, the number of our REO acquisitions that
had been secured by either of these loan types represented more
than 47% of our total REO acquisitions, based on unpaid
principal balance at foreclosure, during the nine months ended
September 30, 2008. Collectively, interest-only and
Alt-A
mortgage loans contributed to more than 50% of our credit losses
in the nine months ended September 30, 2008.
Credit
Loss Performance
Some loans that are delinquent or in foreclosure result in
credit losses. Table 48 provides detail on our credit loss
performance associated with mortgage loans underlying our
guaranteed PCs and Structured Securities as well as mortgage
loans in our Retained Portfolio.
Table 48
Credit Loss Performance
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
|
|
(dollars in millions)
|
|
|
REO BALANCES, NET:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Single-family
|
|
$
|
3,200
|
|
|
$
|
1,321
|
|
|
$
|
3,200
|
|
|
$
|
1,321
|
|
Multifamily
|
|
|
24
|
|
|
|
|
|
|
|
24
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
3,224
|
|
|
$
|
1,321
|
|
|
$
|
3,224
|
|
|
$
|
1,321
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
REO OPERATIONS EXPENSE:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Single-family
|
|
$
|
(333
|
)
|
|
$
|
(50
|
)
|
|
$
|
(806
|
)
|
|
$
|
(80
|
)
|
Multifamily
|
|
|
|
|
|
|
(1
|
)
|
|
|
|
|
|
|
(1
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
(333
|
)
|
|
$
|
(51
|
)
|
|
$
|
(806
|
)
|
|
$
|
(81
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CHARGE-OFFS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Single-family:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Charge-offs,
gross(1)
(including $1,092 million, $92 million,
$2,018 million and $258 million relating to loan loss
reserves, respectively)
|
|
$
|
(1,173
|
)
|
|
$
|
(133
|
)
|
|
$
|
(2,350
|
)
|
|
$
|
(340
|
)
|
Recoveries(2)
|
|
|
236
|
|
|
|
61
|
|
|
|
548
|
|
|
|
161
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Single-family, net
|
|
|
(937
|
)
|
|
|
(72
|
)
|
|
|
(1,802
|
)
|
|
|
(179
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Multifamily:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Charge-offs,
gross(1)
(including $5 million, $3 million, $5 million and
$3 million relating to loan loss reserves, respectively)
|
|
|
(5
|
)
|
|
|
(3
|
)
|
|
|
(5
|
)
|
|
|
(3
|
)
|
Recoveries(2)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Multifamily, net
|
|
|
(5
|
)
|
|
|
(3
|
)
|
|
|
(5
|
)
|
|
|
(3
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Charge-offs:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Charge-offs,
gross(1)
(including $1,097 million, $95 million,
$2,023 million and $261 million relating to loan loss
reserves, respectively)
|
|
|
(1,178
|
)
|
|
|
(136
|
)
|
|
|
(2,355
|
)
|
|
|
(343
|
)
|
Recoveries(2)
|
|
|
236
|
|
|
|
61
|
|
|
|
548
|
|
|
|
161
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total charge-offs, net
|
|
$
|
(942
|
)
|
|
$
|
(75
|
)
|
|
$
|
(1,807
|
)
|
|
$
|
(182
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CREDIT
LOSSES(3)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Single-family
|
|
$
|
(1,270
|
)
|
|
$
|
(122
|
)
|
|
$
|
(2,608
|
)
|
|
$
|
(259
|
)
|
Multifamily
|
|
|
(5
|
)
|
|
|
(4
|
)
|
|
|
(5
|
)
|
|
|
(4
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
(1,275
|
)
|
|
$
|
(126
|
)
|
|
$
|
(2,613
|
)
|
|
$
|
(263
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total in basis
points(4)
(annualized)
|
|
|
26.8
|
|
|
|
3.0
|
|
|
|
18.7
|
|
|
|
2.2
|
|
|
|
(1)
|
Represent the amount of the unpaid
principal balance of a loan that has been discharged in order to
remove the loan from our retained portfolio at the time of
resolution, regardless of when the impact of the credit loss was
recorded on our consolidated statements of income through the
provision for credit losses or losses on loans purchased. The
amount of charge-offs for credit loss performance is generally
calculated as the contractual balance of a loan at the date it
is discharged less the estimated value in final disposition.
|
(2)
|
Recoveries of charge-offs primarily
result from foreclosure alternatives and REO acquisitions on
loans where a share of default risk has been assumed by mortgage
insurers, servicers or other third parties through credit
enhancements.
|
(3)
|
Equal to REO operations expense
plus charge-offs, net. Excludes interest forgone on
nonperforming loans, which reduces our net interest income but
is not reflected in our total credit losses. In addition,
excludes other-than-temporary impairment losses resulting from
deterioration in the credit quality of our mortgage-related
securities.
|
(4)
|
Calculated as annualized credit
losses divided by the average total mortgage portfolio,
excluding non-Freddie Mac mortgage-related securities and that
portion of Structured Securities that is backed by Ginnie Mae
Certificates.
|
Our credit loss performance is a historic metric that measures
losses at the conclusion of the loan and related collateral
resolution process. There is a significant lag in time from the
implementation of loss mitigation activities and the final
resolution of delinquent mortgage loans as well as the
disposition of nonperforming assets. As indicated by the
significant increase in our loan loss reserve during the nine
months ended September 30, 2008, we expect our charge-offs
will continue to increase in the remainder of 2008 and
throughout 2009. Our credit loss performance does not include
our provision for credit losses and losses on loans purchased.
We expect our credit losses to continue to increase during 2008,
as market conditions, such as home prices and the rate of home
sales, continue to deteriorate. As part of our disclosure
commitments
with FHFA, we disclose our estimate of credit loss sensitivity
on a quarterly basis, disclosing the present value of the change
in expected future credit losses from our issued single-family
guaranteed PCs and Structured Securities resulting from an
immediate 5% decline in home prices for the entire United
States. Our estimate of this measure of sensitivity, after
considering recoveries of credit enhancements such as mortgage
insurance and our assumptions about home price appreciation
after the initial 5% decline, was $5.2 billion and
$3.1 billion as of September 30, 2008 and
December 31, 2007, respectively. Our estimate of the actual
decline in national average home prices based on our measure,
which uses data on homes underlying our single-family mortgage
portfolio was 11% for the twelve months ended September 30,
2008.
Single-family charge-offs, gross, for the nine months ended
September 2008 increased to $2.4 billion compared to
$340 million for the nine months ended September 30,
2007, primarily due to an increase in the volume of REO
properties acquired at foreclosure and continued deterioration
of residential real estate markets in regional areas. The volume
of single-family REO additions increased 146% for the nine
months ended September 30, 2008 as compared to the nine
months ended September 30, 2007. The severity of
charge-offs during the nine months ended September 30, 2008
has increased due to declines in regional housing markets
resulting in higher per-property losses. Our per-property loss
severity during 2008 has been greatest in those areas that
experienced the fastest increases in property values during 2000
through 2006, such as California, Florida, Virginia, Nevada and
Arizona. In addition, although
Alt-A loans
comprise approximately 10% of those underlying our single-family
mortgage portfolio as of September 30, 2008, these loans
have contributed approximately 50% of our credit losses during
the nine months ended September 30, 2008. Table 49
presents the credit loss concentration of
Alt-A loans
in our single-family portfolio as of September 30, 2008 and
2007, respectively.
Table 49 Single-Family
Credit Loss Concentration
Analysis(1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unpaid Principal Balance
|
|
|
|
As of September 30,
|
|
|
|
2008
|
|
|
2007
|
|
Composition
|
|
Alt-A
|
|
|
Non
Alt-A
|
|
|
Alt-A
|
|
|
Non
Alt-A
|
|
|
|
(in billions)
|
|
|
Year of original purchase
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
$
|
15
|
|
|
$
|
222
|
|
|
|
N/A
|
|
|
|
N/A
|
|
2007
|
|
|
59
|
|
|
|
297
|
|
|
$
|
46
|
|
|
$
|
208
|
|
2006
|
|
|
54
|
|
|
|
228
|
|
|
|
60
|
|
|
|
265
|
|
All other
|
|
|
61
|
|
|
|
915
|
|
|
|
51
|
|
|
|
1,049
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
189
|
|
|
$
|
1,662
|
|
|
$
|
157
|
|
|
$
|
1,522
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
State
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CA
|
|
$
|
42
|
|
|
$
|
213
|
|
|
$
|
37
|
|
|
$
|
180
|
|
FL
|
|
|
18
|
|
|
|
106
|
|
|
|
16
|
|
|
|
98
|
|
AZ
|
|
|
7
|
|
|
|
44
|
|
|
|
7
|
|
|
|
40
|
|
VA
|
|
|
6
|
|
|
|
55
|
|
|
|
5
|
|
|
|
50
|
|
NV
|
|
|
5
|
|
|
|
18
|
|
|
|
5
|
|
|
|
16
|
|
GA
|
|
|
6
|
|
|
|
55
|
|
|
|
5
|
|
|
|
50
|
|
MI
|
|
|
3
|
|
|
|
58
|
|
|
|
3
|
|
|
|
59
|
|
MD
|
|
|
5
|
|
|
|
47
|
|
|
|
4
|
|
|
|
42
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subtotal
|
|
|
92
|
|
|
|
596
|
|
|
|
82
|
|
|
|
535
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
All other states
|
|
|
97
|
|
|
|
1,066
|
|
|
|
75
|
|
|
|
987
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
189
|
|
|
$
|
1,662
|
|
|
$
|
157
|
|
|
$
|
1,522
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Credit
Losses(2)
|
|
|
|
For the Nine Months Ended September 30,
|
|
|
|
2008
|
|
|
2007
|
|
Composition
|
|
Alt-A
|
|
|
Non
Alt-A
|
|
|
Alt-A
|
|
|
Non
Alt-A
|
|
|
|
(in millions)
|
|
|
Year of original purchase
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
$
|
|
|
|
$
|
2
|
|
|
|
N/A
|
|
|
|
N/A
|
|
2007
|
|
|
372
|
|
|
|
201
|
|
|
$
|
1
|
|
|
$
|
(1
|
)
|
2006
|
|
|
778
|
|
|
|
344
|
|
|
|
25
|
|
|
|
(2
|
)
|
All other
|
|
|
165
|
|
|
|
746
|
|
|
|
(3
|
)
|
|
|
240
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
1,315
|
|
|
$
|
1,293
|
|
|
$
|
23
|
|
|
$
|
237
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
State
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CA
|
|
$
|
565
|
|
|
$
|
233
|
|
|
$
|
1
|
|
|
$
|
2
|
|
FL
|
|
|
129
|
|
|
|
109
|
|
|
|
(1
|
)
|
|
|
(3
|
)
|
AZ
|
|
|
138
|
|
|
|
85
|
|
|
|
|
|
|
|
(2
|
)
|
VA
|
|
|
112
|
|
|
|
31
|
|
|
|
3
|
|
|
|
|
|
NV
|
|
|
75
|
|
|
|
23
|
|
|
|
(1
|
)
|
|
|
|
|
GA
|
|
|
55
|
|
|
|
64
|
|
|
|
2
|
|
|
|
7
|
|
MI
|
|
|
37
|
|
|
|
256
|
|
|
|
3
|
|
|
|
65
|
|
MD
|
|
|
16
|
|
|
|
7
|
|
|
|
|
|
|
|
(1
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subtotal
|
|
|
1,127
|
|
|
|
808
|
|
|
|
7
|
|
|
|
68
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
All other states
|
|
|
188
|
|
|
|
485
|
|
|
|
16
|
|
|
|
169
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
1,315
|
|
|
$
|
1,293
|
|
|
$
|
23
|
|
|
$
|
237
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Delinquency
Rate(3)
|
|
|
|
As of September 30,
|
|
|
|
2008
|
|
|
2007
|
|
Composition
|
|
Alt-A
|
|
|
Non
Alt-A
|
|
|
Alt-A
|
|
|
Non
Alt-A
|
|
|
Year of original purchase
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
.79
|
%
|
|
|
.23
|
%
|
|
|
N/A
|
|
|
|
N/A
|
|
2007
|
|
|
5.24
|
|
|
|
1.72
|
|
|
|
.56
|
%
|
|
|
.12
|
%
|
2006
|
|
|
6.53
|
|
|
|
1.65
|
|
|
|
1.80
|
|
|
|
.43
|
|
All other
|
|
|
2.63
|
|
|
|
.88
|
|
|
|
2.44
|
|
|
|
.57
|
|
Total
|
|
|
4.10
|
|
|
|
1.02
|
|
|
|
1.74
|
|
|
|
.51
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
State
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CA
|
|
|
6.06
|
|
|
|
.86
|
|
|
|
1.39
|
|
|
|
.19
|
|
FL
|
|
|
10.28
|
|
|
|
2.55
|
|
|
|
2.68
|
|
|
|
.58
|
|
AZ
|
|
|
6.21
|
|
|
|
1.27
|
|
|
|
1.88
|
|
|
|
.27
|
|
VA
|
|
|
2.85
|
|
|
|
.52
|
|
|
|
1.55
|
|
|
|
.23
|
|
NV
|
|
|
9.43
|
|
|
|
1.51
|
|
|
|
2.53
|
|
|
|
.40
|
|
GA
|
|
|
3.04
|
|
|
|
1.22
|
|
|
|
2.03
|
|
|
|
.71
|
|
MI
|
|
|
3.69
|
|
|
|
1.07
|
|
|
|
2.49
|
|
|
|
.59
|
|
MD
|
|
|
4.45
|
|
|
|
.83
|
|
|
|
1.24
|
|
|
|
.29
|
|
Subtotal
|
|
|
6.62
|
%
|
|
|
1.29
|
%
|
|
|
1.91
|
%
|
|
|
.41
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
All other states
|
|
|
2.26
|
|
|
|
.89
|
|
|
|
1.59
|
|
|
|
.56
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
4.10
|
%
|
|
|
1.02
|
%
|
|
|
1.74
|
%
|
|
|
.51
|
%
|
|
|
(1)
|
Information is based on
single-family mortgage loans in our retained portfolio as well
as those underlying our PCs and Structured Securities, excluding
those backed by Ginnie Mae Certificates.
|
(2)
|
Credit losses consist of the
aggregate amount of charge-offs, net of recoveries, and the
amount of REO operations expense in each of the respective
periods.
|
(3)
|
Our reported delinquency rates are
based on the number of loans that are 90 days or more past
due as well as those in the process of foreclosure, and exclude
loans whose contractual terms have been modified under agreement
with the borrower, if the borrower is less than 90 days
delinquent under the modified terms.
|
Loan
Loss Reserves
We maintain two mortgage-related loan loss reserves
allowance for losses on mortgage loans held-for-investment and
reserve for guarantee losses at levels we deem
adequate to absorb probable incurred losses on mortgage loans
held-for-investment in our retained portfolio and mortgages
underlying our PCs, Structured Securities and other financial
guarantees. Determining the loan loss and credit-related loss
reserves associated with our mortgage loans and PCs and
Structured Securities is complex and requires significant
management judgment about matters that involve a high degree of
subjectivity. This management estimate is inherently more
difficult to perform due to the absence of historical precedents
relative to the current economic environment. See
MD&A CRITICAL ACCOUNTING POLICIES AND
ESTIMATES Allowance for Loan Losses and Reserve for
Guarantee Losses and ITEM 13. FINANCIAL
STATEMENTS AND SUPPLEMENTARY DATA AUDITED
CONSOLIDATED FINANCIAL STATEMENTS AND ACCOMPANYING
NOTES NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES in our Registration Statement for further
information. Table 50 summarizes our loan loss reserves
activity for guaranteed loans and those mortgage loans held in
our retained portfolio, in total.
Table 50
Loan Loss Reserves Activity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
|
|
(in millions)
|
|
|
Total loan loss
reserves:(1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Beginning balance
|
|
$
|
5,813
|
|
|
$
|
1,138
|
|
|
$
|
2,822
|
|
|
$
|
619
|
|
Provision for credit losses
|
|
|
5,702
|
|
|
|
1,372
|
|
|
|
9,479
|
|
|
|
2,067
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Charge-offs,
gross(2)
|
|
|
(1,097
|
)
|
|
|
(95
|
)
|
|
|
(2,023
|
)
|
|
|
(261
|
)
|
Recoveries(3)
|
|
|
236
|
|
|
|
61
|
|
|
|
548
|
|
|
|
161
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Charge-offs, net
|
|
|
(861
|
)
|
|
|
(34
|
)
|
|
|
(1,475
|
)
|
|
|
(100
|
)
|
Transfers,
net(4)
|
|
|
(434
|
)
|
|
|
(164
|
)
|
|
|
(606
|
)
|
|
|
(274
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending balance
|
|
$
|
10,220
|
|
|
$
|
2,312
|
|
|
$
|
10,220
|
|
|
$
|
2,312
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
Include reserves for loans
held-for-investment in our retained portfolio and reserves for
guarantee losses on PCs and Structured Securities.
|
(2)
|
Charge-offs related to retained
mortgages represent the amount of the unpaid principal balance
of a loan that has been discharged using the reserve balance to
remove the loan from our retained portfolio at the time of
resolution. Charge-offs exclude $81 million and
$41 million for the three months ended September 30,
2008 and 2007, respectively, and $332 million and
$82 million for the nine months ended September 30,
2008 and 2007, respectively, related to certain loans purchased
under financial guarantees and reflected within losses on loans
purchased on our consolidated statements of income.
|
(3)
|
Recoveries of charge-offs primarily
resulting from foreclosure alternatives and REO acquisitions on
loans where a share of default risk has been assumed by mortgage
insurers, servicers or other third parties through credit
enhancements.
|
(4)
|
Consist primarily of: (a) the
transfer of a proportional amount of the recognized reserves for
guaranteed losses related to PC pools associated with
non-performing loans purchased from mortgage pools underlying
our PCs, Structured Securities and long-term standby agreements
to establish the initial recorded investment in these loans at
the date of our purchase; and (b) amounts attributable to
uncollectible interest on PCs and Structured Securities in our
retained portfolio.
|
Our total loan loss reserves increased as we recorded additional
reserves to reflect increased estimates of incurred losses, an
observed increase in delinquency rates and increases in the
estimated severity of losses on a per-property basis related to
our single-family mortgage portfolio. See CONSOLIDATED
RESULTS OF OPERATIONS Non-Interest
Expense Provision for Credit Losses,
for additional information.
OFF-BALANCE
SHEET ARRANGEMENTS
We enter into certain business arrangements that are not
recorded on our consolidated balance sheets or may be recorded
in amounts that differ from the full contract or notional amount
of the transaction. Most of these arrangements relate to our
financial guarantee and securitization activity for which we
record guarantee assets and obligations and the related
securitized assets are owned by third parties. See
ITEM 2. FINANCIAL INFORMATION ANNUAL
MD&A OFF-BALANCE SHEET ARRANGEMENTS in
our Registration Statement and NOTE 2: FINANCIAL
GUARANTEES AND SECURITIZED INTERESTS IN MORTGAGE-RELATED
ASSETS in the notes to our consolidated financial
statements for more discussion of our off-balance sheet
arrangements.
As part of our credit guarantee business, we routinely enter
into forward purchase and sale commitments for mortgage loans
and mortgage-related securities. Some of these commitments are
accounted for as derivatives. Their fair values are reported as
either derivative assets, net or derivative liabilities, net on
our consolidated balance sheets. We also have purchase
commitments primarily related to mortgage purchase flow business
which we principally fulfill by executing PC guarantees in swap
transactions and, to a lesser extent, commitments to purchase
multifamily mortgage loans and revenue bonds that are not
accounted for as derivatives and are not recorded on our
consolidated balance sheets. These non-derivative commitments
totaled $310.0 billion and $173.4 billion at
September 30, 2008 and December 31, 2007,
respectively. The increase during the nine months ended
September 30, 2008 is due primarily to the timing of
contract renewals with existing customers, which most often are
for one-year periods. During 2008, several of the counterparties
to these transactions have merged with other institutions, and
in some cases have been placed into receivership under the
control of the FDIC. See CREDIT RISKS
Institutional Credit Risk Our
Customers Mortgage Seller/Servicers for
further information. Such commitments are not accounted for as
derivatives and are not recorded on our consolidated balance
sheets. These mortgage purchase contracts contain no penalty or
liquidated damages clauses based on our inability to take
delivery of mortgage loans.
Effective December 2007 we established securitization trusts for
the administration of cash remittances received on the
underlying assets of our PCs and Structured Securities. We
receive trust management income, which represents the fees we
earn as master servicer, issuer, trustee and administrator for
our PCs and Structured Securities. These fees, which are
included in our non-interest income, are derived from interest
earned on principal and interest cash flows held in the trust
between the time funds are remitted to the trust by servicers
and the date of distribution to our PC and Structured Securities
holders. The trust management income will be offset by interest
expense we incur when a borrower prepays a mortgage, but the
full amount of interest for the month is due to the PC investor.
We have off-balance sheet exposure to the trust of the same
maximum amount that applies to our credit risk of our
outstanding guarantees; however, we also have exposure to the
trust and its institutional counterparties for any investment
losses that are incurred in our role as the securities
administrator for the trust. In accordance with the trust
agreements, we invest the funds of the trusts in eligible
short-term financial
instruments that are mainly the highest-rated debt types as
classified by a nationally-recognized rating service
organization. During the third quarter of 2008, we recognized
$1.1 billion of losses on investment activity associated
with our role as securities administrator for this trust as a
result of the Lehman short-term lending transactions. See
CONSOLIDATED RESULTS OF OPERATIONS
Securities Administrator Loss on Investment
Activity for further information. As of
September 30, 2008, the investments of the trust were
primarily in cash equivalents, including obligations guaranteed
by the U.S. government.
On September 6, 2008, the Director of FHFA placed us into
conservatorship. On September 7, 2008, the Conservator
entered into the Purchase Agreement with the Treasury for senior
preferred stock and warrants for the purchase of 79.9% of our
common stock outstanding in return for the Treasurys
commitment in the Purchase Agreement. The Purchase Agreement
provides that the Treasury will contribute funds of up to
$100 billion under certain conditions to fund our
operations. We have also entered into the Lending Agreement with
Treasury, which provides for short-term funding, under certain
terms and conditions, on a secured basis. See Executive
Summary Conservatorship for further
information on both the Purchase and Lending Agreements.
As part of the guarantee arrangements pertaining to certain
multifamily housing revenue bonds and securities backed by
multifamily housing revenue bonds, we provided commitments to
advance funds, commonly referred to as liquidity
guarantees, totaling $11.6 billion and
$8.0 billion at September 30, 2008 and
December 31, 2007, respectively. These guarantees require
us to advance funds to third parties that enable them to
repurchase tendered bonds or securities that are unable to be
remarketed. Any repurchased securities are pledged to us to
secure funding until the securities are remarketed. At
September 30, 2008 and December 31, 2007,
$307 million and $ in liquidity guarantee
advances were outstanding. Advances under our liquidity
guarantees typically mature in 60 to 120 days. These
liquidity guarantee advances are included in other assets on our
consolidated balance sheets.
CRITICAL
ACCOUNTING POLICIES AND ESTIMATES
The preparation of financial statements in conformity with GAAP
requires us to make a number of judgments, estimates and
assumptions that affect the reported amounts of our assets,
liabilities, income and expenses. Certain of our accounting
policies, as well as estimates we make, are critical to the
presentation of our financial condition and results of
operations. They often require management to make difficult,
complex or subjective judgments and estimates, at times,
regarding matters that are inherently uncertain. Actual results
could differ from our estimates and different judgments and
assumptions related to these policies and estimates could have a
material impact on our consolidated financial statements.
Our critical accounting policies and estimates relate to:
(a) valuation of a significant portion of assets and
liabilities; (b) allowances for loan losses and reserve for
guarantee losses; (c) application of the static effective
yield method to amortize the guarantee obligation;
(d) application of the effective interest method;
(e) impairment recognition on investments in securities;
and (f) realizability of net deferred tax asset. For
additional information about our critical accounting policies
and estimates and other significant accounting policies,
including recently issued accounting pronouncements, see
ITEM 2. FINANCIAL INFORMATION ANNUAL
MD&A CRITICAL ACCOUNTING POLICIES AND
ESTIMATES and ITEM 13. FINANCIAL STATEMENTS AND
SUPPLEMENTARY DATA AUDITED CONSOLIDATED FINANCIAL
STATEMENTS AND ACCOMPANYING NOTES NOTE 1:
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES in our
Registration Statement.
Realizability
of Net Deferred Tax Asset
We use the asset and liability method of accounting for income
taxes pursuant to SFAS 109. Under this method, deferred tax
assets and liabilities are recognized based upon the expected
future tax consequences of existing temporary differences
between the financial reporting and the tax reporting basis of
assets and liabilities using enacted statutory tax rates.
Valuation allowances are recorded to reduce net deferred tax
assets when it is more likely than not that a tax benefit will
not be realized. The realization of these deferred tax assets is
dependent upon the generation of sufficient taxable income or
upon our intent and ability to hold
available-for-sale
debt securities until the recovery of any temporary unrealized
losses. On a quarterly basis, our management determines whether
a valuation allowance is necessary. In so doing, our management
considers all evidence currently available, both positive and
negative, in determining whether, based on the weight of that
evidence, it is more likely than not that the net deferred tax
asset will be realized. For more information about the evidence
that management considers, see NOTE 12: INCOME
TAXES to our consolidated financial statements and
ITEM 13. FINANCIAL STATEMENTS AND SUPPLEMENTARY
DATA AUDITED CONSOLIDATED FINANCIAL STATEMENTS AND
ACCOMPANYING NOTES NOTE 13: INCOME TAXES
in our Registration Statement.
The consideration of this evidence requires significant
estimates, assumptions and judgments, particularly about our
financial condition and results of operations for several years
into the future and our intent and ability to hold
available-for-sale
debt securities with temporary unrealized losses until recovery.
As discussed in ITEM 1A. RISK FACTORS, recent events
fundamentally affecting our control, management and operations
are likely to affect our future financial condition and results
of operations. These events have resulted in a variety of
uncertainties regarding our future
operations, our business objectives and strategies and our
future profitability, the impact of which cannot be reliably
forecasted at this time. As such, any changes in these
estimates, assumptions or judgments may have a material effect
on our financial position and results of operations.
As described in NOTE 12: INCOME TAXES to our
consolidated financial statements, our management determined
that, as of September 30, 2008, it was more likely than not
that we would not realize the portion of our net deferred tax
assets that is dependent upon the generation of future taxable
income. This determination was driven by recent events and the
resulting uncertainties that existed as of September 30,
2008 that are discussed in ITEM 1A. RISK FACTORS. As
a result, we established a valuation allowance against these net
deferred tax assets at September 30, 2008, which had a
material effect on our financial position as of
September 30, 2008 and our results of operations for the
three and six months then ended. It is possible that, in future
periods, the uncertainties regarding our future operations and
profitability could be resolved such that it could become more
likely than not that these net deferred tax assets would be
realized due to the generation of sufficient taxable income. If
that were to occur, our management would assess the need for a
reduction of the valuation allowance, which could have a
material effect on our financial position and results of
operations in the period of the reduction.
Also, as described in NOTE 12: INCOME TAXES to
our consolidated financial statements, our management has
determined that a valuation allowance is not necessary for the
portion of our net deferred tax assets that is dependent upon
our intent and ability to hold
available-for-sale
debt securities until the recovery of any temporary unrealized
losses. These temporary unrealized losses have only impacted
comprehensive income, not income from continuing operations or
our taxable income, nor will they impact income from continuing
operations or taxable income if they are held to maturity. As
such, the realization of these net deferred tax assets is not
dependent upon the generation of sufficient taxable income but
is instead dependent on our intent and ability to hold these
securities until recovery, which may be at maturity. The
conclusion by management that these unrealized losses are
temporary and that we have the intent and ability to hold these
securities until recovery requires significant estimates,
assumptions and judgments, as described in ITEM 2.
FINANCIAL INFORMATION ANNUAL
MD&A CRITICAL ACCOUNTING POLICIES AND
ESTIMATES Impairment Recognition on Investments in
Securities in our Registration Statement. Any changes in
these estimates, assumptions or judgments in future periods may
result in the recognition of an
other-than-temporary
impairment, which would result in some of these net deferred tax
assets not being realized and may have a material effect on our
financial position and results of operations.
Fair
Value Measurements
Effective January 1, 2008, we adopted SFAS 157, which
defines fair value, establishes a framework for measuring fair
value and expands disclosures about fair value measurements. See
Determination of Fair Value for additional
information about fair value hierarchy and measurements. Fair
value is the price that would be received to sell an asset or
paid to transfer a liability in an orderly transaction between
market participants at the measurement date. Upon adoption of
SFAS 157 on January 1, 2008, we began estimating the
fair value of our newly-issued guarantee obligations at their
inception using the practical expedient provided by FIN 45,
as amended by SFAS 157. Using the practical expedient, the
initial guarantee obligation is recorded at an amount equal to
the fair value of compensation received, inclusive of all rights
related to the transaction, in exchange for our guarantee. As a
result, we no longer record estimates of deferred gains or
immediate, day one losses on most guarantees. In
addition, amortization of the guarantee obligation will now more
closely follow our economic release from risk under the
guarantee. However, all unamortized amounts recorded prior to
January 1, 2008 will continue to be deferred and amortized
using existing amortization methods with respect to disclosure
of the fair value of our guarantee obligation on the Fair Value
Balance Sheet. Valuation of the guarantee obligation subsequent
to initial recognition will use current pricing assumptions and
related inputs. For information regarding our fair value methods
and assumptions, see NOTE 14: FAIR VALUE
DISCLOSURES to our consolidated financial statements.
Determination
of Fair Value
SFAS 157 establishes a fair value hierarchy that
prioritizes the inputs to valuation techniques used to measure
fair value based on the inputs a market participant would use at
the measurement date. Observable inputs reflect market data
obtained from independent sources. Unobservable inputs reflect
assumptions based on the best information available under the
circumstances. Unobservable inputs are used to measure fair
value to the extent that observable inputs are not available, or
in situations where there is little, if any, market activity for
an asset or liability at the measurement date. We use valuation
techniques that maximize the use of observable inputs, where
available, and minimize the use of unobservable inputs.
The three levels of the fair value hierarchy under SFAS 157
are described below:
|
|
|
|
Level 1:
|
Quoted prices (unadjusted) in active markets that are accessible
at the measurement date for identical assets or liabilities;
|
|
|
Level 2:
|
Quoted prices for similar assets and liabilities in active
markets; quoted prices for identical or similar assets and
liabilities in markets that are not active; inputs other than
quoted market prices that are
|
|
|
|
|
|
observable for the asset or liability; and inputs that are
derived principally from or corroborated by observable market
data for substantially the full term of the assets; and
|
|
|
|
|
Level 3:
|
Unobservable inputs for the asset or liability that are
supported by little or no market activity and that are
significant to the fair values.
|
We categorize assets and liabilities in the scope of
SFAS 157 within the fair value hierarchy based on the
valuation process used to derive their fair values and our
judgment regarding the observability of the related inputs.
Those judgments are based on our knowledge and observations of
the markets relevant to the individual assets and liabilities
and may vary based on current market conditions. In applying our
judgments, we look to ranges of third party prices, transaction
volumes and discussions with pricing service vendors to
understand and assess the extent of market benchmarks available
and the judgments or modeling required in their processes. Based
on these factors, we determine whether the fair values are
observable in active markets or determine that the markets are
inactive.
Our Level 1 financial instruments consist of
exchange-traded derivatives where quoted prices exist for the
exact instrument in an active market. Our Level 2
instruments generally consist of high credit quality agency
mortgage-related securities, commercial mortgage-backed
securities, non-mortgage-related asset-backed securities,
interest-rate swaps, option-based derivatives and
foreign-currency denominated debt. These instruments are
generally valued through one of the following methods:
(a) dealer or pricing service inputs with the value derived
by comparison to recent transactions or similar securities and
adjusting for differences in prepayment or liquidity
characteristics; or (b) modeled through an industry
standard modeling technique that relies upon observable inputs
such as discount rates and prepayment assumptions.
Our Level 3 assets primarily consist of non-agency
residential mortgage-related securities, our guarantee asset and
multifamily mortgage loans held-for-sale. While the non-agency
mortgage-related securities market has become significantly less
liquid, resulting in lower transaction volumes, wider credit
spreads and less transparency in 2008, we value our non-agency
mortgage-related securities based primarily on prices received
from third party pricing services and prices received from
dealers. The techniques used to value these instruments
generally are either (a) a comparison to transactions of
instruments with similar collateral and risk profiles; or
(b) industry standard modeling such as the discounted cash
flow model. For a large majority of the securities we value
using dealers and pricing services, we obtain at least three
independent prices, which are non-binding to us or our
counterparties. When multiple prices are received, we use the
median of the prices. The models and related assumptions used by
the dealers and pricing services are owned and managed by them.
However, we have an understanding of their processes used to
develop the prices provided to us based on our ongoing due
diligence. We have formal discussions with our pricing service
vendors on at least a quarterly basis to maintain a current
understanding of the processes and inputs they use to develop
prices. We make no adjustments to the individual prices we
receive from third party pricing services or dealers for
non-agency mortgage-related securities backed by subprime and
Alt-A
mortgage loans beyond calculating median prices and discarding
certain prices that are not valid based on our validation
procedures.
These validation procedures are executed to ensure that the
individual prices we receive are consistent with our
observations of the marketplace and prices that are provided to
us by other dealers or pricing services. These processes include
automated checks of prices for reasonableness based on
variations from prices provided in previous periods, comparisons
of prices to internally calculated expected prices and relative
value comparisons based on specific characteristics of
securities. To the extent we determine that a price provided to
us is outside established parameters, we will further examine
the price including follow up discussions with the specific
pricing service or dealer and ultimately not use that price if
we are not able to determine the price is valid. All of these
processes are executed prior to the use of the prices in the
financial statement process. We validate our prices using
sources and methods different from the sources we use to obtain
the price. This process is performed by an independent control
group separate from that which is responsible for obtaining
the prices. The pricing and related validation process is
overseen by a senior management valuation committee that is
responsible for reviewing all pricing judgments, methods,
controls and results. The prices provided to us consider the
existence of credit enhancements, including monoline insurance
coverage and the current lack of liquidity in the market place.
We consider credit risk in the valuation of our assets and
liabilities, including in our derivative positions. For
derivatives that are in an asset position, we hold collateral
against those positions in accordance with agreed upon
thresholds. The amount of collateral held depends on the credit
rating of the counterparty and is based on our credit risk
policies. See CREDIT RISKS Derivative
Counterparty Credit Risk for a discussion of our
counterparty credit risk. Similarly, for derivatives that are in
a liability position to us we post collateral to counterparties
in accordance with agreed upon thresholds. The fair value of
derivative assets considers the impact of institutional credit
risk in the event that the counterparty does not honor its
payment obligation. Additionally, the fair value of derivative
liabilities considers the impact of our institutional credit
risk.
For a description of how we determine the fair value of our
guarantee asset, see NOTE 2: FINANCIAL GUARANTEES AND
SECURITIZED INTERESTS IN MORTGAGE-RELATED ASSETS to our
consolidated financial statements.
Our valuation process and related SFAS 157 hierarchy
assessments require us to make judgments regarding the liquidity
of the market place. These judgments are based on the volume of
securities traded in the market place, the width of bid/ask
spreads and dispersion of prices on similar securities. As
previously mentioned, we have observed a significant reduction
in liquidity within the non-agency mortgage-related security
markets. We continue to utilize the prices provided to us by
various pricing services and dealers and believe that the
procedures executed by the pricing services and dealers,
combined with our internal verification process, ensure that the
prices used to develop the financial statements are in
accordance with the guidance in SFAS 157.
We periodically evaluate our valuation techniques and may change
them to improve our fair value estimates, to accommodate market
developments or to compensate for changes in data availability
and reliability or other operational constraints. We review a
range of market quotes from pricing services or dealers and
perform analysis of internal valuations on a monthly basis to
confirm the reasonableness of the valuations. See
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES
ABOUT MARKET RISK Interest-Rate Risk and Other
Market Risks for a discussion of market risks and our
interest-rate sensitivity measures, PMVS and duration gap. In
addition, see NOTE 2: FINANCIAL GUARANTEES AND
SECURITIZED INTERESTS IN MORTGAGE-RELATED ASSETS to our
consolidated financial statements for a sensitivity analysis of
the fair value of our guarantee asset and other retained
interests and the key assumptions utilized in fair value
measurements.
Table 51 below summarizes our assets and liabilities
measured at fair value on a recurring basis by level in the
valuation hierarchy at September 30, 2008.
Table 51
Summary of Assets and Liabilities at Fair Value on a Recurring
Basis
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At September 30, 2008
|
|
|
|
Assets
|
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-mortgage-related
|
|
|
|
|
|
|
|
|
|
|
|
Debt securities
|
|
|
|
|
|
|
|
|
|
Mortgage Loans
|
|
|
Mortgage-related securities
|
|
|
securities
|
|
|
|
|
|
Guarantee
|
|
|
|
|
|
denominated
|
|
|
|
|
|
|
|
|
|
Held-for-sale,
|
|
|
Available-for-sale,
|
|
|
Trading, at
|
|
|
Available-for-sale,
|
|
|
Derivative
|
|
|
asset, at
|
|
|
|
|
|
in foreign
|
|
|
Derivative
|
|
|
|
|
|
|
at fair value
|
|
|
at fair value
|
|
|
fair value
|
|
|
at fair value
|
|
|
assets,
net(1)
|
|
|
fair value
|
|
|
Total(1)
|
|
|
currencies
|
|
|
liabilities,
net(1)
|
|
|
Total(1)
|
|
|
|
(dollars in millions)
|
|
|
Level 1
|
|
|
|
%
|
|
|
|
%
|
|
|
|
%
|
|
|
|
%
|
|
|
1
|
%
|
|
|
|
%
|
|
|
|
%
|
|
|
|
%
|
|
|
2
|
%
|
|
|
1
|
%
|
Level 2
|
|
|
|
|
|
|
73
|
|
|
|
97
|
|
|
|
100
|
|
|
|
99
|
|
|
|
|
|
|
|
78
|
|
|
|
100
|
|
|
|
96
|
|
|
|
98
|
|
Level 3
|
|
|
100
|
|
|
|
27
|
|
|
|
3
|
|
|
|
|
|
|
|
|
|
|
|
100
|
|
|
|
22
|
|
|
|
|
|
|
|
2
|
|
|
|
1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
100
|
%
|
|
|
100
|
%
|
|
|
100
|
%
|
|
|
100
|
%
|
|
|
100
|
%
|
|
|
100
|
%
|
|
|
100
|
%
|
|
|
100
|
%
|
|
|
100
|
%
|
|
|
100
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total GAAP Fair Value
|
|
$
|
95
|
|
|
$
|
478,413
|
|
|
$
|
118,002
|
|
|
$
|
10,410
|
|
|
$
|
3,040
|
|
|
$
|
9,679
|
|
|
$
|
619,639
|
|
|
$
|
13,701
|
|
|
$
|
1,359
|
|
|
$
|
15,060
|
|
|
|
(1)
|
Percentages by level are based on
gross fair value of derivative assets and derivative liabilities
before counterparty netting, cash collateral netting, net
trade/settle receivable or payable and net derivative interest
receivable or payable.
|
Changes
in Level 3 Recurring Fair Value Measurements
At September 30, 2008, we measured and recorded on a
recurring basis $142.8 billion, or approximately 22% of
total assets, at fair value using significant unobservable
inputs (Level 3), before the impact of counterparty and
cash collateral netting across the levels of the fair value
hierarchy. Our Level 3 assets primarily consist of
non-agency residential mortgage-related securities, our
guarantee asset and multifamily mortgage loans held-for-sale. We
also measured and recorded on a recurring basis
$0.3 billion, or 1% of total liabilities, at fair value
using significant unobservable inputs, before the impact of
counterparty and cash collateral netting across the levels of
the fair value hierarchy. Our Level 3 liabilities consist
of derivative liabilities, net.
In the third quarter of 2008, our Level 3 assets decreased
by $6.8 billion, primarily in our non-agency
mortgage-related securities, backed by subprime and
Alt-A
mortgage loans. This decline was mainly attributable to
substantial monthly remittances of principal repayments from the
underlying collateral. Our net transfer of Level 2 assets
to Level 3 during the third quarter of 2008 was
$9.9 billion. See LIQUIDITY AND CAPITAL
RESOURCES Retained Portfolio for more
information.
During the nine months ended September 30, 2008, our
Level 3 assets increased significantly because the market
for non-agency mortgage-related securities backed by subprime
and Alt-A
mortgages continued to experience a significant reduction in
liquidity and wider spreads, as investor demand for these assets
decreased. As a result, we have observed more variability in the
quotations received from dealers and third-party pricing
services. Consequently, we transferred $155.8 billion of
Level 2 assets to Level 3 during the nine months ended
September 30, 2008. These transfers were primarily within
non-agency mortgage-related securities backed by subprime and
Alt-A
mortgage loans where inputs that are significant to their
valuation became limited or unavailable. We concluded that the
prices on these securities received from pricing services and
dealers were reflective of significant unobservable inputs as
the markets have become significantly less
active, requiring higher degrees of judgment to extrapolate fair
values from limited market benchmarks. We recorded
$17.6 billion in additional losses primarily in AOCI on
these transferred assets during the nine months ended
September 30, 2008, which were included in our Level 3
reconciliation. See NOTE 14: FAIR VALUE
DISCLOSURES Table 14.2 Fair Value
Measurements of Assets and Liabilities Using Significant
Unobservable Inputs to our consolidated financial
statements for the Level 3 reconciliation. For discussion
of types and characteristics of mortgage loans underlying our
mortgage-related securities, see CREDIT RISKS and
CONSOLIDATED BALANCE SHEETS ANALYSIS
Table 17 Characteristics of Mortgage Loans and
Mortgage-Related Securities in our Retained Portfolio.
Controls
over Fair Value Measurement
To ensure that fair value measurements are appropriate and
reliable, we employ control processes to validate the techniques
and models we use. These control processes include review and
approval of new transaction types, price verification and review
of valuation judgments, methods and models. Where applicable,
valuations are back tested comparing the settlement prices to
where the fair values were measured. Where models are employed
to assist in the measurement of fair value, material changes
made to those models during the periods presented are reviewed
and approved by the Valuation Committee, with senior
representation from business areas, Enterprise Risk Oversight
and Finance. Inputs used by those models are regularly updated
for changes in the underlying data, assumptions, valuation
inputs, or market conditions.
Groups independent of our trading and investing function,
including the Financial Valuation Control group and the
Valuation Committee, participate in the review and validation
process. Financial Valuation Control performs monthly
independent verification by comparing the methodology driven
price to other market source data (to the extent available), and
uses independent analytics to determine if assigned fair values
are reasonable. Financial Valuation Controls review
targets coverage across all products with increased attention to
higher risk/impact valuations. The Valuation Committee evaluates
and approves all significant valuation adjustments, judgments,
methods, controls and results. In addition, the Model Governance
Committee is responsible for the review and approval of the
pricing models used in our fair value measurements.
The Fair
Value Option for Financial Assets and Financial
Liabilities
Effective January 1, 2008, we adopted SFAS 159 for
certain eligible financial instruments. This statement permits
entities to choose to measure many financial instruments and
certain other items at fair value that are not currently
required to be measured at fair value in order to improve
financial reporting by providing entities with the opportunity
to mitigate volatility in reported earnings caused by measuring
related assets and liabilities differently without having to
apply complex hedge accounting provisions. The effect of the
first measurement to fair value is reported as a
cumulative-effect adjustment to the beginning balance of
retained earnings. We elected the fair value option for certain
available-for-sale mortgage-related securities that were
identified as an economic offset to the changes in fair value of
the guarantee asset caused by interest rate movements,
foreign-currency denominated debt and investments in securities
classified as available-for-sale securities and identified as
within the scope of Emerging Issues Task
Force 99-20,
Recognition of Interest Income and Impairment on
Purchased Beneficial Interests and Beneficial Interests That
Continue to be Held by a Transferor in Securitized Financial
Assets. As a result of the adoption of SFAS 159,
we recognized a $1.0 billion after-tax increase to our
beginning retained earnings at January 1, 2008. In
addition, during the third quarter of 2008, we elected the fair
value option for certain multifamily held-for-sale mortgage
loans. For additional information on the impact of the election
of the fair value option, see NOTE 1: SUMMARY OF
SIGNIFICANT ACCOUNTING POLICIES Changes in
Accounting Principles to our consolidated financial
statements. For information regarding our fair value methods and
assumptions, see NOTE 14: FAIR VALUE
DISCLOSURES to our consolidated financial statements.
OUR
PORTFOLIOS
Guaranteed
PCs and Structured Securities
Guaranteed PCs and Structured Securities represent the unpaid
principal balances of the mortgage-related assets we issue or
otherwise guarantee. Our guaranteed PCs are pass-through
securities that represent undivided interests in trusts that own
pools of mortgages we have purchased. Our Structured Securities
represent beneficial interests in pools of PCs and certain other
types of mortgage-related assets. We create Structured
Securities primarily by resecuritizing our PCs or previously
issued Structured Securities as collateral. Similar to our PCs,
we guarantee the payment of principal and interest to the
holders of all tranches of our Structured Securities. By issuing
Structured Securities, we seek to provide liquidity to
alternative sectors of the mortgage market. We do not charge a
management and guarantee fee for Structured Securities backed by
our PCs or previously issued Structured Securities, because the
underlying collateral is already guaranteed, so there is no
incremental credit risk to us as a result of resecuritization.
We also issue Structured Securities to third parties in
exchanges for non-Freddie Mac mortgage-related securities, which
we refer to as Structured Transactions. See ITEM 1.
BUSINESS Our Business Segments
Single-family Guarantee Segment in our Registration
Statement and CREDIT RISKS Mortgage Credit
Risk herein for detailed discussion and other information
on our PCs and Structured Securities, including Structured
Transactions.
In addition to our mortgage security guarantees, during the nine
months ended September 30, 2008 and 2007, we entered into
$1.6 billion and $19.4 billion, respectively, of
long-term standby commitments for mortgage assets held by third
parties that require us to purchase loans from lenders when the
loans subject to these commitments meet certain delinquency
criteria. We terminated $18.8 billion of our previously
issued long-term standby commitments in the nine months
ended September 30, 2008. The majority of the loans
previously covered by these commitments were subsequently
securitized as PCs. We have included these long-term standby
commitments in the reported activity and balances of our
guaranteed PCs and Structured Securities portfolio. Long-term
standby commitments represented approximately 1% and 2% of the
balance of our PCs and Structured Securities portfolio at
September 30, 2008 and December 31, 2007,
respectively. Table 52 presents the distribution of
underlying mortgage assets for our issued PCs and Structured
Securities.
Table 52
Issued Guaranteed PCs and Structured
Securities(1)
|
|
|
|
|
|
|
|
|
|
|
September 30, 2008
|
|
|
December 31, 2007
|
|
|
|
(in millions)
|
|
|
PCs and Structured Securities backed by Freddie Mac
mortgage-related securities:
|
|
|
|
|
|
|
|
|
Single-family:
|
|
|
|
|
|
|
|
|
Conventional:
|
|
|
|
|
|
|
|
|
30-year
fixed-rate(2)
|
|
$
|
1,206,517
|
|
|
$
|
1,091,212
|
|
20-year
fixed-rate
|
|
|
68,667
|
|
|
|
72,225
|
|
15-year
fixed-rate
|
|
|
253,897
|
|
|
|
272,490
|
|
ARMs/adjustable-rate
|
|
|
84,054
|
|
|
|
91,219
|
|
Option
ARMs(3)
|
|
|
1,591
|
|
|
|
1,853
|
|
Interest-only(4)
|
|
|
163,310
|
|
|
|
159,028
|
|
Balloon/resets
|
|
|
11,981
|
|
|
|
17,242
|
|
Conforming-jumbo
|
|
|
2,067
|
|
|
|
|
|
FHA/VA
|
|
|
1,323
|
|
|
|
1,283
|
|
Rural Housing Service and other federally guaranteed loans
|
|
|
121
|
|
|
|
132
|
|
|
|
|
|
|
|
|
|
|
Total single-family
|
|
|
1,793,528
|
|
|
|
1,706,684
|
|
Multifamily:
|
|
|
|
|
|
|
|
|
Conventional and other
|
|
|
14,526
|
|
|
|
10,658
|
|
|
|
|
|
|
|
|
|
|
Total multifamily
|
|
|
14,526
|
|
|
|
10,658
|
|
|
|
|
|
|
|
|
|
|
Structured Securities backed by non-Freddie Mac mortgage-related
securities:
|
|
|
|
|
|
|
|
|
Single-family:
|
|
|
|
|
|
|
|
|
Ginnie Mae
Certificates(5)
|
|
|
1,102
|
|
|
|
1,268
|
|
Structured
Transactions(6)
|
|
|
24,406
|
|
|
|
19,323
|
|
Multifamily:
|
|
|
|
|
|
|
|
|
Structured Transactions
|
|
|
846
|
|
|
|
900
|
|
|
|
|
|
|
|
|
|
|
Total Structured Securities backed by non-Freddie Mac
mortgage-related securities
|
|
|
26,354
|
|
|
|
21,491
|
|
|
|
|
|
|
|
|
|
|
Total issued guaranteed PCs and Structured Securities
|
|
$
|
1,834,408
|
|
|
$
|
1,738,833
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
Based on unpaid principal balances
of the securities and excludes mortgage-related securities
traded, but not yet settled. Also includes long-term standby
commitments for mortgage assets held by third parties that
require that we purchase loans from lenders when these loans
meet certain delinquency criteria.
|
(2)
|
Portfolio balances include
$1.9 billion and $1.8 billion of
40-year
fixed-rate mortgages at September 30, 2008 and
December 31, 2007, respectively.
|
(3)
|
Excludes option ARM mortgage loans
that back our Structured Transactions. See endnote (6) for
additional information.
|
(4)
|
Represents loans where the borrower
pays interest only for a period of time before the borrower
begins making principal payments. Includes both fixed- and
variable-rate interest-only loans.
|
(5)
|
Ginnie Mae Certificates that
underlie the Structured Securities are backed by FHA/VA loans.
|
(6)
|
Represents Structured Securities
backed by non-agency securities that include prime, FHA/VA and
subprime mortgage loan issuances. Includes $10.0 billion
and $12.8 billion of securities backed by option ARM
mortgage loans at September 30, 2008 and December 31,
2007, respectively.
|
Table 53 depicts the composition of our total mortgage
portfolio and the various segment portfolios.
Table 53
Freddie Macs Total Mortgage Portfolio and Segment
Portfolio
Composition(1)
|
|
|
|
|
|
|
|
|
|
|
September 30, 2008
|
|
|
December 31, 2007
|
|
|
|
(in millions)
|
|
|
Total mortgage portfolio:
|
|
|
|
|
|
|
|
|
Retained portfolio:
|
|
|
|
|
|
|
|
|
Single-family mortgage loans
|
|
$
|
32,006
|
|
|
$
|
24,589
|
|
Multifamily mortgage loans
|
|
|
68,306
|
|
|
|
57,569
|
|
|
|
|
|
|
|
|
|
|
Total mortgage loans
|
|
|
100,312
|
|
|
|
82,158
|
|
|
|
|
|
|
|
|
|
|
Guaranteed PCs and Structured Securities in our retained
portfolio
|
|
|
374,946
|
|
|
|
356,970
|
|
|
|
|
|
|
|
|
|
|
Non-Freddie Mac mortgage-related securities, agency
|
|
|
57,108
|
|
|
|
47,836
|
|
Non-Freddie Mac mortgage-related securities, non-agency
|
|
|
204,510
|
|
|
|
233,849
|
|
|
|
|
|
|
|
|
|
|
Total non-Freddie Mac mortgage-related securities
|
|
|
261,618
|
|
|
|
281,685
|
|
|
|
|
|
|
|
|
|
|
Total retained
portfolio(2)
|
|
|
736,876
|
|
|
|
720,813
|
|
|
|
|
|
|
|
|
|
|
Guaranteed PCs and Structured Securities held by third
parties:
|
|
|
|
|
|
|
|
|
Single-family PCs and Structured Securities
|
|
|
1,438,821
|
|
|
|
1,363,613
|
|
Single-family Structured Transactions
|
|
|
7,862
|
|
|
|
9,351
|
|
Multifamily PCs and Structured Securities
|
|
|
11,933
|
|
|
|
7,999
|
|
Multifamily Structured Transactions
|
|
|
846
|
|
|
|
900
|
|
|
|
|
|
|
|
|
|
|
Total guaranteed PCs and Structured Securities held by third
parties
|
|
|
1,459,462
|
|
|
|
1,381,863
|
|
|
|
|
|
|
|
|
|
|
Total mortgage portfolio
|
|
$
|
2,196,338
|
|
|
$
|
2,102,676
|
|
|
|
|
|
|
|
|
|
|
Guaranteed PCs and Structured Securities:
|
|
|
|
|
|
|
|
|
In our retained portfolio
|
|
|
374,946
|
|
|
|
356,970
|
|
Held by third parties
|
|
|
1,459,462
|
|
|
|
1,381,863
|
|
|
|
|
|
|
|
|
|
|
Total Guaranteed PCs and Structured Securities
|
|
$
|
1,834,408
|
|
|
$
|
1,738,833
|
|
|
|
|
|
|
|
|
|
|
Segment portfolios:
|
|
|
|
|
|
|
|
|
Investments Mortgage-related investment
portfolio:
|
|
|
|
|
|
|
|
|
Single-family mortgage loans
|
|
$
|
32,006
|
|
|
$
|
24,589
|
|
Guaranteed PCs and Structured Securities in our retained
portfolio
|
|
|
374,946
|
|
|
|
356,970
|
|
Non-Freddie Mac mortgage-related securities in our retained
portfolio
|
|
|
261,618
|
|
|
|
281,685
|
|
|
|
|
|
|
|
|
|
|
Total Investments Mortgage-related investment
portfolio(3)
|
|
$
|
668,570
|
|
|
$
|
663,244
|
|
|
|
|
|
|
|
|
|
|
Single-family Guarantee Credit guarantee
portfolio:
|
|
|
|
|
|
|
|
|
Single-family PCs and Structured Securities in our retained
portfolio
|
|
$
|
354,707
|
|
|
$
|
343,071
|
|
Single-family PCs and Structured Securities held by third parties
|
|
|
1,438,821
|
|
|
|
1,363,613
|
|
Single-family Structured Transactions in our retained portfolio
|
|
|
17,646
|
|
|
|
11,240
|
|
Single-family Structured Transactions held by third parties
|
|
|
7,862
|
|
|
|
9,351
|
|
|
|
|
|
|
|
|
|
|
Total Single-family Guarantee Credit guarantee
portfolio
|
|
$
|
1,819,036
|
|
|
$
|
1,727,275
|
|
|
|
|
|
|
|
|
|
|
Multifamily Guarantee and loan portfolios:
|
|
|
|
|
|
|
|
|
Multifamily PCs and Structured Securities
|
|
$
|
14,526
|
|
|
$
|
10,658
|
|
Multifamily Structured Transactions
|
|
|
846
|
|
|
|
900
|
|
|
|
|
|
|
|
|
|
|
Total Multifamily guarantee portfolio
|
|
|
15,372
|
|
|
|
11,558
|
|
Multifamily loan portfolio
|
|
|
68,306
|
|
|
|
57,569
|
|
|
|
|
|
|
|
|
|
|
Total Multifamily Guarantee and loan
portfolios
|
|
$
|
83,678
|
|
|
$
|
69,127
|
|
|
|
|
|
|
|
|
|
|
Less: Guaranteed PCs and Structured Securities in our retained
portfolio(4)
|
|
|
(374,946
|
)
|
|
|
(356,970
|
)
|
|
|
|
|
|
|
|
|
|
Total mortgage portfolio
|
|
$
|
2,196,338
|
|
|
$
|
2,102,676
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
Based on unpaid principal balance
and excludes mortgage loans and mortgage-related securities
traded, but not yet settled. For PCs and Structured Securities,
the balance reflects reported security balances and not the
unpaid principal of the underlying mortgage loans. Mortgage
loans held in our retained portfolio reflect the unpaid
principal balance of the loan.
|
(2)
|
See CONSOLIDATED BALANCE
SHEETS ANALYSIS Table 17
Characteristics of Mortgage Loans and Mortgage-Related
Securities in our Retained Portfolio for a reconciliation
of our retained portfolio amounts shown in this table to the
amounts shown under such caption in conformity with GAAP on our
consolidated balance sheets.
|
(3)
|
Includes certain assets related to
Single-family Guarantee activities and Multifamily activities.
|
(4)
|
The amount of PCs and Structured
Securities in our retained portfolio is included in both our
segments mortgage-related and guarantee portfolios and
thus deducted in order to reconcile to our total mortgage
portfolio. These securities are managed by the Investments
segment, which receives related interest income; however, the
Single-family and Multifamily segments manage and receive
associated management and guarantee fees.
|
During the nine months ended September 30, 2008 and 2007,
our total mortgage portfolio grew at an annualized rate of 6%
and 14%, respectively. Our new business purchases consist of
mortgage loans and non-Freddie Mac mortgage-related securities
that are purchased for our retained portfolio or serve as
collateral for our issued PCs and Structured Securities. We
generate a significant portion of our mortgage purchase volume
through several key mortgage lenders. During the nine months
ended September 30, 2008, our purchases of fixed-rate
product as a percentage of our total purchases increased while
our purchases of ARMs and interest-only products decreased. We
expect this trend to continue in the fourth quarter of 2008.
Table 54 summarizes purchases into our total mortgage
portfolio.
Table 54
Total Mortgage Portfolio Activity
Detail(1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
|
|
Nine Months Ended September 30,
|
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
|
|
|
|
|
% of
|
|
|
|
|
|
% of
|
|
|
|
|
|
% of
|
|
|
|
|
|
% of
|
|
|
|
|
|
|
Purchase
|
|
|
|
|
|
Purchase
|
|
|
|
|
|
Purchase
|
|
|
|
|
|
Purchase
|
|
|
|
Amount
|
|
|
Amounts
|
|
|
Amount
|
|
|
Amounts
|
|
|
Amount
|
|
|
Amounts
|
|
|
Amount
|
|
|
Amounts
|
|
|
|
(dollars in millions)
|
|
|
New business purchases:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Single-family mortgage purchases:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Conventional:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
30-year
amortizing
fixed-rate(2)
|
|
$
|
55,853
|
|
|
|
74
|
%
|
|
$
|
86,209
|
|
|
|
67
|
%
|
|
$
|
248,408
|
|
|
|
74
|
%
|
|
$
|
238,509
|
|
|
|
65
|
%
|
15-year
amortizing fixed-rate
|
|
|
5,007
|
|
|
|
7
|
|
|
|
12,309
|
|
|
|
9
|
|
|
|
26,375
|
|
|
|
8
|
|
|
|
22,448
|
|
|
|
6
|
|
ARMs/adjustable-rate(3)
|
|
|
2,856
|
|
|
|
4
|
|
|
|
2,101
|
|
|
|
2
|
|
|
|
10,432
|
|
|
|
3
|
|
|
|
11,075
|
|
|
|
3
|
|
Interest-only(4)
|
|
|
3,824
|
|
|
|
5
|
|
|
|
22,391
|
|
|
|
17
|
|
|
|
21,884
|
|
|
|
7
|
|
|
|
83,301
|
|
|
|
23
|
|
Balloon/resets(5)
|
|
|
14
|
|
|
|
< 1
|
|
|
|
13
|
|
|
|
< 1
|
|
|
|
138
|
|
|
|
< 1
|
|
|
|
45
|
|
|
|
< 1
|
|
Conforming-jumbo
|
|
|
1,613
|
|
|
|
2
|
|
|
|
|
|
|
|
|
|
|
|
2,084
|
|
|
|
1
|
|
|
|
|
|
|
|
|
|
FHA/VA(6)
|
|
|
191
|
|
|
|
< 1
|
|
|
|
2
|
|
|
|
< 1
|
|
|
|
433
|
|
|
|
< 1
|
|
|
|
146
|
|
|
|
< 1
|
|
Rural Housing Service and other federally guaranteed loans
|
|
|
76
|
|
|
|
< 1
|
|
|
|
49
|
|
|
|
< 1
|
|
|
|
167
|
|
|
|
< 1
|
|
|
|
135
|
|
|
|
< 1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total single-family
|
|
|
69,434
|
|
|
|
92
|
|
|
|
123,074
|
|
|
|
95
|
|
|
|
309,921
|
|
|
|
93
|
|
|
|
355,659
|
|
|
|
97
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Multifamily mortgage purchases:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Conventional and other
|
|
|
6,009
|
|
|
|
8
|
|
|
|
3,504
|
|
|
|
3
|
|
|
|
17,748
|
|
|
|
5
|
|
|
|
9,158
|
|
|
|
2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total multifamily
|
|
|
6,009
|
|
|
|
8
|
|
|
|
3,504
|
|
|
|
3
|
|
|
|
17,748
|
|
|
|
5
|
|
|
|
9,158
|
|
|
|
2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total mortgage purchases
|
|
|
75,443
|
|
|
|
100
|
|
|
|
126,578
|
|
|
|
98
|
|
|
|
327,669
|
|
|
|
98
|
|
|
|
364,817
|
|
|
|
99
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-Freddie Mac mortgage-related securities purchased for
Structured Securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Single-family:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ginnie Mae Certificates
|
|
|
4
|
|
|
|
< 1
|
|
|
|
4
|
|
|
|
< 1
|
|
|
|
6
|
|
|
|
< 1
|
|
|
|
44
|
|
|
|
< 1
|
|
Structured Transactions
|
|
|
|
|
|
|
|
|
|
|
2,817
|
|
|
|
2
|
|
|
|
8,245
|
|
|
|
2
|
|
|
|
3,017
|
|
|
|
1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Non-Freddie Mac mortgage-related securities
purchased for Structured Securities
|
|
|
4
|
|
|
|
< 1
|
|
|
|
2,821
|
|
|
|
2
|
|
|
|
8,251
|
|
|
|
2
|
|
|
|
3,061
|
|
|
|
1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total single-family and multifamily mortgage purchases and
total non-Freddie Mac mortgage-related securities purchased for
Structured Securities
|
|
$
|
75,447
|
|
|
|
100
|
%
|
|
$
|
129,399
|
|
|
|
100
|
%
|
|
$
|
335,920
|
|
|
|
100
|
%
|
|
$
|
367,878
|
|
|
|
100
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-Freddie Mac mortgage-related securities purchased into
our retained portfolio:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Agency securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fannie Mae:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Single-family:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed-rate
|
|
$
|
11,150
|
|
|
|
|
|
|
$
|
976
|
|
|
|
|
|
|
$
|
29,412
|
|
|
|
|
|
|
$
|
2,079
|
|
|
|
|
|
Variable-rate
|
|
|
1,023
|
|
|
|
|
|
|
|
4,623
|
|
|
|
|
|
|
|
16,832
|
|
|
|
|
|
|
|
8,352
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total agency mortgage-related securities
|
|
|
12,173
|
|
|
|
|
|
|
|
5,599
|
|
|
|
|
|
|
|
46,244
|
|
|
|
|
|
|
|
10,431
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-agency securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Single-family:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed-rate
|
|
|
|
|
|
|
|
|
|
|
260
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
529
|
|
|
|
|
|
Variable-rate
|
|
|
|
|
|
|
|
|
|
|
3,330
|
|
|
|
|
|
|
|
618
|
|
|
|
|
|
|
|
41,914
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total single-family
|
|
|
|
|
|
|
|
|
|
|
3,590
|
|
|
|
|
|
|
|
618
|
|
|
|
|
|
|
|
42,443
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial mortgage-backed securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed-rate
|
|
|
|
|
|
|
|
|
|
|
280
|
|
|
|
|
|
|
|
547
|
|
|
|
|
|
|
|
3,381
|
|
|
|
|
|
Variable-rate
|
|
|
|
|
|
|
|
|
|
|
5,713
|
|
|
|
|
|
|
|
660
|
|
|
|
|
|
|
|
15,509
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total commercial mortgage-backed securities
|
|
|
|
|
|
|
|
|
|
|
5,993
|
|
|
|
|
|
|
|
1,207
|
|
|
|
|
|
|
|
18,890
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage revenue bonds:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed-rate
|
|
|
22
|
|
|
|
|
|
|
|
604
|
|
|
|
|
|
|
|
81
|
|
|
|
|
|
|
|
1,407
|
|
|
|
|
|
Variable-rate
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total mortgage revenue bonds
|
|
|
22
|
|
|
|
|
|
|
|
604
|
|
|
|
|
|
|
|
81
|
|
|
|
|
|
|
|
1,407
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total non-agency mortgage-related securities
|
|
|
22
|
|
|
|
|
|
|
|
10,187
|
|
|
|
|
|
|
|
1,906
|
|
|
|
|
|
|
|
62,740
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total non-Freddie Mac mortgage-related securities
purchased into our retained portfolio
|
|
|
12,195
|
|
|
|
|
|
|
|
15,786
|
|
|
|
|
|
|
|
48,150
|
|
|
|
|
|
|
|
73,171
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total new business purchases
|
|
$
|
87,642
|
|
|
|
|
|
|
$
|
145,185
|
|
|
|
|
|
|
$
|
384,070
|
|
|
|
|
|
|
$
|
441,049
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage purchases with credit
enhancements(7)
|
|
|
23
|
%
|
|
|
|
|
|
|
22
|
%
|
|
|
|
|
|
|
22
|
%
|
|
|
|
|
|
|
19
|
%
|
|
|
|
|
Mortgage
liquidations(8)
|
|
$
|
66,689
|
|
|
|
|
|
|
$
|
73,474
|
|
|
|
|
|
|
$
|
260,655
|
|
|
|
|
|
|
$
|
242,226
|
|
|
|
|
|
Mortgage liquidations rate
(annualized)(8)
|
|
|
12
|
%
|
|
|
|
|
|
|
15
|
%
|
|
|
|
|
|
|
17
|
%
|
|
|
|
|
|
|
18
|
%
|
|
|
|
|
Freddie Mac securities repurchased into our retained portfolio:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Single-family:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed-rate
|
|
$
|
20,032
|
|
|
|
|
|
|
$
|
40,708
|
|
|
|
|
|
|
$
|
111,130
|
|
|
|
|
|
|
$
|
78,691
|
|
|
|
|
|
Variable-rate
|
|
|
1,906
|
|
|
|
|
|
|
|
6,402
|
|
|
|
|
|
|
|
23,406
|
|
|
|
|
|
|
|
24,732
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Freddie Mac securities repurchased into our retained
portfolio
|
|
$
|
21,938
|
|
|
|
|
|
|
$
|
47,110
|
|
|
|
|
|
|
$
|
134,536
|
|
|
|
|
|
|
$
|
103,423
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
Based on unpaid principal balances.
Excludes mortgage loans and mortgage-related securities traded
but not yet settled. Also excludes net additions to our retained
portfolio for delinquent mortgage loans and balloon/reset
mortgages purchased out of PC pools.
|
(2)
|
Includes
40-year and
20-year
fixed-rate mortgages.
|
(3)
|
Includes amortizing ARMs with 1-,
3-, 5-, 7- and
10-year
initial fixed-rate periods.
|
(4)
|
Represents loans where the borrower
pays interest only for a period of time before the borrower
begins making principal payments. Includes both fixed- and
variable-rate interest-only loans.
|
(5)
|
Represents mortgages whose terms
require lump sum principal payments on contractually determined
future dates unless the borrower qualifies for and elects an
extension of the maturity date at an adjusted interest-rate.
|
(6)
|
Excludes FHA/VA loans that back
Structured Transactions.
|
(7)
|
Excludes mortgage-related
securities backed by Ginnie Mae Certificates.
|
(8)
|
Based on total mortgage portfolio.
|
FORWARD-LOOKING
STATEMENTS
We regularly communicate information concerning our business
activities to investors, securities analysts, the news media and
others as part of our normal operations. Some of these
communications, including this
Form 10-Q,
contain forward-looking statements pertaining to the
conservatorship and our current expectations and objectives for
financial reporting, remediation efforts, future business plans,
capital plans, economic and market conditions and trends, market
share, credit losses, and results of operations and financial
condition on a GAAP, Segment Earnings and fair value basis.
Forward-looking statements are often accompanied by, and
identified with, terms such as objective,
expect, trend, forecast,
believe, intend, could,
future and similar phrases. These statements are not
historical facts, but rather represent our expectations based on
current information, plans, judgments, assumptions, estimates
and projections. Forward-looking statements involve known and
unknown risks, uncertainties and other factors, some of which
are beyond our control. You should not unduly rely on our
forward-looking statements. Actual results may differ materially
from the expectations expressed in the forward-looking
statements we make as a result of various factors, including
those factors described in the RISK FACTORS section
of this
Form 10-Q,
the comparably captioned sections in our
Form 10-Q
for the quarter ended June 30, 2008 and our Registration
Statement, and:
|
|
|
|
|
the actions FHFA, Treasury and our management may take;
|
|
|
|
the impact of the restrictions and other terms of the
conservatorship, the Purchase Agreement, the senior preferred
stock and the warrant on our business;
|
|
|
|
any restructuring or reorganization in the form of our company,
including whether we will remain a stockholder-owned company and
whether we will be placed under receivership;
|
|
|
|
the risk that we may not be able to maintain the continued
listing of our common and exchange-listed issues of preferred
stock on the NYSE;
|
|
|
|
the success of the U.S. governments efforts to
stabilize the financial markets through the implementation of
EESA;
|
|
|
|
changes in applicable legislative or regulatory requirements,
including regulation of the subprime or non-traditional mortgage
product markets, the Reform Act, changes to our charter, changes
to affordable housing goals regulation, reinstatement of
regulatory capital requirements or the exercise or assertion of
additional regulatory or administrative authority;
|
|
|
|
our ability to effectively identify and manage credit risk
and/or changes to the credit environment;
|
|
|
|
changes in general regional, national or international economic,
business or market conditions and competitive pressures,
including consolidation of mortgage originators, employment
rates and home price appreciation;
|
|
|
|
our ability to effectively implement our business strategies and
manage the risks in our business, including our efforts to
improve the supply and liquidity of, and demand for, our
products;
|
|
|
|
our ability to effectively identify and manage interest-rate and
other market risks, including the levels and volatilities of
interest rates, as well as the shape and slope of the yield
curves;
|
|
|
|
incomplete or inaccurate information provided by customers and
counterparties, or adverse changes in the financial condition of
our customers and counterparties;
|
|
|
|
changes to, or implementation of, legislative, regulatory or
contractual limits on the growth of any aspect of our business
activities, including our retained portfolio;
|
|
|
|
our ability to effectively identify, assess, evaluate, manage,
mitigate or remediate control deficiencies and risks, including
material weaknesses and significant deficiencies, in our
internal control over financial reporting and disclosure
controls and procedures;
|
|
|
|
changes in our judgments, assumptions, forecasts or estimates
regarding rates of growth in our business, spreads we expect to
earn, and the reinstatement of required capital levels;
|
|
|
|
our ability to effectively manage and implement changes,
developments or impacts of accounting or tax standards and
interpretations or changes to our accounting policies or
estimates;
|
|
|
|
the availability of debt financing in sufficient quantity and at
attractive rates to support growth in our retained portfolio, to
refinance maturing debt and to mitigate interest-rate risk;
|
|
|
|
changes in pricing, valuation or other methodologies, models,
assumptions, judgments, estimates and/or other measurement
techniques or their respective reliability;
|
|
|
|
changes in mortgage-to-debt option-adjusted spreads;
|
|
|
|
|
|
the availability of options, interest-rate and currency swaps
and other derivative financial instruments of the types and
quantities and with acceptable counterparties needed for
investment funding and risk management purposes;
|
|
|
|
the rate of growth in total outstanding U.S. residential
mortgage debt and the size of the U.S. residential mortgage
market;
|
|
|
|
volatility of reported results due to changes in the fair value
of certain instruments or assets;
|
|
|
|
preferences of originators in selling into the secondary market;
|
|
|
|
changes to our underwriting and disclosure requirements or
investment standards for mortgage-related products;
|
|
|
|
investor preferences for mortgage loans and mortgage-related and
debt securities compared to other investments;
|
|
|
|
the ability of our financial, accounting, data processing and
other operating systems or infrastructure and those of our
vendors to process the complexity and volume of our transactions;
|
|
|
|
borrower preferences for fixed-rate mortgages or adjustable-rate
mortgages;
|
|
|
|
the occurrence of a major natural or other disaster in
geographic areas in which portions of our total mortgage
portfolio are concentrated;
|
|
|
|
other factors and assumptions described in this
Form 10-Q,
our
Form 10-Q
for the quarter ended June 30, 2008 or our Registration
Statement, including in the MD&A section;
|
|
|
|
our assumptions and estimates regarding the foregoing and our
ability to anticipate the foregoing factors and their impacts;
and
|
|
|
|
market reactions to the foregoing.
|
We undertake no obligation to update forward-looking statements
we make to reflect events or circumstances after the date of
this
Form 10-Q
or to reflect the occurrence of unanticipated events.
RISK
MANAGEMENT AND DISCLOSURE COMMITMENTS
In October 2000, we announced our voluntary adoption of a series
of commitments designed to enhance market discipline, liquidity
and capital. In September 2005, we entered into a written
agreement with FHFA that updated these commitments and set forth
a process for implementing them. A copy of the letters between
us and FHFA dated September 1, 2005 constituting the
written agreement has been filed as an exhibit to our
Registration Statement, and is available on the Investor
Relations page of our website at
www.freddiemac.com/investors/sec_filings/index.html. The status
of our commitments at September 30, 2008 follows:
|
|
|
|
Description
|
|
Status
|
|
|
1. Periodic Issuance of Subordinated Debt:
We will issue Freddie
SUBS®
securities for public secondary market trading that are rated by
no fewer than two nationally recognized statistical rating
organizations.
Freddie
SUBS®
securities will be issued in an amount such that the sum of
total capital (core capital plus general allowance for losses)
and the outstanding balance of Qualifying subordinated
debt will equal or exceed the sum of (i) 0.45% of
outstanding PCs and Structured Securities we guaranteed; and
(ii) 4% of total on-balance sheet assets. Qualifying
subordinated debt is discounted by one-fifth each year during
the instruments last five years before maturity; when the
remaining maturity is less than one year, the instrument is
entirely excluded. We will take reasonable steps to maintain
outstanding subordinated debt of sufficient size to promote
liquidity and reliable market quotes on market values.
Each quarter, we will submit to FHFA
calculations of the quantity of qualifying Freddie
SUBS®
securities and total capital as part of our quarterly capital
report.
Every six months, we will submit to FHFA a
subordinated debt management plan that includes any issuance
plans for the six months following the date of the plan.
|
|
FHFA, as Conservator of Freddie Mac, has suspended
the requirements in the September 2005 agreement with respect to
issuance, maintenance, and reporting and disclosure of Freddie
Mac subordinated debt during the term of conservatorship and
thereafter until directed otherwise.
FHFA has directed Freddie Mac during the period of
conservatorship and thereafter until directed otherwise to make,
without deferral, all periodic principal and interest payments
on all outstanding subordinated debt, regardless of Freddie
Macs existing capital levels.
|
|
2. Liquidity Management and Contingency Planning:
We will maintain a contingency plan providing
for at least three months liquidity without relying upon
the issuance of unsecured debt. We will also periodically test
the contingency plan in consultation with FHFA.
|
|
We have in place a liquidity contingency plan, upon
which we report to FHFA on a weekly basis. We periodically test
this plan in accordance with our agreement with FHFA.
|
|
3. Interest-Rate Risk Disclosures:
We will provide public disclosure of our
duration gap, Portfolio Market Value Sensitivity-Level, or
PMVS-L and
Portfolio Market Value Sensitivity-Yield Curve, or
PMVS-YC
interest-rate risk sensitivity results on a monthly basis. See
ITEM 2. FINANCIAL INFORMATION ANNUAL
MD&A QUANTITATIVE AND QUALITATIVE DISCLOSURES
ABOUT MARKET RISK Interest-Rate Risk and Other
Market Risks Portfolio Market Value Sensitivity
and Measurement of Interest-Rate Risk in our
Registration Statement for a description of these metrics.
|
|
For the nine months ended September 30, 2008,
our duration gap averaged zero months,
PMVS-L
averaged $418 million and
PMVS-YC
averaged $70 million. Our 2008 monthly average duration
gap, PMVS results and related disclosures are provided in our
Monthly Volume Summary which is available on our website,
www.freddiemac.com/investors/volsum and our current reports on
Form 8-K
we file with the SEC.
|
|
|
|
|
|
Description
|
|
Status
|
|
|
4. Credit Risk Disclosures:
We will make quarterly assessments of the
expected impact on credit losses from an immediate 5% decline in
single-family home prices for the entire U.S. We will disclose
the impact in present value terms and measure our estimated
losses both before and after receipt of private mortgage
insurance claims and other credit enhancements.
|
|
Our quarterly credit risk sensitivity estimates are
as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Before Receipt
of Credit
Enhancements(1)
|
|
After Receipt
of Credit
Enhancements(2)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Present
Value, or NPV(3)
|
|
NPV
Ratio(4)
|
|
NPV(3)
|
|
NPV
Ratio(4)
|
|
|
|
|
|
|
|
|
|
(dollars in millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
09/30/08
|
|
$5,948
|
|
32.3 bps
|
|
$5,230
|
|
28.4 bps
|
|
|
|
|
|
|
|
|
|
|
|
|
|
06/30/08
|
|
$5,151
|
|
28.3 bps
|
|
$4,241
|
|
23.3 bps
|
|
|
|
|
|
|
|
|
|
|
|
|
|
03/31/08
|
|
$4,922
|
|
27.8 bps
|
|
$3,914
|
|
22.1 bps
|
|
|
|
|
|
|
|
|
|
|
|
|
|
12/31/07(5)
|
|
$4,036
|
|
23.2 bps
|
|
$3,087
|
|
17.8 bps
|
|
|
|
|
|
|
|
|
|
|
|
|
|
09/30/07
|
|
$1,959
|
|
11.7 bps
|
|
$1,415
|
|
8.4 bps
|
|
|
|
|
|
|
|
|
|
|
|
|
|
06/30/07
|
|
$1,768
|
|
11.0 bps
|
|
$1,292
|
|
8.1 bps
|
|
|
|
|
|
|
|
|
(1) Assumes that none of the credit enhancements currently
covering our mortgage loans has any mitigating impact on our
credit losses.
|
|
|
|
|
|
(2) Assumes we collect amounts due from credit enhancement
providers after giving effect to certain assumptions about
counterparty default rates.
|
|
|
|
|
|
(3) Based on the single-family mortgage portfolio,
excluding Structured Securities backed by Ginnie Mae
Certificates.
|
|
|
|
|
|
(4) Calculated as the ratio of NPV of increase in credit
losses to the single-family mortgage portfolio, defined in
footnote (3) above.
|
|
|
|
|
|
(5) The significant increase in our credit risk sensitivity
estimates beginning in Q4 2007 was primarily attributable
to changes in our assumptions employed to calculate the credit
risk sensitivity disclosure. Given deterioration in housing
fundamentals at the end of 2007, we modified our assumptions for
slower recovery of forecasted home prices subsequent to the
immediate 5% decline.
|
|
|
|
|
5. Public Disclosure of Risk Rating:
We will seek to obtain a rating, that will
be continuously monitored by at least one nationally recognized
statistical rating organization, assessing our
risk-to-the-government or independent financial
strength.
|
|
At September 30, 2008, we no longer had a
risk-to-the-government
rating from Standard & Poors. On
September 7, 2008, S&P lowered our
risk-to-the-government
rating to R (regulatory supervision) from
A− and withdrew the rating because of
conservatorship.
At September 30, 2008, our Bank Financial
Strength rating from Moodys was E+. On
September 7, 2008, Moodys lowered our rating to
E+ from D+ following our placement into
conservatorship. The Bank Financial Strength rating
scale ranges from A, highest, to E,
lowest.
|
|
ITEM 3.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK
Our retained portfolio investment and credit guarantee
activities expose us to three broad categories of risk:
(a) interest-rate risk and other market risks;
(b) credit risks; and (c) operational risks. Risk
management is a critical aspect of our business. See
ITEM 1A. RISK FACTORS in our Registration
Statement and PART II ITEM 1A. RISK
FACTORS in our
Form 10-Q
for the quarter ended June 30, 2008 and this
Form 10-Q
for further information regarding these and other risks. We
manage risk through a framework that recognizes primary risk
ownership and management by our business areas. Within this
framework, our executive management responsible for independent
risk oversight monitors performance against our risk management
strategies and established risk limits and reporting thresholds,
identifies and assesses potential issues and provides oversight
regarding changes in business processes and activities. See
ITEM 2. MD&A CREDIT RISKS for
a discussion of credit risks and see ITEM 4T.
CONTROLS AND PROCEDURES for a discussion of disclosure
controls and procedures and internal control over financial
reporting.
Interest-Rate
Risk and Other Market Risks
See ITEM 2. FINANCIAL INFORMATION ANNUAL
MD&A QUANTITATIVE AND QUALITATIVE DISCLOSURES
ABOUT MARKET RISK Interest-Rate Risk and Other
Market Risks in our Registration Statement for more
information.
PMVS
and Duration Gap
Our primary interest-rate risk measures are PMVS and duration
gap. PMVS is measured in two ways, one measuring the estimated
sensitivity of our portfolio market value to parallel moves in
interest rates (Portfolio Market Value Sensitivity-Level or
PMVS-L) and
the other to nonparallel movements (Portfolio Market Value
Sensitivity Yield Curve or
PMVS-YC). In
December 2007, we changed our PMVS reporting to present
estimated
dollars-at-risk,
rather than a percentage of fair value of common equity. We
believe this change provides more relevant information and
better represents our overall level and low exposure to adverse
interest-rate movements given the substantial reduction in the
fair value of common equity that occurred during 2007.
The 50 basis point shift and 25 basis point change in
slope of the LIBOR yield curve used for our PMVS measures
represent events that are expected to have an approximately 5%
probability of occurring over a one-month time horizon. Our PMVS
and duration gap estimates are determined using models that
involve our best judgment of interest-rate and prepayment
assumptions. Accordingly, while we believe that PMVS and
duration gap are useful risk management tools, they should be
understood as estimates rather than as precise measurements.
Methodologies used to calculate interest-rate risk sensitivity
disclosures are periodically changed on a prospective basis to
reflect improvements in the underlying estimation processes.
During the second quarter of 2008, we made changes to reflect
new prepayment and OAS assumptions related to certain floating
rate securities.
Limitations
of Market Risk Measures
There are inherent limitations in any methodology used to
estimate exposure to changes in market interest rates. Our
sensitivity analyses for PMVS and duration gap contemplate only
certain movements in interest rates and are performed at a
particular point in time based on the estimated fair value of
our existing portfolio. These sensitivity analyses do not
incorporate other factors that may have a significant effect,
most notably expected future business activities and strategic
actions that management may take to manage interest rate risk.
In addition, when market conditions change rapidly and
dramatically, as they have since July 2007, the assumptions that
we use in our models for our sensitivity analyses may not keep
pace with changing conditions. As such, these analyses are not
intended to provide precise forecasts of the effect a change in
market interest rates would have on the estimated fair value of
our net assets.
PMVS
Results
Table 55 provides estimated
PMVS-L and
PMVS-YC
results. Table 55 also provides
PMVS-L
estimates assuming an immediate 100 basis point shift in
the LIBOR yield curve. Because we do not hedge all prepayment
risk, the duration of our mortgage assets changes more rapidly
as changes in interest rates increase. Accordingly, as shown in
Table 55, the
PMVS-L
results based on a 100 basis point shift in the LIBOR curve
are disproportionately higher than the
PMVS-L
results based on a 50 basis point shift in the LIBOR curve.
Table 55
PMVS Assuming Shifts of the LIBOR Yield Curve
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Potential Pre-Tax Loss in
|
|
|
Portfolio Market Value
|
|
|
PMVS-YC
|
|
PMVS-L
|
|
|
25 bps
|
|
50 bps
|
|
100 bps
|
|
|
(in millions)
|
|
At:
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2008
|
|
$
|
114
|
|
|
$
|
322
|
|
|
$
|
1,258
|
|
December 31, 2007
|
|
$
|
42
|
|
|
$
|
533
|
|
|
$
|
1,681
|
|
Derivatives have enabled us to keep our interest-rate risk
exposure at consistently low levels in a wide range of
interest-rate environments. Table 56 shows that the low
PMVS-L risk
levels for the periods presented would generally have been
higher if we had not used derivatives to manage our
interest-rate risk exposure.
Table 56
Derivative Impact on
PMVS-L
(50 bps)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Before Derivatives
|
|
After Derivatives
|
|
Effect of Derivatives
|
|
|
(in millions)
|
|
At:
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2008
|
|
$
|
3,523
|
|
|
$
|
322
|
|
|
$
|
(3,201
|
)
|
December 31, 2007
|
|
$
|
1,371
|
|
|
$
|
533
|
|
|
$
|
(838
|
)
|
The disclosure in our Monthly Volume Summary reports, which are
available on our website at www.freddiemac.com and in current
reports on
Form 8-K
we file with the SEC, reflects the average of the daily
PMVS-L,
PMVS-YC and
duration gap estimates for a given reporting period (a month,
quarter or year).
Duration
Gap Results
Our estimated average duration gap for both the months of
September 2008 and December 2007 was zero months. A positive
duration gap indicates that the duration of our assets exceeds
the duration of our liabilities, which, from a net perspective,
implies that the fair value of equity will increase in value
when interest rates fall and decrease in value when interest
rates rise. A duration gap of zero implies that the duration of
our assets equals the duration of our liabilities. As a result,
the change in value of assets from an instantaneous move in
interest rates, either up or down, will be accompanied by an
equal and offsetting change in the value of liabilities, thus
leaving the fair value of equity unchanged. A negative duration
gap indicates that the duration of our liabilities exceeds the
duration of our assets, which, from a net perspective, implies
that the fair value of equity will increase in value when
interest rates rise and decrease in value when interest rates
fall.
Use of
Derivatives and Interest-Rate Risk Management
We use derivatives primarily to:
|
|
|
|
|
hedge forecasted issuances of debt and synthetically create
callable and non-callable funding;
|
|
|
|
regularly adjust or rebalance our funding mix in order to more
closely match changes in the interest-rate characteristics of
our mortgage assets; and
|
|
|
|
hedge foreign-currency exposure (see ITEM 2.
FINANCIAL INFORMATION ANNUAL MD&A
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK Sources of Interest-Rate Risk and Other
Market Risks Foreign-Currency Risk in our
Registration Statement).
|
Types
of Derivatives
The derivatives we use to hedge interest-rate and
foreign-currency risks are common in the financial markets. We
principally use the following types of derivatives:
|
|
|
|
|
LIBOR- and Euro Interbank Offered Rate, or Euribor-, based
interest-rate swaps;
|
|
|
|
LIBOR- and Treasury-based options (including swaptions);
|
|
|
|
LIBOR- and Treasury-based exchange-traded futures; and
|
|
|
|
Foreign-currency swaps.
|
Derivative
Positions
In addition to swaps, futures and purchased options, our
derivative positions include the following:
Written Options and Swaptions. Written
call and put swaptions are sold to counterparties allowing them
the option to enter into receive- and pay-fixed swaps,
respectively. Written call and put options on mortgage-related
securities give the counterparty the right to execute a contract
under specified terms, which generally occurs when we are in a
liability position. We use these written options and swaptions
to manage convexity risk over a wide range of interest rates. We
may, from time to time, write other derivative contracts such as
caps, floors, interest-rate futures and options on buy-up and
buy-down commitments.
Forward Purchase and Sale
Commitments. We routinely enter into forward
purchase and sale commitments for mortgage loans and
mortgage-related securities. Most of these commitments are
derivatives subject to the requirements of
SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities, as amended.
Swap Guarantee Derivatives. We issue
swap guarantee derivatives that guarantee the payments on
(a) multifamily mortgage loans that are originated and held
by state and municipal housing finance agencies to support
tax-exempt multifamily housing revenue bonds and
(b) Freddie Mac pass-through certificates which are backed
by tax-exempt multifamily housing revenue bonds and related
taxable bonds
and/or
loans. In connection with some of these guarantees, we may also
guarantee the sponsors or the borrowers performance
as a counterparty on any related interest-rate swaps used to
mitigate interest-rate risk.
Credit Derivatives. We enter into
credit derivatives, including risk-sharing agreements. Under
these risk-sharing agreements, default losses on specific
mortgage loans delivered by sellers are compared to default
losses on reference pools of mortgage loans with similar
characteristics. Based upon the results of that comparison, we
remit or receive payments based upon the default performance of
the referenced pools of mortgage loans. In addition, we enter
into agreements whereby we assume credit risk for mortgage loans
held by third parties in exchange for a monthly fee. We are
obligated to purchase any of the mortgage loans that become
120 days delinquent.
In addition, we have purchased mortgage loans containing debt
cancellation contracts, which provide mortgage debt or payment
cancellation for borrowers who experience unanticipated losses
of income dependent on a covered event. The rights and
obligations under these agreements have been assigned to the
servicers. However, in the event the servicer does not perform
as required by contract, under our guarantee, we would be
obligated to make the required contractual payments.
ITEM 4T.
CONTROLS AND PROCEDURES
Evaluation
of Disclosure Controls and Procedures
Disclosure controls and procedures include, without limitation,
controls and procedures designed to ensure that the information
we are required to disclose in our financial reports is
recorded, processed, summarized and reported within the time
periods specified by the SEC rules and forms and that such
information is accumulated and communicated to senior
management, as appropriate, to allow timely decisions regarding
required disclosure. In designing our disclosure controls and
procedures, we recognize that any controls and procedures, no
matter how well designed and operated, can provide only
reasonable assurance of achieving the desired control
objectives, and we must apply judgment in implementing possible
controls and procedures. Management, including the
companys Chief Executive Officer and Acting Chief
Financial Officer, conducted an evaluation of the effectiveness
of our disclosure controls and procedures as of
September 30, 2008. As a result of managements
evaluation, our Chief Executive Officer and Acting Chief
Financial Officer concluded that our disclosure controls and
procedures were not effective as of September 30, 2008, at
a reasonable level of assurance. We lack a functioning Board of
Directors and Audit Committee with oversight authority with
respect to our disclosure controls and procedures. In addition,
we have not yet updated the design of our disclosure controls
and procedures to take account of the conservatorship. As a
result, we have not been able to rely on the disclosure controls
and procedures that were in place as of September 30, 2008
or as of the date of this filing. As described below, we have
identified two corresponding material weaknesses in our internal
control over financial reporting, which management considers an
integral part of our disclosure controls and procedures.
However, we and the Conservator are designing and implementing
policies and procedures and have undertaken numerous steps and
activities, as identified below, intended to permit accumulation
and communication to management of information needed to meet
our disclosure obligations under the federal securities laws,
including disclosure affecting our financial statements.
We are continuing to work with the Conservator to remediate our
disclosure controls and procedures, however, as of the date of
filing of this report, the deficiency in our disclosure controls
and procedures has not been remediated.
Changes
in Internal Control Over Financial Reporting
We have evaluated whether any changes in our internal control
over financial reporting during the quarter ended
September 30, 2008 have materially affected, or are
reasonably likely to materially affect, our internal control
over financial reporting. Based on our evaluation, management
has concluded that the following changes in our internal control
over financial reporting that occurred during the third quarter
of 2008 have materially affected, or are reasonably likely to
materially affect, our internal control over financial reporting:
|
|
|
|
|
Conservatorship. On September 6, 2008,
FHFA was appointed Conservator of Freddie Mac. By operation of
law, the Conservator succeeded to the powers of our
shareholders, management and board of directors. As a result, we
ceased to have functioning committees of the board of directors,
including the audit committee. As discussed below, these matters
have led management to identify two material weaknesses in
internal control over financial reporting.
|
|
|
|
Changes in Management. During the third
quarter of 2008, we appointed a new Chief Executive Officer and
announced several management changes, including the appointment
of an Acting Chief Financial Officer and acting Chief Credit
Officer, and the realignment of our business lines to report
directly to the Chief Executive Officer. We also announced the
departures of our Chief Business Officer and Chief Financial
Officer.
|
New
Material Weaknesses
As with our disclosure controls and procedures, despite the
activities described below, up to the date of filing this report
we were unable to design, implement, operate and test policies
and procedures necessary to remediate the following two material
weaknesses in our internal control over financial reporting as
of September 30, 2008:
|
|
|
|
|
Board of Directors and Audit Committee. Upon the appointment of
FHFA as the Conservator on September 6, 2008, the Board of
Directors and its committees, including the Audit Committee,
ceased to have any authority. The Audit Committee, in accordance
with its charter, is responsible for reviewing and discussing
with management and others
|
|
|
|
|
|
the adequacy and effectiveness of our internal control over
financial reporting and management reports thereon, as well as
the annual audited and quarterly unaudited financial statements
and certain disclosures required to be contained in our periodic
reports. In addition, the Audit Committee previously consulted
with management to address disclosure and accounting issues and
reviewed drafts of periodic reports before we filed such reports
with the SEC. As of September 30, 2008 and the date of this
filing, neither a Board of Directors nor an Audit Committee has
been reconstituted. As a result, we lacked the appropriate
governance structure to provide oversight of our financial
reporting process.
|
|
|
|
|
|
Policy Updates. We have not yet updated our policies that
establish the design of our disclosure controls and procedures
to take account of the conservatorship. As a result, our
disclosure controls and procedures have not provided adequate
mechanisms for information that may have financial statement
disclosure ramifications to be communicated to management.
Accordingly, we did not maintain effective controls and
procedures designed to ensure complete and accurate financial
reporting disclosure as required by GAAP.
|
Remediation
Progress and Mitigation
Since September 30, 2008, working with the Conservator, we
have made the following progress in remediating these material
weaknesses in internal control over financial reporting and in
improving the effectiveness of our disclosure controls and
procedures:
|
|
|
|
|
Board of Directors and Board Committees. The Conservator has
indicated that it intends to appoint a full Board of Directors
to which it will delegate specified roles and responsibilities.
|
|
|
|
Updated Policies. We are working with our Conservator to design,
implement, operate and test updated policies and procedures
intended to ensure that adequate communication will occur under
these unique circumstances, and to provide communication and
training regarding those policies and procedures.
|
Together with our Conservator, management has implemented
mitigating actions during conservatorship intended to provide
oversight of our financial reporting process in lieu of audit
committee oversight and permit accumulation and communication to
management of information needed to meet our disclosure
obligations under the federal securities laws, including
disclosure affecting our financial statements. These include the
following:
|
|
|
|
|
Beginning on September 8, 2008, FHFA examiners established
a presence on site at our headquarters and at locations of other
key operations, in part to enhance good communication with
management and employees.
|
|
|
|
Many of our departments and executive officers who remained
after the conservatorship were assigned designated FHFA liaisons
who monitored activities within those departments, provided
direction and advice, and made themselves available to answer
questions for those officers or departments and raise issues
with others at FHFA for prompt resolution.
|
|
|
|
FHFA representatives established weekly meetings with various
groups within the company to enhance the flow of information and
to provide oversight on a variety of matters, including
accounting, capital markets management, fulfillment of mission,
external communications and legal matters.
|
|
|
|
The Director of FHFA is in frequent communication with our Chief
Executive Officer.
|
|
|
|
Various officials within FHFA, including a number of senior
officials, have participated in review of our various SEC
filings and have engaged in discussions regarding issues
associated with the information contained in those filings.
|
|
|
|
Senior officials within FHFAs accounting group have met
weekly with our senior financial executives regarding our
accounting policies, practices and procedures.
|
|
|
|
As part of the process for filing this Quarterly Report on
Form 10-Q,
senior members of management met with representatives of the
Conservator. At that meeting, the representatives of the
Conservator in attendance discussed and reviewed with various
members of senior management: a draft of this report;
managements representation letter to our independent
registered public accounting firm; and significant accounting
decisions. In addition, during that meeting, the representatives
of the Conservator asked questions and discussed issues in a
manner similar to that previously employed by our Audit
Committee.
|
It is expected that many of these activities will no longer be
necessary once a Board of Directors and committees, with powers
similar to those possessed by the Board of Directors and its
committees prior to conservatorship, are reconstituted.
New
Significant Deficiency
Our assessment of controls over our process for estimating our
reserve for loan losses has identified various deficiencies in
the governance and execution of the process that could result in
significant variances in model output. While our process uses
multiple other sources of data, along with model output, to
inform managements judgment, the identified deficiencies
make it difficult to produce a consistently reliable result for
management to review. Because of deteriorating market conditions
during the third quarter, the lack of clear accountability for
the process as we transitioned to conservatorship and
stress on the governance process due to recent changes in
management, we believe these deficiencies aggregate to a new
significant deficiency in our internal control over financial
reporting as of September 30, 2008. Management is currently
developing a remediation plan to resolve this matter.
Summary
of Remediation Progress
Our progress as of September 30, 2008 toward remediation of
the newly identified material weaknesses and significant
deficiency and the previously disclosed significant deficiencies
in internal control over financial reporting is summarized
below. We report progress toward remediation in the following
stages:
|
|
|
|
|
In process We are in the process of designing and
implementing controls to correct identified internal control
deficiencies and conducting ongoing evaluations to ensure all
deficiencies have been identified.
|
|
|
|
Remediation activities implemented We have designed
and implemented the controls that we believe are necessary to
remediate the identified internal control deficiencies.
|
|
|
|
Remediated After a sufficient period of operation of
the controls implemented to remediate the control deficiencies,
management has evaluated the controls and found them to be
operating effectively.
|
|
|
|
|
|
|
|
|
|
|
|
Remediation
|
|
Remediation
|
|
|
Progress as of
|
|
Progress as of
|
Material Weaknesses (MW) and
Significant Deficiencies (SD)
|
|
June 30, 2008
|
|
September 30, 2008
|
|
MW Board of Directors and Audit Committee
|
|
|
|
|
|
|
|
|
We do not have a functioning Board of Directors and Audit
Committee. As a result, we lack the appropriate governance
structure to provide oversight of our financial reporting
process.
|
|
|
Not applicable
|
|
|
|
In process
|
|
|
|
|
|
|
|
|
|
|
MW Policy Updates
|
|
|
|
|
|
|
|
|
We have not yet updated our policies that establish the design
of our disclosure controls and procedures to take account of the
conservatorship. As a result, our disclosure controls and
procedures have not provided adequate mechanisms for information
that may have financial statement disclosure ramifications to be
communicated to management.
|
|
|
Not applicable
|
|
|
|
In process
|
|
|
|
|
|
|
|
|
|
|
SD Tax Basis Balance Sheet
|
|
|
|
|
|
|
|
|
We do not maintain a tax basis balance sheet to support deferred
tax accounting under GAAP, which could result in balance sheet
misclassifications and potential income statement adjustments.
|
|
|
In process
|
|
|
|
In process
|
|
|
|
|
|
|
|
|
|
|
SD Oversight of Models and Model Applications
|
|
|
|
|
|
|
|
|
Our model governance and monitoring procedures did not
effectively ensure that changes to and our use of models in our
financial reporting process are appropriate.
|
|
|
Remediation
activities
implemented
|
|
|
|
Remediation
activities
implemented
|
|
|
|
|
|
|
|
|
|
|
SD IT Security Shared IDs
|
|
|
|
|
|
|
|
|
We have not consistently executed security controls over system
and user accounts that can be used by multiple individuals.
|
|
|
In process
|
|
|
|
In process
|
|
|
|
|
|
|
|
|
|
|
SD User Access Recertification
|
|
|
|
|
|
|
|
|
We have not effectively executed periodic review and
recertification of user access to financial applications and
related technical platforms.
|
|
|
In process
|
|
|
|
In process
|
|
|
|
|
|
|
|
|
|
|
SD Loan Loss Reserve
|
|
|
|
|
|
|
|
|
Deficiencies in the governance and execution of our loan loss
reserve process make it difficult to produce a consistently
reliable result for management to review.
|
|
|
Not applicable
|
|
|
|
In process
|
|
FREDDIE
MAC
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
|
|
(dollars in millions, except share-related amounts)
|
|
|
Interest income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage loans
|
|
$
|
1,361
|
|
|
$
|
1,103
|
|
|
$
|
3,924
|
|
|
$
|
3,244
|
|
Mortgage-related securities
|
|
|
8,590
|
|
|
|
8,943
|
|
|
|
25,103
|
|
|
|
26,278
|
|
Cash and investments
|
|
|
518
|
|
|
|
959
|
|
|
|
1,558
|
|
|
|
2,897
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest income
|
|
|
10,469
|
|
|
|
11,005
|
|
|
|
30,585
|
|
|
|
32,419
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Short-term debt
|
|
|
(1,468
|
)
|
|
|
(2,292
|
)
|
|
|
(5,149
|
)
|
|
|
(6,749
|
)
|
Long-term debt
|
|
|
(6,795
|
)
|
|
|
(7,521
|
)
|
|
|
(20,231
|
)
|
|
|
(22,028
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest expense on debt securities
|
|
|
(8,263
|
)
|
|
|
(9,813
|
)
|
|
|
(25,380
|
)
|
|
|
(28,777
|
)
|
Due to Participation Certificate investors
|
|
|
|
|
|
|
(98
|
)
|
|
|
|
|
|
|
(322
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest expense
|
|
|
(8,263
|
)
|
|
|
(9,911
|
)
|
|
|
(25,380
|
)
|
|
|
(29,099
|
)
|
Expense related to derivatives
|
|
|
(362
|
)
|
|
|
(333
|
)
|
|
|
(1,034
|
)
|
|
|
(995
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income
|
|
|
1,844
|
|
|
|
761
|
|
|
|
4,171
|
|
|
|
2,325
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-interest income (loss)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Management and guarantee income (includes interest on guarantee
asset of $299, $138, $757 and $395, respectively)
|
|
|
832
|
|
|
|
718
|
|
|
|
2,378
|
|
|
|
1,937
|
|
Gains (losses) on guarantee asset
|
|
|
(1,722
|
)
|
|
|
(465
|
)
|
|
|
(2,002
|
)
|
|
|
(168
|
)
|
Income on guarantee obligation
|
|
|
783
|
|
|
|
473
|
|
|
|
2,721
|
|
|
|
1,377
|
|
Derivative gains (losses)
|
|
|
(3,080
|
)
|
|
|
(188
|
)
|
|
|
(3,210
|
)
|
|
|
(394
|
)
|
Gains (losses) on investment activity
|
|
|
(9,747
|
)
|
|
|
478
|
|
|
|
(11,855
|
)
|
|
|
(44
|
)
|
Unrealized gains (losses) on foreign-currency denominated debt
recorded at fair value
|
|
|
1,500
|
|
|
|
|
|
|
|
684
|
|
|
|
|
|
Gains (losses) on debt retirement
|
|
|
36
|
|
|
|
91
|
|
|
|
312
|
|
|
|
187
|
|
Recoveries on loans impaired upon purchase
|
|
|
91
|
|
|
|
125
|
|
|
|
438
|
|
|
|
232
|
|
Foreign-currency gains (losses), net
|
|
|
|
|
|
|
(1,162
|
)
|
|
|
|
|
|
|
(1,692
|
)
|
Other income
|
|
|
25
|
|
|
|
47
|
|
|
|
147
|
|
|
|
154
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-interest income (loss)
|
|
|
(11,282
|
)
|
|
|
117
|
|
|
|
(10,387
|
)
|
|
|
1,589
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-interest expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Salaries and employee benefits
|
|
|
(133
|
)
|
|
|
(216
|
)
|
|
|
(605
|
)
|
|
|
(656
|
)
|
Professional services
|
|
|
(61
|
)
|
|
|
(103
|
)
|
|
|
(188
|
)
|
|
|
(296
|
)
|
Occupancy expense
|
|
|
(16
|
)
|
|
|
(16
|
)
|
|
|
(49
|
)
|
|
|
(46
|
)
|
Other administrative expenses
|
|
|
(98
|
)
|
|
|
(93
|
)
|
|
|
(267
|
)
|
|
|
(275
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total administrative expenses
|
|
|
(308
|
)
|
|
|
(428
|
)
|
|
|
(1,109
|
)
|
|
|
(1,273
|
)
|
Provision for credit losses
|
|
|
(5,702
|
)
|
|
|
(1,372
|
)
|
|
|
(9,479
|
)
|
|
|
(2,067
|
)
|
Real estate owned operations expense
|
|
|
(333
|
)
|
|
|
(51
|
)
|
|
|
(806
|
)
|
|
|
(81
|
)
|
Losses on certain credit guarantees
|
|
|
(2
|
)
|
|
|
(392
|
)
|
|
|
(17
|
)
|
|
|
(719
|
)
|
Losses on loans purchased
|
|
|
(252
|
)
|
|
|
(649
|
)
|
|
|
(423
|
)
|
|
|
(1,129
|
)
|
Securities administrator loss on investment activity
|
|
|
(1,082
|
)
|
|
|
|
|
|
|
(1,082
|
)
|
|
|
|
|
Low-income housing tax credit partnerships
|
|
|
(121
|
)
|
|
|
(111
|
)
|
|
|
(346
|
)
|
|
|
(354
|
)
|
Minority interest in earnings of consolidated subsidiaries
|
|
|
|
|
|
|
(4
|
)
|
|
|
(8
|
)
|
|
|
(22
|
)
|
Other expenses
|
|
|
(86
|
)
|
|
|
(63
|
)
|
|
|
(264
|
)
|
|
|
(168
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-interest expense
|
|
|
(7,886
|
)
|
|
|
(3,070
|
)
|
|
|
(13,534
|
)
|
|
|
(5,813
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss before income tax (expense) benefit
|
|
|
(17,324
|
)
|
|
|
(2,192
|
)
|
|
|
(19,750
|
)
|
|
|
(1,899
|
)
|
Income tax (expense) benefit
|
|
|
(7,971
|
)
|
|
|
954
|
|
|
|
(6,517
|
)
|
|
|
1,257
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(25,295
|
)
|
|
$
|
(1,238
|
)
|
|
$
|
(26,267
|
)
|
|
$
|
(642
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred stock dividends and issuance costs on redeemed
preferred stock (including $, $, $ and $6 of
issuance costs on redeemed preferred stock, respectively)
|
|
|
(6
|
)
|
|
|
(102
|
)
|
|
|
(509
|
)
|
|
|
(292
|
)
|
Amount allocated to participating security option holders
|
|
|
|
|
|
|
(2
|
)
|
|
|
(1
|
)
|
|
|
(4
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss applicable to common stockholders
|
|
$
|
(25,301
|
)
|
|
$
|
(1,342
|
)
|
|
$
|
(26,777
|
)
|
|
$
|
(938
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss per common share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
(19.44
|
)
|
|
$
|
(2.07
|
)
|
|
$
|
(30.90
|
)
|
|
$
|
(1.43
|
)
|
Diluted
|
|
$
|
(19.44
|
)
|
|
$
|
(2.07
|
)
|
|
$
|
(30.90
|
)
|
|
$
|
(1.43
|
)
|
Weighted average common shares outstanding (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
1,301,430
|
|
|
|
647,377
|
|
|
|
866,472
|
|
|
|
653,825
|
|
Diluted
|
|
|
1,301,430
|
|
|
|
647,377
|
|
|
|
866,472
|
|
|
|
653,825
|
|
Dividends per common share
|
|
$
|
|
|
|
$
|
0.50
|
|
|
$
|
0.50
|
|
|
$
|
1.50
|
|
The accompanying notes are an integral part of these
unaudited consolidated financial statements.
FREDDIE
MAC
CONSOLIDATED BALANCE SHEETS
|
|
|
|
|
|
|
|
|
|
|
September 30,
|
|
|
|
|
|
|
2008
|
|
|
December 31,
|
|
|
|
(unaudited)
|
|
|
2007
|
|
|
|
(in millions, except
|
|
|
|
share-related amounts)
|
|
|
Assets
|
|
|
|
|
|
|
|
|
Retained portfolio
|
|
|
|
|
|
|
|
|
Mortgage loans:
|
|
|
|
|
|
|
|
|
Held-for-investment,
at amortized cost (net of allowances for loan losses of $459 and
$256, respectively)
|
|
$
|
86,225
|
|
|
$
|
76,347
|
|
Held-for-sale,
at lower-of-cost-or-fair-value (except $95 at fair value at
September 30, 2008)
|
|
|
11,978
|
|
|
|
3,685
|
|
|
|
|
|
|
|
|
|
|
Mortgage loans, net
|
|
|
98,203
|
|
|
|
80,032
|
|
Mortgage-related securities:
|
|
|
|
|
|
|
|
|
Available-for-sale,
at fair value (includes $22,659 and $17,010, respectively,
pledged as collateral that may be repledged)
|
|
|
478,413
|
|
|
|
615,665
|
|
Trading, at fair value
|
|
|
118,002
|
|
|
|
14,089
|
|
|
|
|
|
|
|
|
|
|
Total mortgage-related securities
|
|
|
596,415
|
|
|
|
629,754
|
|
|
|
|
|
|
|
|
|
|
Retained portfolio
|
|
|
694,618
|
|
|
|
709,786
|
|
|
|
|
|
|
|
|
|
|
Cash and investments
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
|
50,180
|
|
|
|
8,574
|
|
Investments:
|
|
|
|
|
|
|
|
|
Non-mortgage-related securities:
|
|
|
|
|
|
|
|
|
Available-for-sale,
at fair value
|
|
|
10,410
|
|
|
|
35,101
|
|
Securities purchased under agreements to resell and federal
funds sold
|
|
|
8,000
|
|
|
|
6,562
|
|
|
|
|
|
|
|
|
|
|
Cash and investments
|
|
|
68,590
|
|
|
|
50,237
|
|
|
|
|
|
|
|
|
|
|
Accounts and other receivables, net
|
|
|
5,298
|
|
|
|
5,003
|
|
Derivative assets, net
|
|
|
3,040
|
|
|
|
827
|
|
Guarantee asset, at fair value
|
|
|
9,679
|
|
|
|
9,591
|
|
Real estate owned, net
|
|
|
3,224
|
|
|
|
1,736
|
|
Deferred tax asset, net
|
|
|
11,866
|
|
|
|
10,304
|
|
Low-income housing tax credit partnerships equity investments
|
|
|
4,248
|
|
|
|
4,568
|
|
Other assets
|
|
|
3,827
|
|
|
|
2,316
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
804,390
|
|
|
$
|
794,368
|
|
|
|
|
|
|
|
|
|
|
Liabilities and
stockholders equity (deficit)
|
|
|
|
|
|
|
|
|
Short-term debt (includes $1,950 at fair value at
September 30, 2008)
|
|
$
|
319,641
|
|
|
$
|
295,921
|
|
Long-term debt (includes $11,751 at fair value at
September 30, 2008)
|
|
|
464,309
|
|
|
|
442,636
|
|
Accrued interest payable
|
|
|
6,207
|
|
|
|
7,864
|
|
Guarantee obligation
|
|
|
13,874
|
|
|
|
13,712
|
|
Derivative liabilities, net
|
|
|
1,359
|
|
|
|
582
|
|
Reserve for guarantee losses on Participation Certificates
|
|
|
9,761
|
|
|
|
2,566
|
|
Other liabilities
|
|
|
2,939
|
|
|
|
4,187
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
818,090
|
|
|
|
767,468
|
|
|
|
|
|
|
|
|
|
|
Commitments and contingencies (Notes 2, 3, 11 and 12)
|
|
|
|
|
|
|
|
|
Minority interests in consolidated subsidiaries
|
|
|
95
|
|
|
|
176
|
|
Stockholders equity (deficit)
|
|
|
|
|
|
|
|
|
Senior preferred stock, at redemption value
|
|
|
1,000
|
|
|
|
|
|
Preferred stock, at redemption value
|
|
|
14,109
|
|
|
|
14,109
|
|
Common stock, $0.00 par value, 4,000,000,000 and 806,000,000
shares authorized, 725,863,886 shares issued and
647,156,870 shares and 646,266,701 shares outstanding,
respectively
|
|
|
|
|
|
|
152
|
|
Additional paid-in capital
|
|
|
14
|
|
|
|
871
|
|
Retained earnings
|
|
|
833
|
|
|
|
26,909
|
|
Accumulated other comprehensive income (loss), or AOCI, net of
taxes, related to:
|
|
|
|
|
|
|
|
|
Available-for-sale securities
|
|
|
(22,037
|
)
|
|
|
(7,040
|
)
|
Cash flow hedge relationships
|
|
|
(3,554
|
)
|
|
|
(4,059
|
)
|
Defined benefit plans
|
|
|
(43
|
)
|
|
|
(44
|
)
|
|
|
|
|
|
|
|
|
|
Total AOCI, net of taxes
|
|
|
(25,634
|
)
|
|
|
(11,143
|
)
|
Treasury stock, at cost, 78,707,016 shares and
79,597,185 shares, respectively
|
|
|
(4,117
|
)
|
|
|
(4,174
|
)
|
|
|
|
|
|
|
|
|
|
Total stockholders equity (deficit)
|
|
|
(13,795
|
)
|
|
|
26,724
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and stockholders equity (deficit)
|
|
$
|
804,390
|
|
|
$
|
794,368
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these
unaudited consolidated financial statements.
FREDDIE
MAC
CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY
(DEFICIT)
(UNAUDITED)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30,
|
|
|
|
2008
|
|
|
2007
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Shares
|
|
|
Amount
|
|
|
|
(in millions)
|
|
|
Senior preferred stock, at redemption value
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, beginning of year
|
|
|
|
|
|
$
|
|
|
|
|
|
|
|
$
|
|
|
Senior preferred stock issuance
|
|
|
1
|
|
|
|
1,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Senior preferred stock, end of period
|
|
|
1
|
|
|
|
1,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred stock, at redemption value
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, beginning of year
|
|
|
464
|
|
|
|
14,109
|
|
|
|
132
|
|
|
|
6,109
|
|
Preferred stock issuances
|
|
|
|
|
|
|
|
|
|
|
104
|
|
|
|
2,600
|
|
Preferred stock redemptions
|
|
|
|
|
|
|
|
|
|
|
(12
|
)
|
|
|
(600
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred stock, end of period
|
|
|
464
|
|
|
|
14,109
|
|
|
|
224
|
|
|
|
8,109
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock, par value
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, beginning of year
|
|
|
726
|
|
|
|
152
|
|
|
|
726
|
|
|
|
152
|
|
Adjustment to par value
|
|
|
|
|
|
|
(152
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock, end of period
|
|
|
726
|
|
|
|
|
|
|
|
726
|
|
|
|
152
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional paid-in capital
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, beginning of year
|
|
|
|
|
|
|
871
|
|
|
|
|
|
|
|
962
|
|
Stock-based compensation
|
|
|
|
|
|
|
60
|
|
|
|
|
|
|
|
61
|
|
Income tax benefit from stock-based compensation
|
|
|
|
|
|
|
(13
|
)
|
|
|
|
|
|
|
2
|
|
Preferred stock issuance costs
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(26
|
)
|
Common stock issuances
|
|
|
|
|
|
|
(60
|
)
|
|
|
|
|
|
|
(31
|
)
|
Real Estate Investment Trust preferred stock repurchase
|
|
|
|
|
|
|
4
|
|
|
|
|
|
|
|
(7
|
)
|
Adjustment to common stock par value
|
|
|
|
|
|
|
152
|
|
|
|
|
|
|
|
|
|
Common stock warrant issuance
|
|
|
|
|
|
|
2,304
|
|
|
|
|
|
|
|
|
|
Commitment from the U.S. Department of the Treasury
|
|
|
|
|
|
|
(3,304
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional paid-in capital, end of period
|
|
|
|
|
|
|
14
|
|
|
|
|
|
|
|
961
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Retained earnings
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, beginning of year
|
|
|
|
|
|
|
26,909
|
|
|
|
|
|
|
|
31,372
|
|
Cumulative effect of change in accounting principle, net of taxes
|
|
|
|
|
|
|
1,023
|
|
|
|
|
|
|
|
181
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, beginning of year, as adjusted
|
|
|
|
|
|
|
27,932
|
|
|
|
|
|
|
|
31,553
|
|
Net loss
|
|
|
|
|
|
|
(26,267
|
)
|
|
|
|
|
|
|
(642
|
)
|
Preferred stock dividends declared
|
|
|
|
|
|
|
(503
|
)
|
|
|
|
|
|
|
(286
|
)
|
Common stock dividends declared
|
|
|
|
|
|
|
(329
|
)
|
|
|
|
|
|
|
(989
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Retained earnings, end of period
|
|
|
|
|
|
|
833
|
|
|
|
|
|
|
|
29,636
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
AOCI, net of taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, beginning of year
|
|
|
|
|
|
|
(11,143
|
)
|
|
|
|
|
|
|
(8,451
|
)
|
Cumulative effect of change in accounting principle, net of taxes
|
|
|
|
|
|
|
(850
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, beginning of year, as adjusted
|
|
|
|
|
|
|
(11,993
|
)
|
|
|
|
|
|
|
(8,451
|
)
|
Changes in unrealized gains (losses) related to
available-for-sale securities, net of reclassification
adjustments
|
|
|
|
|
|
|
(14,143
|
)
|
|
|
|
|
|
|
(1,469
|
)
|
Changes in unrealized gains (losses) related to cash flow hedge
relationships, net of reclassification adjustments
|
|
|
|
|
|
|
501
|
|
|
|
|
|
|
|
724
|
|
Changes in defined benefit plans
|
|
|
|
|
|
|
1
|
|
|
|
|
|
|
|
7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
AOCI, net of taxes, end of period
|
|
|
|
|
|
|
(25,634
|
)
|
|
|
|
|
|
|
(9,189
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Treasury stock, at cost
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, beginning of year
|
|
|
80
|
|
|
|
(4,174
|
)
|
|
|
65
|
|
|
|
(3,230
|
)
|
Common stock issuances
|
|
|
(1
|
)
|
|
|
57
|
|
|
|
(1
|
)
|
|
|
44
|
|
Common stock repurchases
|
|
|
|
|
|
|
|
|
|
|
16
|
|
|
|
(1,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Treasury stock, end of period
|
|
|
79
|
|
|
|
(4,117
|
)
|
|
|
80
|
|
|
|
(4,186
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total stockholders equity (deficit)
|
|
|
|
|
|
$
|
(13,795
|
)
|
|
|
|
|
|
$
|
25,483
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income (loss)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
|
|
|
|
$
|
(26,267
|
)
|
|
|
|
|
|
$
|
(642
|
)
|
Changes in other comprehensive income (loss), net of taxes, net
of reclassification adjustments
|
|
|
|
|
|
|
(13,641
|
)
|
|
|
|
|
|
|
(738
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive income (loss)
|
|
|
|
|
|
$
|
(39,908
|
)
|
|
|
|
|
|
$
|
(1,380
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these
unaudited consolidated financial statements.
FREDDIE
MAC
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended
|
|
|
|
September 30,
|
|
|
|
2008
|
|
|
2007
|
|
|
|
(in millions)
|
|
|
Cash flows from operating activities
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(26,267
|
)
|
|
$
|
(642
|
)
|
Adjustments to reconcile net loss to net cash used for operating
activities:
|
|
|
|
|
|
|
|
|
Hedge accounting losses
|
|
|
16
|
|
|
|
|
|
Derivative losses
|
|
|
2,207
|
|
|
|
635
|
|
Asset related amortization premiums, discounts and
basis adjustments
|
|
|
84
|
|
|
|
28
|
|
Debt related amortization premiums and discounts on
certain debt securities and basis adjustments
|
|
|
6,678
|
|
|
|
8,192
|
|
Net discounts paid on retirements of debt
|
|
|
(6,981
|
)
|
|
|
(6,195
|
)
|
Gains on debt retirement
|
|
|
(312
|
)
|
|
|
(187
|
)
|
Provision for credit losses
|
|
|
9,479
|
|
|
|
2,067
|
|
Low-income housing tax credit partnerships
|
|
|
346
|
|
|
|
354
|
|
Losses on loans purchased
|
|
|
423
|
|
|
|
1,129
|
|
Losses on investment activity
|
|
|
11,881
|
|
|
|
80
|
|
Foreign-currency losses, net
|
|
|
|
|
|
|
1,692
|
|
Unrealized gains on foreign-currency denominated debt recorded
at fair value
|
|
|
(684
|
)
|
|
|
|
|
Deferred income taxes
|
|
|
5,959
|
|
|
|
(462
|
)
|
Purchases of
held-for-sale
mortgages
|
|
|
(29,871
|
)
|
|
|
(16,091
|
)
|
Sales of
held-for-sale
mortgages
|
|
|
21,196
|
|
|
|
14,369
|
|
Repayments of
held-for-sale
mortgages
|
|
|
457
|
|
|
|
95
|
|
Due to Participation Certificates and Structured Securities Trust
|
|
|
(180
|
)
|
|
|
|
|
Change in trading securities
|
|
|
|
|
|
|
(2,269
|
)
|
Change in accounts and other receivables, net
|
|
|
(1,129
|
)
|
|
|
(360
|
)
|
Change in amounts due to Participation Certificate investors, net
|
|
|
|
|
|
|
(1,360
|
)
|
Change in accrued interest payable
|
|
|
(1,188
|
)
|
|
|
(786
|
)
|
Change in income taxes payable
|
|
|
(594
|
)
|
|
|
(1,459
|
)
|
Change in guarantee asset, at fair value
|
|
|
(87
|
)
|
|
|
(2,478
|
)
|
Change in guarantee obligation
|
|
|
236
|
|
|
|
2,404
|
|
Other, net
|
|
|
705
|
|
|
|
530
|
|
|
|
|
|
|
|
|
|
|
Net cash used for operating activities
|
|
|
(7,626
|
)
|
|
|
(714
|
)
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities
|
|
|
|
|
|
|
|
|
Purchases of trading securities
|
|
|
(100,523
|
)
|
|
|
|
|
Proceeds from sales of trading securities
|
|
|
67,222
|
|
|
|
|
|
Proceeds from maturities of trading securities
|
|
|
14,674
|
|
|
|
|
|
Purchases of
available-for-sale
securities
|
|
|
(168,108
|
)
|
|
|
(240,572
|
)
|
Proceeds from sales of
available-for-sale
securities
|
|
|
35,182
|
|
|
|
82,475
|
|
Proceeds from maturities of
available-for-sale
securities
|
|
|
175,446
|
|
|
|
181,194
|
|
Purchases of
held-for-investment
mortgages
|
|
|
(16,215
|
)
|
|
|
(13,161
|
)
|
Repayments of
held-for-investment
mortgages
|
|
|
4,797
|
|
|
|
7,076
|
|
Increase in restricted cash
|
|
|
(899
|
)
|
|
|
|
|
Net (payments) proceeds from mortgage insurance and acquisitions
and dispositions of real estate owned
|
|
|
(2,455
|
)
|
|
|
1,255
|
|
Net (increase) decrease in securities purchased under agreements
to resell and Federal funds sold
|
|
|
(1,437
|
)
|
|
|
5,762
|
|
Derivative premiums and terminations and swap collateral, net
|
|
|
(4,472
|
)
|
|
|
(1,118
|
)
|
Investments in low-income housing tax credit partnerships
|
|
|
|
|
|
|
(116
|
)
|
|
|
|
|
|
|
|
|
|
Net cash provided by investing activities
|
|
|
3,212
|
|
|
|
22,795
|
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities
|
|
|
|
|
|
|
|
|
Proceeds from issuance of short-term debt
|
|
|
832,442
|
|
|
|
722,518
|
|
Repayments of short-term debt
|
|
|
(806,121
|
)
|
|
|
(737,779
|
)
|
Proceeds from issuance of long-term debt
|
|
|
218,830
|
|
|
|
149,092
|
|
Repayments of long-term debt
|
|
|
(197,623
|
)
|
|
|
(153,691
|
)
|
Proceeds from the issuance of preferred stock
|
|
|
|
|
|
|
2,574
|
|
Redemption of preferred stock
|
|
|
|
|
|
|
(600
|
)
|
Payment of cash dividends on preferred stock and common stock
|
|
|
(835
|
)
|
|
|
(1,279
|
)
|
Excess tax benefits associated with stock-based awards
|
|
|
4
|
|
|
|
5
|
|
Payments of low-income housing tax credit partnerships notes
payable
|
|
|
(600
|
)
|
|
|
(824
|
)
|
Increase (decrease) in cash overdraft
|
|
|
6
|
|
|
|
(3
|
)
|
Other, net
|
|
|
(83
|
)
|
|
|
(1,226
|
)
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used for) financing activities
|
|
|
46,020
|
|
|
|
(21,213
|
)
|
|
|
|
|
|
|
|
|
|
Net increase in cash and cash equivalents
|
|
|
41,606
|
|
|
|
868
|
|
Cash and cash equivalents at beginning of year
|
|
|
8,574
|
|
|
|
11,359
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of period
|
|
$
|
50,180
|
|
|
$
|
12,227
|
|
|
|
|
|
|
|
|
|
|
Supplemental cash flow information
|
|
|
|
|
|
|
|
|
Cash paid (received) for:
|
|
|
|
|
|
|
|
|
Debt interest
|
|
$
|
27,868
|
|
|
$
|
28,821
|
|
Swap collateral interest
|
|
|
137
|
|
|
|
344
|
|
Derivative interest carry, net
|
|
|
261
|
|
|
|
(838
|
)
|
Income taxes
|
|
|
1,230
|
|
|
|
663
|
|
Non-cash investing and financing activities:
|
|
|
|
|
|
|
|
|
Held-for-sale
mortgages securitized and retained as
available-for-sale
securities
|
|
|
|
|
|
|
169
|
|
Transfers from mortgage loans to real estate owned
|
|
|
1,517
|
|
|
|
1,977
|
|
Investments in low-income housing tax credit partnerships
financed by notes payable
|
|
|
|
|
|
|
173
|
|
Transfers from
held-for-sale
mortgages to
held-for-investment
mortgages
|
|
|
|
|
|
|
40
|
|
Transfers from retained portfolio Participation Certificates to
held-for-investment
mortgages
|
|
|
|
|
|
|
1,570
|
|
Issuance of senior preferred stock to U.S. Department of the
Treasury
|
|
|
1,000
|
|
|
|
|
|
Transfers from
available-for-sale
securities to trading securities
|
|
|
87,281
|
|
|
|
|
|
The accompanying notes are an integral part of these
unaudited consolidated financial statements.
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
NOTE 1:
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Conservatorship
Entry
into Conservatorship
On September 6, 2008, at the request of the Secretary of
the U.S. Department of the Treasury, or Treasury, the
Chairman of the Board of Governors of the Federal Reserve and
the Director of the Federal Housing Finance Agency, or FHFA, our
Board of Directors adopted a resolution consenting to putting
the company into conservatorship. After obtaining this consent,
the Director of FHFA appointed FHFA as our Conservator on
September 6, 2008, in accordance with the Federal Housing
Finance Regulatory Reform Act of 2008, or Reform Act, and the
Federal Housing Enterprises Financial Safety and Soundness Act
of 1992.
Upon its appointment, the Conservator immediately succeeded to
all rights, titles, powers and privileges of Freddie Mac, and of
any stockholder, officer or director of Freddie Mac with respect
to Freddie Mac and its assets, and succeeded to the title to all
books, records and assets of Freddie Mac held by any other legal
custodian or third party. The Conservator has the power to take
over our assets and operate our business with all the powers of
our stockholders, directors and officers, and to conduct all
business of the company. The Conservator announced at that time
that it would eliminate the payment of dividends on common and
preferred stock during the conservatorship.
On September 7, 2008, the Director of FHFA issued a
statement that he had determined that we could not continue to
operate safely and soundly and fulfill our critical public
mission without significant action to address FHFAs
concerns, which were principally: safety and soundness concerns,
including our current capitalization; current market conditions;
our financial performance and condition; our inability to obtain
funding according to normal practices and prices; and our
critical importance in supporting the U.S. residential
mortgage market.
Overview
of Treasury Agreements
Senior
Preferred Stock Purchase Agreement
The Conservator, acting on our behalf, entered into a senior
preferred stock purchase agreement, or Purchase Agreement, with
Treasury on September 7, 2008. Under the Purchase
Agreement, Treasury provided us with its commitment to provide
up to $100 billion in funding under specified conditions.
The Purchase Agreement requires Treasury, upon the request of
the Conservator, to provide funds to us after any quarter in
which we have a negative net worth (that is, our total
liabilities exceed our total assets, as reflected on our GAAP
balance sheet). In exchange for Treasurys funding
commitment, we issued to Treasury, as an initial commitment fee:
(1) one million shares of Variable Liquidation Preference
Senior Preferred Stock (with an initial liquidation preference
of $1 billion), which we refer to as the senior preferred
stock; and (2) a warrant to purchase, for a nominal price,
shares of our common stock equal to 79.9% of the total number of
shares of our common stock outstanding at the time the warrant
is exercised, which we refer to as the warrant. We did not
receive any cash proceeds from Treasury as a result of issuing
the senior preferred stock or the warrant.
We are not permitted to redeem the senior preferred stock prior
to the termination of Treasurys funding commitment set
forth in the Purchase Agreement; however, we are permitted to
pay down the liquidation preference of the outstanding shares of
senior preferred stock to the extent of (1) accrued and
unpaid dividends previously added to the liquidation preference
and not previously paid down; and (2) quarterly commitment
fees previously added to the liquidation preference and not
previously paid down.
Under the terms of the Purchase Agreement, Treasury is entitled
to a quarterly dividend of 10% per year (which increases to 12%
per year if not paid timely and in cash) on the aggregate
liquidation preference of the senior preferred stock. To the
extent we are required to draw on the Purchase Agreement, and
therefore increase the liquidation preference of the senior
preferred stock, the amounts payable for this dividend could be
substantial and have an adverse impact on our financial position
and net worth. The senior preferred stock is also entitled to a
priority payment equal to the liquidation preference over the
common stock and all other series of preferred stock in the
event of our liquidation. In addition, beginning on
March 31, 2010, we are required to pay a quarterly
commitment fee to Treasury, which will accrue from
January 1, 2010. We are required to pay this fee each
quarter for as long as the Purchase Agreement is in effect. The
amount of this fee has not yet been determined.
The Purchase Agreement includes significant restrictions on our
ability to manage our business, including limiting the amount of
indebtedness we can incur to 110% of our aggregate indebtedness
as of June 30, 2008 and capping the size of our retained
portfolio at $850 billion as of December 31, 2009. In
addition, beginning in 2010, we must decrease the size of our
retained portfolio at the rate of 10% per year until it reaches
$250 billion. In addition, while the senior preferred stock
is outstanding, we are prohibited from issuing equity securities
without Treasurys consent, and the terms of the Purchase
Agreement and warrant make it unlikely that we will be able to
obtain equity from other private sources.
The Purchase Agreement has an indefinite term and can terminate
only in very limited circumstances, which do not include the end
of the conservatorship. The agreement therefore could continue
after the conservatorship ends. Treasury has the right to
exercise the warrant, in whole or in part, at any time on or
before September 7, 2028.
Expected
Draw under the Purchase Agreement
At September 30, 2008, our liabilities exceeded our assets
under GAAP by $(13.7) billion while our stockholders
equity (deficit) totaled $(13.8) billion. The Director of
FHFA has submitted a request under the Purchase Agreement in the
amount of $13.8 billion to Treasury. We expect to receive
such funds by November 29, 2008. If the Director of FHFA
were to determine in writing that our assets are, and have been
for a period of 60 days, less than our obligations to
creditors and others, FHFA would be required to place us into
receivership. As a result of this draw, the aggregate
liquidation preference of the senior preferred stock will
increase to $14.8 billion, and our annual aggregate
dividend payment to Treasury, at the 10% dividend rate, would
increase to $1.5 billion. If we are unable to pay such
dividend in cash in any quarter, the unpaid amount will be added
to the aggregate liquidation preference of the senior preferred
stock and the dividend rate on the unpaid liquidation preference
will increase to 12% per year.
Treasury
Credit Facility
On September 18, 2008, we entered into a lending agreement
with Treasury, or Lending Agreement, pursuant to which Treasury
established a new secured lending credit facility that is
available to us until December 31, 2009 as a liquidity
back-stop. In order to borrow pursuant to the Lending Agreement,
we are required to post collateral in the form of Freddie Mac or
Fannie Mae mortgage-backed securities to secure all borrowings
under the facility. The terms of any borrowings under the
Lending Agreement, including the interest rate payable on the
loan and the amount of collateral we will need to provide as
security for the loan, will be determined by Treasury. Treasury
is not obligated under the Lending Agreement to make any loan to
us.
As of November 14, 2008, we have not borrowed any amounts
under the Lending Agreement.
Changes
in Company Management and our Board of Directors
Since our entry into conservatorship on September 6, 2008,
eight members of our Board of Directors have resigned, including
Richard F. Syron, our former Chairman and Chief Executive
Officer. On September 16, 2008, the Conservator appointed
John A. Koskinen as the new non-executive Chairman of our
Board of Directors. We currently have 4 members of our
Board of Directors and 9 vacancies.
As noted above, as our Conservator, FHFA has assumed the powers
of our Board of Directors. Accordingly, the current Board of
Directors acts with neither the power nor the duty to manage,
direct or oversee our business and affairs. The Conservator has
indicated that it intends to appoint a full Board of Directors
to which it will delegate specified roles and responsibilities.
On September 7, 2008, the Conservator appointed
David M. Moffett as our Chief Executive Officer, effective
immediately.
Supervision
of our Business under the Reform Act and During
Conservatorship
During the third quarter of 2008, the company experienced a
number of significant changes in our regulatory supervisory
environment. First, on July 30, 2008, President Bush signed
into law the Reform Act, which placed us under the regulation of
a new regulator, FHFA. That legislation strengthened the
existing safety and soundness oversight of the government
sponsored enterprises, or GSEs, and provided FHFA with new
safety and soundness authority that is comparable to and in some
respects broader than that of the federal bank agencies. That
legislation gave FHFA enhanced powers that, even if we were not
placed into conservatorship, gave them the authority to raise
capital levels above statutory minimum levels, regulate the size
and content of our portfolio, and to approve new mortgage
products. That legislation also gave FHFA the authority to place
the GSEs into conservatorship or receivership under conditions
set forth in the statute.
Second, we experienced a change in control when we were placed
into conservatorship on September 6, 2008 and then entered
into the Purchase Agreement and issued the senior preferred
stock and warrant to Treasury. Under conservatorship, we have
additional heightened supervision and direction from our
regulator, FHFA, who is also acting as our Conservator.
The conservatorship has no specified termination date. There can
be no assurance as to when or how the conservatorship will be
terminated, whether we will continue to exist following
conservatorship, or what our business structure will be during
or following our conservatorship. In a statement issued on
September 7, 2008, the Secretary of the Treasury indicated
that 2008 and 2009 should be viewed as a time out
where we and Fannie Mae are stabilized while policymakers decide
our future role and structure. He also stated that there is a
consensus that we and Fannie Mae pose a systemic risk and cannot
continue in our current form.
Managing
Our Business During Conservatorship Our
Objectives
Based on the Federal Home Loan Mortgage Corporation Act, which
we refer to as our charter, public statements from Treasury
officials and guidance from our Conservator, we have a variety
of different, and potentially conflicting, objectives, including:
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providing liquidity, stability and affordability in the mortgage
market;
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immediately providing additional assistance to the struggling
housing and mortgage markets;
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reducing the need to draw funds from Treasury pursuant to the
Purchase Agreement;
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returning to long-term profitability; and
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protecting the interests of the taxpayers.
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These objectives create conflicts in strategic and day-to-day
decision making that will likely lead to less than optimal
outcomes for one or more, or possibly all, of these objectives.
For example, maintaining a positive net worth could require us
to constrain some of our business activities, including
activities that provide liquidity, stability and affordability
to the mortgage market. Conversely, to the extent we increase
activities to assist the mortgage market, our financial results
are likely to suffer, and we may be less able to maintain a
positive net worth. We regularly consult with and get direction
from our Conservator on how to balance these objectives. To the
extent that we are unable to maintain a positive net worth
following our expected draw of funds from Treasury after the
filing of this
Form 10-Q,
we will be required to request additional funding from Treasury
under the Purchase Agreement, which will further increase our
ongoing dividend obligations and, therefore, extend the period
of time until we might be able to return to profitability.
Additional
Impacts of Conservatorship and Related Events
Total stockholders equity (deficit) reflects the following
actions as a result of our Purchase Agreement with Treasury:
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Preferred stock increased by $1 billion reflecting the
issuance of senior preferred stock to Treasury.
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We issued a warrant to Treasury for the purchase of our common
stock with an estimated value of $2.3 billion representing
79.9% of our common stock outstanding on a fully diluted basis
at the time of exercise at a price of $0.00001 per share.
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As a result of our issuance to Treasury of the warrant to
purchase shares of our common stock equal to 79.9% of the total
number of shares of our common stock outstanding, on a fully
diluted basis, we are deemed related parties with the U.S.
government. Except for the transactions with Treasury discussed
above and in NOTE 7: DEBT SECURITIES AND SUBORDINATED
BORROWINGS, and NOTE 8: STOCKHOLDERS
EQUITY (DEFICIT), no transactions outside of normal
business activities have occurred between us and the U.S.
government during the three and nine months ended
September 30, 2008.
We issued the senior preferred stock and the warrant to Treasury
in consideration for the commitment set forth in our Purchase
Agreement with Treasury, and for no other consideration. As a
result, the issuance of the senior preferred stock and warrant
to Treasury had no impact on total stockholders equity
(deficit), as the offset was to additional paid-in capital. The
first dividend on the senior preferred stock will be payable on
December 31, 2008. If we choose not to pay this dividend in
cash, the amount of the dividend payable will be added to the
aggregate liquidation preference of the senior preferred stock.
Total stockholders equity (deficit) also reflects the
following actions of the Director of FHFA, as Conservator:
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The elimination of the par value of our common stock which
resulted in the reclassification of $152 million from
common stock to additional
paid-in-capital
on our consolidated balance sheet as of September 30, 2008.
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An increase in the number of common shares available for
issuance to four billion shares as of September 30, 2008.
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FHFA, as Conservator, has suspended our minimum and risk-based
capital requirements during conservatorship and directed us to
focus our risk and capital management on maintaining a positive
stockholders equity under GAAP.
The Director of FHFA has classified Freddie Mac as
undercapitalized as of June 30, 2008, using FHFAs
discretionary authority as provided by Statute. FHFA stated
that, although Freddie Macs capital calculations for
June 30, 2008 reflect that it met the FHFA-directed and
statutory requirements for capital, the continued market
downturn during late July and August raised significant
questions about the sufficiency of its capital.
On October 9, 2008, FHFA announced that the Director of
FHFA has suspended the capital classifications of Freddie Mac
during the conservatorship, in light of the Purchase Agreement,
and that existing statutory and FHFA-directed regulatory capital
requirements will not be binding during the conservatorship.
During the conservatorship, FHFA will not issue quarterly
capital classifications of Freddie Mac, but we will continue to
submit capital reports to FHFA.
For additional information concerning the conservatorship and
the effects of the Purchase Agreement, see NOTE 7:
DEBT SECURITIES AND SUBORDINATED BORROWINGS,
NOTE 8: STOCKHOLDERS EQUITY (DEFICIT) and
NOTE 9: REGULATORY CAPITAL.
Basis of
Presentation
The accompanying unaudited consolidated financial statements
include our accounts and those of our subsidiaries, and should
be read in conjunction with the audited consolidated financial
statements and related notes included in our Form 10
Registration Statement filed and declared effective by the SEC
on July 18, 2008, or Registration Statement. We are
operating under the basis that we will realize assets and
satisfy liabilities in the normal course of business as a going
concern and in accordance with our delegation of authority.
These unaudited consolidated financial statements have been
prepared in conformity with GAAP for interim financial
information. Certain financial information that is normally
included in annual financial statements prepared in conformity
with GAAP but is not required for interim reporting purposes has
been condensed or omitted. Certain amounts in prior
periods consolidated financial statements have been
reclassified to conform to the current presentation. In the
opinion of management, all adjustments, which include only
normal recurring adjustments, have been recorded for a fair
statement of our unaudited consolidated financial statements in
conformity with GAAP.
Net income (loss) includes certain adjustments to correct
immaterial errors related to previously reported periods.
Use of
Estimates
The preparation of our consolidated financial statements
requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities as of the date
of these consolidated balance sheets as well as the reported
amounts of revenues and expenses during the reporting periods.
Management has made significant estimates in preparation of the
financial statements, including, but not limited to, valuation
of financial instruments and other assets and liabilities,
amortization of assets and liabilities and allowance for loan
losses and reserves for guarantee losses. Actual results could
be different from these estimates.
Change in
Accounting Principles
Fair
Value Measurements
Effective January 1, 2008, we adopted Statement of
Financial Accounting Standards, or SFAS, No. 157,
Fair Value Measurements, or SFAS 157,
which defines fair value, establishes a framework for measuring
fair value in GAAP and expands disclosures about fair value
measurements. SFAS 157 defines fair value as the price that
would be received to sell an asset or paid to transfer a
liability in an orderly transaction between market participants
at the measurement date (also referred to as exit price). The
adoption of SFAS 157 did not cause a cumulative effect
adjustment to our GAAP consolidated financial statements on
January 1, 2008. SFAS 157 amends FASB Interpretation
No., or FIN, 45, Guarantors Accounting and
Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others, an Interpretation of FASB
Statements No. 5, 57 and 107 and Rescission of FASB
Interpretation No. 34, or FIN 45, to provide
for a practical expedient in measuring the fair value at
inception of a guarantee. Upon adoption of SFAS 157 on
January 1, 2008, we began measuring the fair value of our
newly-issued guarantee obligations at their inception using the
practical expedient provided by FIN 45, as amended by
SFAS 157. Using the practical expedient, the initial
guarantee obligation is recorded at an amount equal to the fair
value of compensation received, inclusive of all rights related
to the transaction, in exchange for our guarantee. As a result,
we no longer record estimates of deferred gains or immediate
day one losses on most guarantees. In addition,
amortization of the guarantee obligation will now more closely
follow our economic release from risk under the guarantee. This
change is further discussed in NOTE 2: FINANCIAL
GUARANTEES AND SECURITIZED INTERESTS IN MORTGAGE-RELATED
ASSETS.
Measurement
Date for Employers Defined Pension and Other
Postretirement Plans
Effective January 1, 2008, we adopted the measurement date
provisions of SFAS No. 158, Employers
Accounting for Defined Benefit Pension and Other Postretirement
Plans, an Amendment of FASB Statements No. 87, 88, 106 and
132(R),
or SFAS 158. In accordance with the standard, we are
required to measure our defined plan assets and obligations as
of the date of our consolidated balance sheet and change the
measurement date from September 30 to December 31. The
transition approach we elected for the change was the
15-month
approach. Under this approach, we continued to use the
measurements determined for our Registration Statement to
estimate the effects of the change. As a result of adoption, we
recognized an $8 million decrease in retained earnings
(after tax) at January 1, 2008 and the impact to AOCI
(after tax) was immaterial.
The
Fair Value Option for Financial Assets and Financial
Liabilities
On January 1, 2008, we adopted SFAS No. 159,
The Fair Value Option for Financial Assets and
Financial Liabilities, Including an Amendment of FASB Statement
No. 115, or SFAS 159 or the fair value
option, which permits entities to choose to measure many
financial instruments and certain other items at fair value that
are not required to be measured at fair value. The effect of the
first measurement to fair value is reported as a
cumulative-effect adjustment to the opening balance of retained
earnings. We elected the fair value option for certain
available-for-sale mortgage-related securities, foreign-currency
denominated debt, and investments in securities classified as
available-for-sale securities and identified as within the scope
of Emerging Issues Task Force, or EITF,
99-20,
Recognition of Interest Income and Impairment on
Purchased Beneficial Interests and Beneficial Interests That
Continue to Be Held by a Transferor in Securitized Financial
Assets.
Our election of the fair value option for the items discussed
above was made in an effort to better reflect, in the financial
statements, the economic offsets that exist related to items
that were not previously recognized as changes in fair value
through our consolidated statements of income. As a result of
the adoption, we recognized a $1.0 billion after-tax
increase to our beginning retained earnings at January 1,
2008, representing the effect of changing our measurement basis
to fair value for the above items with the fair value option
elected. During the third quarter of 2008, we elected the fair
value option for certain multifamily held-for-sale mortgage
loans. For additional information on the election of the fair
value option and SFAS 159, see NOTE 14: FAIR
VALUE DISCLOSURES.
Table 1.1 summarizes the incremental effect on individual
line items on our consolidated balance sheets upon the adoption
of SFAS 159.
Table 1.1
Change in Accounting for the Fair Value Option
Impact on Financial Statements
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Balance Sheet
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Balance Sheet
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January 1, 2008
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Net Gain/(Losses)
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January 1, 2008
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prior to Adoption
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upon Adoption
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after Adoption
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(in millions)
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Mortgage-related
securities(1)
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$
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87,281
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$
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$
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87,281
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Total debt securities,
net(2)
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19,091
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276
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18,815
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Cumulative-effect adjustment (pre-tax)
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276
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Impact on deferred tax
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(95
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Cumulative-effect adjustment (net of taxes)
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181
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Reclassification from AOCI to retained earnings, net of
taxes(1)
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850
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Cumulative-effect adjustments to retained earnings
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$
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1,031
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(1)
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Effective January 1, 2008, we
elected the fair value option for certain available-for-sale
mortgage-related securities that were identified as economic
offsets to the changes in fair value of the guarantee asset and
investments in securities classified as available-for-sale
securities and identified as within the scope of
EITF 99-20.
The net gains/(losses) upon adoption represent the
reclassification of the related unrealized gains/(losses) from
AOCI, net of taxes, to retained earnings.
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(2)
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Effective January 1, 2008, our
measurement basis for debt securities denominated in a foreign
currency changed from amortized cost to fair value. The
difference between the carrying amount and fair value at the
adoption of SFAS 159 was recorded as a cumulative-effect
adjustment to retained earnings.
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Recently
Issued Accounting Standards, Not Yet Adopted
Determining
Whether Instruments Granted in Share-based Payment Transactions
are Participating Securities
In June 2008, the Financial Accounting Standards Board, or FASB,
issued FASB Staff Position, or FSP,
No. EITF 03-6-1,
Determining Whether Instruments Granted in Share-Based
Payment Transactions Are Participating Securities, or
FSP EITF 03-6-1.
The guidance in this FSP applies to the calculation of earnings
per share for share-based payment awards with rights to
dividends or dividend equivalents. It clarifies that unvested
share-based payment awards that contain nonforfeitable rights to
dividends or dividend equivalents (whether paid or unpaid) are
participating securities and shall be included in the
computation of earnings per share pursuant to the two-class
method.
FSP EITF 03-6-1
is effective and will be retrospectively applied by us on
January 1, 2009. We expect the adoption of this FSP will
have an immaterial impact on our consolidated financial
statements.
Accounting
for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities and Consolidation of Variable
Interest Entities, or VIEs
In April 2008, the FASB voted to eliminate Qualifying Special
Purpose Entities, or QSPEs, from the guidance in
SFAS No. 140, Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of
Liabilities a replacement of FASB Statement
No. 125, or SFAS 140. The FASB has also
proposed revisions to the consolidation model prescribed by
FIN 46 (revised December 2003),Consolidation of
Variable Interest Entities, an interpretation of
ARB No. 51, or
FIN 46(R),
to accommodate the removal of the scope exemption applicable to
QSPEs. While the revised standards have not been finalized and
the Boards proposals have been subject to a public comment
period through November 14, 2008, these changes may have a
significant impact on our consolidated financial statements.
These proposed revisions could be effective as early as January
2010.
Noncontrolling
Interests
In December 2007, the FASB issued SFAS No. 160,
Noncontrolling Interests in Consolidated Financial
Statements an amendment of
ARB No. 51, or SFAS 160. A
noncontrolling interest (referred to as a minority interest
prior to adoption) is the portion of equity in a subsidiary not
attributable, directly or indirectly, to the parent.
SFAS 160 will require that noncontrolling interests be
presented within equity, instead of between liabilities and
equity. SFAS 160 will also require that net income include
amounts attributable to the noncontrolling interests, instead of
reducing net income by those amounts. SFAS 160 will also
require expanded disclosures. SFAS 160 would be effective
for and retrospectively adopted by us on January 1, 2009.
We have not yet determined the impact of adopting SFAS 160
on our consolidated financial statements.
NOTE 2:
FINANCIAL GUARANTEES AND SECURITIZED
INTERESTS IN MORTGAGE-RELATED ASSETS
Financial
Guarantees
We provide a variety of financial guarantees. For a discussion
of these guarantees see ITEM 13. FINANCIAL
STATEMENTS AND SUPPLEMENTARY DATA AUDITED
CONSOLIDATED FINANCIAL STATEMENTS AND ACCOMPANYING
NOTES NOTE 2: FINANCIAL GUARANTEES AND
TRANSFERS OF SECURITIZED INTERESTS IN MORTGAGE-RELATED
ASSETS in our Registration Statement.
Guaranteed
PCs, Structured Securities and Other Mortgage
Guarantees
We guarantee the payment of principal and interest on issued PCs
and Structured Securities that are backed by pools of mortgage
loans. For our fixed-rate PCs, we guarantee the timely payment
of interest at the applicable PC coupon rate and scheduled
principal payments for the underlying mortgages. For our
adjustable-rate mortgage, or ARM PCs, we guarantee the timely
payment of the weighted average coupon interest rate and the
full and final payment of principal for the underlying
mortgages. We do not guarantee the timely payment of principal
for ARM PCs. To the extent the interest rate is modified and
reduced for a loan underlying a fixed-rate PC, we pay the
shortfall between the original contractual interest rate and the
modified interest rate. To the extent the interest rate is
modified and reduced for a loan underlying an ARM PC, we only
guarantee the timely payment of the modified interest rate and
we are not responsible for any shortfalls between the original
contractual interest rate and the modified interest rate. When
our Structured Securities consist of re-securitizations of PCs,
our guarantee and the impacts of modifications to the interest
rate of the underlying loans operate in the same manner as PCs.
In addition to our guarantees on PCs and Structured Securities
we also provide long-term standby commitments to certain
customers, which obligate us to purchase delinquent loans that
are covered by those agreements. Most of the guarantees we
provide meet the definition of a derivative under
SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities, or SFAS 133;
however, most of these guarantees also qualify for a scope
exemption for financial guarantee contracts in SFAS 133.
For guarantees that meet the scope exemption, we initially
account for the guarantee obligation at fair value and
subsequently amortize the obligation into earnings. If we
determine that our guarantee does not qualify for the scope
exemption, we account for it as a derivative with changes in
fair value reflected in current period earnings.
At September 30, 2008 and December 31, 2007, we had
$1,834.4 billion and $1,738.8 billion of issued PCs
and Structured Securities and such other mortgage guarantees,
respectively, of which $374.9 billion and
$357.0 billion were held in our retained portfolio. When we
purchase Freddie Mac PCs or Structured Securities for our
retained portfolio, we do not derecognize any components of the
guarantee asset, guarantee obligation, reserve for guarantee
losses, or any other outstanding recorded amounts associated
with the guarantee transaction because our contractual guarantee
obligation to the unconsolidated PC trust remains in force until
the trust is liquidated, unless the trust is consolidated.
Whether we own the security or not, our guarantee obligation and
related credit exposure do not change. Our valuation of these
securities is consistent with the legal structure of the
guarantee transaction, which includes the Freddie Mac guarantee
to the securitization trust. Upon the subsequent sale of a
Freddie Mac PC or Structured Security, we continue to account
for any outstanding recorded amounts associated with the
guarantee transaction on the same basis as prior to the sale of
the Freddie Mac PC or Structured Security, because the sale does
not result in the retention of any new assets or the assumption
of any new liabilities.
There were $1,710.3 billion and $1,518.8 billion at
September 30, 2008 and December 31, 2007,
respectively, of Structured Securities backed by resecuritized
PCs and other previously issued Structured Securities. These
restructured securities do not increase our credit-related
exposure and consist of single-class and
multi-class Structured Securities backed by PCs, Real
Estate Mortgage Investment Conduits, or REMICs, interest-only
strips, and principal-only strips.
Our guarantee obligation represents the recognized liability
associated with our guarantee of PCs and Structured Securities
net of cumulative amortization. Upon adoption of SFAS 157
on January 1, 2008, we began measuring the fair value of
our newly-issued guarantee obligations at their inception using
the practical expedient provided by FIN 45, as amended by
SFAS 157. Using the practical expedient, the initial
guarantee obligation is recorded at an amount equal to the fair
value of compensation received in the related securitization
transaction. As a result, we no longer record estimates of
deferred gains or immediate, day one, losses on most
guarantees. However, all unamortized amounts recorded prior to
January 1, 2008 will continue to be deferred and amortized
using existing amortization methods. In addition to our
guarantee obligation, we recognized a reserve for guarantee
losses on PCs that totaled $9.8 billion and
$2.6 billion at September 30, 2008 and
December 31, 2007, respectively.
Derivative
Instruments
Derivative instruments include written options, written
swaptions, interest-rate swap guarantees and guarantees of
stated final maturity Structured Securities. Derivative
instruments also include short-term default guarantee
commitments that we account for as derivatives.
Servicing-Related
Premium Guarantees
We provide guarantees to reimburse servicers for premiums paid
to acquire servicing in situations where the original seller is
unable to perform under its separate servicing agreement. The
liability associated with these agreements was not material at
September 30, 2008 and December 31, 2007.
Table 2.1 below presents our maximum potential amount of
future payments, our recognized liability and the maximum
remaining term of these guarantees.
Table 2.1
Financial Guarantees
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September 30, 2008
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December 31, 2007
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Maximum
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Maximum
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Maximum
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Recognized
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Remaining
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Maximum
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Recognized
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Remaining
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Exposure
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Liability
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Term
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Exposure
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Liability
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Term
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(dollars in millions, terms in years)
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Guaranteed PCs, Structured Securities and other mortgage
guarantees
issued(1)
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$
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1,834,408
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$
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13,874
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44
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$
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1,738,833
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$
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13,712
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40
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Derivative instruments
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40,115
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226
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35
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32,538
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129
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30
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Servicing-related premium guarantees
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52
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5
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37
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5
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(1)
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Exclude mortgage loans and
mortgage-related securities traded, but not yet settled.
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With the exception of derivative instruments in Table 2.1,
maximum exposure represents the contractual amounts that could
be lost under the guarantees if underlying borrowers defaulted,
without consideration of possible recoveries under recourse
provisions or from collateral held or pledged. The maximum
exposure related to interest-rate swap derivative guarantees is
based on contractual rates and without consideration of recovery
under recourse provisions. The maximum exposure related to other
derivative instruments is based on the notional amount of the
contract. The maximum exposure disclosed above is not
representative of the actual loss we are likely to incur, based
on our historical loss experience and after consideration of
proceeds from related collateral liquidation.
Other
Financial Commitments
As part of the guarantee arrangements pertaining to certain
multifamily housing revenue bonds and to certain securities
backed by multifamily housing revenue bonds, we provided
commitments to advance funds, commonly referred to as
liquidity guarantees, totaling $11.6 billion
and $8.0 billion at September 30, 2008 and
December 31, 2007, respectively. These guarantees require
us to advance funds to third parties that enable them to
repurchase tendered bonds or securities that are unable to be
remarketed. Any repurchased bonds or securities are pledged to
us to secure funding until the bonds or securities are
remarketed. At September 30, 2008 and December 31,
2007, $307 million and $ in liquidity guarantee
advances were outstanding. Advances under our liquidity
guarantees typically mature in 60 to 120 days. These
liquidity guarantee advances are included in other assets on our
consolidated balance sheets.
Gains
and Losses on Transfers of PCs and Structured Securities that
are Accounted for as Sales
We recognized gains (losses) on transfers of PCs and Structured
Securities that were accounted for as sales under SFAS 140.
For the three months ended September 30, 2008 and 2007, the
net pre-tax gains (losses) were approximately $39 million
and $(26) million, respectively. For the nine months ended
September 30, 2008 and 2007, the net pre-tax gains (losses)
were approximately $131 million and $(125) million,
respectively.
Valuation
of Recognized Guarantee Asset
Guarantee
Asset
Our approach for estimating the fair value of the guarantee
asset at September 30, 2008 used third-party market data as
practicable. For approximately 74% of the fair value of the
guarantee asset, which relates to fixed-rate loan products that
reflect current market rates, the valuation approach involved
obtaining dealer quotes on proxy securities with collateral
similar to aggregated characteristics of our portfolio. This
effectively equates the guarantee asset with current, or
spot, market values for excess servicing
interest-only securities. We consider these securities to be
comparable to the guarantee asset, in that they represent
interest-only cash flows, and do not have matching
principal-only securities. The remaining 26% of the fair value
of the guarantee asset related to underlying loan products for
which comparable market prices were not readily available. These
amounts relate specifically to ARM products, highly seasoned
loans or fixed-rate loans with coupons that are not consistent
with current market rates. This portion of the guarantee asset
was valued using an expected cash flow approach including only
those cash flows expected to result from our contractual right
to receive management and guarantee fees, with market input
assumptions extracted from the dealer quotes provided on the
more liquid products, reduced by an
estimated liquidity discount. We establish some of our guarantee
asset in accordance with SFAS 140 in transactions through
various underwriters in which we issue our PCs and Structured
Securities for cash. However, we issue most of our PCs and
Structured Securities in guarantor swap transactions in which
securities dealers or investors deliver to us the
mortgage-related assets underlying the securities in exchange
for the securities themselves. We establish the majority of our
guarantee asset in these guarantor swap transactions in
accordance with FIN 45. The key assumptions used in
valuation of our guarantee asset and a sensitivity analysis for
our guarantee asset, which includes those guarantee assets
established in swap transactions as well as those established in
cash sales, are presented below.
Key
Assumptions Used in the Valuation of the Guarantee
Asset
Table 2.2 summarizes the key assumptions associated with
the fair value measurements of the recognized guarantee asset.
The fair values at the time of securitization and the subsequent
fair value measurements were estimated using third-party
information. However, the assumptions included in this table for
those periods are those implied by our fair value estimates,
with the internal rates of return, or IRRs, adjusted where
necessary to align our internal models with estimated fair
values determined using third-party information. Prepayment
rates are presented as implied by our internal models and have
not been similarly adjusted.
At September 30, 2008, our guarantee asset totaled
$9.7 billion on our consolidated balance sheets, of which
approximately $0.2 billion, or approximately 2%, related to
PCs and Structured Securities backed by multifamily mortgage
loans. Table 2.2 contains the key assumptions used to
derive the fair value measurement of the entire guarantee asset
associated with PCs and other financial guarantees backed by
single-family mortgage loans. For the portion of our guarantee
asset that is valued by obtaining dealer quotes on proxy
securities, we derive the assumptions from the prices we are
provided. Table 2.3 contains a sensitivity analysis of the
fair value of the entire guarantee asset associated with PCs and
other financial guarantees backed by single-family mortgage
loans.
Table 2.2
Key Assumptions Utilized in Fair Value Measurements of the
Guarantee Asset (Single-Family Mortgages)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Nine Months Ended
|
|
|
September 30,
|
|
September 30,
|
Mean Valuation
Assumptions(1)
|
|
2008
|
|
2007
|
|
2008
|
|
2007
|
|
IRRs(2)
|
|
|
10.9
|
%
|
|
|
5.9
|
%
|
|
|
10.0
|
%
|
|
|
6.4
|
%
|
Prepayment
rates(3)
|
|
|
11.2
|
%
|
|
|
15.5
|
%
|
|
|
14.0
|
%
|
|
|
17.3
|
%
|
Weighted average lives (years)
|
|
|
6.6
|
|
|
|
5.6
|
|
|
|
5.8
|
|
|
|
5.2
|
|
|
|
(1)
|
Mean values represent the weighted
average of all estimated IRRs, prepayment rate and weighted
average lives assumptions.
|
(2)
|
IRR assumptions represent an unpaid
principal balance weighted average of the discount rates
inherent in the fair value of the recognized guarantee asset. We
estimated the IRRs using a model which employs multiple interest
rate scenarios versus a single assumption.
|
(3)
|
Although prepayment rates are
simulated monthly, the assumptions above represent annualized
prepayment rates based on unpaid principal balances.
|
Table 2.3
Sensitivity Analysis of the Guarantee Asset (Single-Family
Mortgages)
|
|
|
|
|
|
|
|
|
|
|
September 30, 2008
|
|
December 31, 2007
|
|
|
(dollars in millions)
|
|
Fair value
|
|
$
|
9,473
|
|
|
$
|
9,417
|
|
Weighted average IRR assumptions
|
|
|
13.9
|
%
|
|
|
8.1
|
%
|
Impact on fair value of 100 bps unfavorable change
|
|
$
|
(306
|
)
|
|
$
|
(389
|
)
|
Impact on fair value of 200 bps unfavorable change
|
|
$
|
(593
|
)
|
|
$
|
(746
|
)
|
Weighted average prepayment rate assumptions
|
|
|
11.2
|
%
|
|
|
16.5
|
%
|
Impact on fair value of 10% unfavorable change
|
|
$
|
(374
|
)
|
|
$
|
(516
|
)
|
Impact on fair value of 20% unfavorable change
|
|
$
|
(722
|
)
|
|
$
|
(977
|
)
|
Valuation
of Other Retained Interests
Other retained interests include securities we issued as part of
resecuritization transactions for which those interests not
retained are sold. The fair value of other retained interests is
generally based on independent price quotations obtained from
third-party pricing services or dealer provided prices.
To report the hypothetical sensitivity of the carrying value of
other retained interests, we used internal models adjusted where
necessary to align with the fair values. The sensitivity
analysis in Table 2.4 illustrates hypothetical adverse
changes in the fair value of other retained interests for
changes in key assumptions based on these models.
Table 2.4
Sensitivity Analysis of Other Retained
Interests(1)
|
|
|
|
|
|
|
|
|
|
|
September 30, 2008
|
|
December 31, 2007
|
|
|
(dollars in millions)
|
|
Fair value
|
|
$
|
99,324
|
|
|
$
|
107,931
|
|
Weighted average IRR assumptions
|
|
|
5.8
|
%
|
|
|
5.5
|
%
|
Impact on fair value of 100 bps unfavorable change
|
|
$
|
(4,191
|
)
|
|
$
|
(4,109
|
)
|
Impact on fair value of 200 bps unfavorable change
|
|
$
|
(8,073
|
)
|
|
$
|
(7,928
|
)
|
Weighted average prepayment rate assumptions
|
|
|
7.0
|
%
|
|
|
8.7
|
%
|
Impact on fair value of 10% unfavorable change
|
|
$
|
(12
|
)
|
|
$
|
(30
|
)
|
Impact on fair value of 20% unfavorable change
|
|
$
|
(15
|
)
|
|
$
|
(57
|
)
|
|
|
(1)
|
The sensitivity analysis includes
only other retained interests whose fair value is impacted as a
result of changes in IRR and prepayment assumptions.
|
Cash
Flows on Transfers of Securitized Interests and Corresponding
Retained Interests
Table 2.5 summarizes cash flows on retained interests as
well as the amount of cash payments made to acquire delinquent
loans to satisfy our financial performance obligations.
Table 2.5
Details of Cash Flows
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Nine Months Ended
|
|
|
September 30,
|
|
September 30,
|
|
|
2008
|
|
2007
|
|
2008
|
|
2007
|
|
|
(in millions)
|
Cash flows from:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Transfers of Freddie Mac securities that were accounted for as
sales(1)
|
|
$
|
8,392
|
|
|
$
|
12,538
|
|
|
$
|
33,124
|
|
|
$
|
51,580
|
|
Cash flows received on the guarantee
asset(2)
|
|
|
730
|
|
|
|
585
|
|
|
|
2,139
|
|
|
|
1,661
|
|
Other retained interests principal and
interest(3)
|
|
|
5,092
|
|
|
|
5,882
|
|
|
|
15,958
|
|
|
|
18,352
|
|
Purchases of delinquent or foreclosed
loans(4)
|
|
|
(3,962
|
)
|
|
|
(2,179
|
)
|
|
|
(6,745
|
)
|
|
|
(5,648
|
)
|
|
|
(1)
|
Represents proceeds from securities
receiving sales treatment under SFAS 140 including sales of
Structured Securities. On our consolidated statements of cash
flows, this amount is included in the investing activities as
part of proceeds from sales of trading and available-for-sale
securities.
|
(2)
|
Represents cash received related to
management and guarantee fees, which reduce the guarantee asset.
On our consolidated statements of cash flows, the change in
guarantee asset and the corresponding management and guarantee
fee income are reflected as operating activities.
|
(3)
|
Represents cash proceeds related to
interest income and principal repayment of our securities that
are not transferred to third parties upon the completion of a
securitization or resecuritization transaction. On our
consolidated statements of cash flows, the cash flows from
interest are included in net income (loss) and the principal
repayments are included in the investing activities as part of
proceeds from maturities of trading and available-for-sale
securities. The amount for the three and nine months ended
September 30, 2007 has been revised to also include
interest-only and principal-only strips, which conforms to the
2008 presentation.
|
(4)
|
Represents our cash payments for
the purchase of delinquent or foreclosed loans from mortgage
pools underlying our PCs and Structured Securities. On our
consolidated statements of cash flows, this amount is included
in the investing activities as part of purchases of
held-for-investment mortgages.
|
Credit
Protection and Other Forms of Recourse
In connection with our guarantees of PCs and Structured
Securities issued, we have credit protection in the form of
primary mortgage insurance, pool insurance, recourse to lenders,
and other forms of credit enhancements. At September 30,
2008 and December 31, 2007, we recorded $1.8 billion
and $0.7 billion, respectively, within other assets on our
consolidated balance sheets related to these credit enhancements
on securitized mortgages. Table 2.6 presents the maximum
amounts of potential loss recovery by type of credit protection.
Table 2.6
Credit Protection and Other Forms of
Recourse(1)
|
|
|
|
|
|
|
|
|
|
|
September 30, 2008
|
|
December 31, 2007
|
|
|
(in millions)
|
|
PCs and Structured Securities:
|
|
|
|
|
|
|
|
|
Single-family:
|
|
|
|
|
|
|
|
|
Primary mortgage insurance
|
|
$
|
59,652
|
|
|
$
|
51,897
|
|
Lender recourse and indemnifications
|
|
|
11,446
|
|
|
|
12,085
|
|
Pool insurance
|
|
|
3,819
|
|
|
|
3,813
|
|
Other credit enhancements
|
|
|
483
|
|
|
|
549
|
|
Multifamily:
|
|
|
|
|
|
|
|
|
Credit enhancements
|
|
|
3,019
|
|
|
|
1,233
|
|
Structured Securities backed by Ginnie Mae
Certificates(2)
|
|
|
1,102
|
|
|
|
1,268
|
|
|
|
(1)
|
Exclude credit enhancements related
to Structured Transactions, which had unpaid principal balances
that totaled $25.3 billion and $20.2 billion at
September 30, 2008 and December 31, 2007, respectively.
|
(2)
|
Ginnie Mae Certificates are backed
by the full faith and credit of the U.S. government.
|
In addition to the types of credit enhancements associated with
our PCs and Structured Securities, certain of our Structured
Transactions benefit from additional credit protection afforded
by subordinated security structures. Our Structured Transactions
also include $1.9 billion at September 30, 2008 of
securitized FHA/VA loans, for which those agencies provide
recourse for 100% of qualifying losses associated with the loan.
There were $5.3 billion in unpaid principal balance of
these securities at September 30, 2008, which had coverage,
including amounts associated with subordination, of up to
approximately 19% of the security balance, on average. The
remaining Structured Transactions, which do not have
subordination protection or other forms of credit enhancement,
totaled $18.0 billion at September 30, 2008. Although
our charge-offs associated with Structured Transactions to date
have been minimal, we have increased our provision for credit
losses associated with the loans underlying these guarantees
during the three and nine months ended September 30, 2008.
Securities
Administration
Effective December 2007 we established securitization trusts for
the administration of cash remittances received on the
underlying assets of our PCs and Structured Securities. We
receive trust management income, which represents the fees we
earn as master servicer, issuer, trustee and securities
administrator for our issued PCs and Structured Securities.
These fees, which are included in our non-interest income, are
derived from interest earned on principal and interest cash
flows held in the trust between the time funds are remitted to
the trust by servicers and the date of distribution to our PC
and Structured Securities holders. The trust management income
is offset by interest expense we incur when a borrower prepays a
mortgage, but the full amount of interest for the month is due
to the PC investor. We must indemnify the trust for any
investment losses that are incurred in our role as the
securities administrator for the trust. In August 2008, acting
as the security administrator
for a trust which holds mortgage loan pools backing our PCs, we
invested in $1.2 billion of short-term, unsecured loans
which we made to Lehman Brothers Holdings, Inc., or Lehman, on
the trusts behalf. These transactions were due to mature
on September 15, 2008. On September 15, 2008, Lehman
filed a chapter 11 bankruptcy petition in the Bankruptcy
Court for the Southern District of New York. Lehman failed to
repay these loans and accrued interest. To the extent there is a
loss related to an eligible investment for the trusts, we, as
the administrator, are responsible for making up that shortfall.
During the third quarter of 2008, we recorded a
$1.1 billion loss to reduce the carrying amount of this
asset to our estimate of the net realizable amount on these
transactions. The loss amount was recorded to securities
administrator loss on investment activity on our consolidated
statements of income. The remaining carrying amount is included
in other assets as of September 30, 2008 on our
consolidated balance sheets.
Other
Indemnifications
In connection with certain business transactions, we may provide
indemnification to counterparties for claims arising out of
breaches of certain obligations (e.g., those arising from
representations and warranties) in contracts entered into in the
normal course of business. For a discussion of these
indemnifications see ITEM 13. FINANCIAL
STATEMENTS AND SUPPLEMENTARY DATA AUDITED
CONSOLIDATED FINANCIAL STATEMENTS AND ACCOMPANYING
NOTES NOTE 2: FINANCIAL GUARANTEES AND
TRANSFERS OF SECURITIZED INTERESTS IN MORTGAGE-RELATED
ASSETS in our Registration Statement. Our assessment is
that the risk of any material loss from such a claim for
indemnification is remote and there are no probable and
estimable losses associated with these contracts. Therefore, we
have not recorded any liabilities related to these
indemnifications on our consolidated balance sheets at
September 30, 2008 and December 31, 2007.
NOTE 3:
VARIABLE INTEREST ENTITIES
We are a party to numerous entities that are considered to be
VIEs. Our investments in VIEs include low-income housing tax
credit, or LIHTC, partnerships and certain Structured Securities
transactions. In addition, we buy the highly-rated senior
securities in non-mortgage-related, asset-backed investment
trusts that are VIEs. Our investments in these securities do not
represent a significant variable interest in the securitization
trusts as the securities issued by these trusts are not designed
to absorb a significant portion of the variability in the trust.
Accordingly, we do not consolidate these securities. See
ITEM 13. FINANCIAL STATEMENTS AND SUPPLEMENTARY
DATA AUDITED CONSOLIDATED FINANCIAL STATEMENTS AND
ACCOMPANYING NOTES NOTE 1: SUMMARY OF
SIGNIFICANT ACCOUNTING POLICIES Consolidation and
Equity Method of Accounting in our Registration Statement
for further information regarding the consolidation practices of
our VIEs.
LIHTC
Partnerships
We invest as a limited partner in LIHTC partnerships formed for
the purpose of providing funding for affordable multifamily
rental properties. The LIHTC partnerships invest as limited
partners in lower-tier partnerships, which own and operate
multifamily rental properties. These properties are rented to
qualified low-income tenants, allowing the properties to be
eligible for federal tax credits. Most of these LIHTC
partnerships are VIEs. A general partner operates the
partnership, identifying investments and obtaining debt
financing as needed to finance partnership activities. Although
these partnerships generate operating losses, we realize a
return on our investment through reductions in income tax
expense that result from tax credits and the deductibility of
the operating losses of these partnerships. The partnership
agreements are typically structured to meet a required
15-year
period of occupancy by qualified low-income tenants. The
investments in LIHTC partnerships, in which we were either the
primary beneficiary or had a significant variable interest, were
made between 1989 and 2007. At September 30, 2008 and
December 31, 2007, we did not guarantee any obligations of
these LIHTC partnerships and our exposure was limited to the
amount of our investment. At September 30, 2008 and
December 31, 2007, we were the primary beneficiary of
investments in six partnerships and we consolidated these
investments. The investors in the obligations of the
consolidated LIHTC partnerships have recourse only to the assets
of those VIEs and do not have recourse to us.
VIEs Not
Consolidated
LIHTC
Partnerships
At both September 30, 2008 and December 31, 2007, we
had unconsolidated investments in 189 LIHTC partnerships,
respectively, in which we had a significant variable interest.
The size of these partnerships at September 30, 2008 and
December 31, 2007, as measured in total assets, was
$10.5 billion and $10.3 billion, respectively. These
partnerships are accounted for using the equity method. As a
limited partner, our maximum exposure to loss equals the
undiscounted book value of our equity investment. At
September 30, 2008 and December 31, 2007, our maximum
exposure to loss on unconsolidated LIHTC partnerships, in which
we had a significant variable interest, was $3.4 billion
and $3.7 billion, respectively.
Structured
Transactions
We periodically issue securities in Structured Transactions,
which are backed by mortgage loans or non-Freddie Mac
mortgage-related securities using collateral pools transferred
to a trust specifically created for the purpose of issuing
securities. These trusts issue various senior interests and
subordinated interests. We purchase interests, including senior
interests, of the trusts and issue and guarantee Structured
Securities backed by these interests. The subordinated interests
are generally either held by the seller or other party or sold
in the capital markets. Generally, the structure of the
transactions and the trusts as qualifying special purpose
entities exempts them from the scope of
FIN 46(R).
However, at September 30, 2008 and December 31, 2007,
we had an interest in one Structured Transaction that did not
fall within the scope of this exception and in which we had a
significant variable interest. Our involvement in this one
Structured Transaction began in 2002. The size of the Structured
Transaction at September 30, 2008 and December 31,
2007 as measured in total assets, was $36 million and
$40 million, respectively. For the same dates, our maximum
exposure to loss on this transaction was $33 million and
$37 million, respectively, consisting of the book value of
our investments plus incremental guarantees of the senior
interests that are held by third parties.
NOTE 4:
SECURITIES HELD IN OUR RETAINED PORTFOLIO AND CASH AND
INVESTMENTS PORTFOLIO
Table 4.1 summarizes amortized cost, estimated fair values
and corresponding gross unrealized gains and gross unrealized
losses for available-for-sale securities by major security type.
Table 4.1
Available-For-Sale Securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
|
|
|
Gross
|
|
|
|
|
|
|
|
|
|
Unrealized
|
|
|
Unrealized
|
|
|
|
|
|
|
Amortized Cost
|
|
|
Gains
|
|
|
Losses
|
|
|
Fair Value
|
|
|
|
(in millions)
|
|
September 30, 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Retained portfolio:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage-related securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Freddie Mac
|
|
$
|
277,099
|
|
|
$
|
1,632
|
|
|
$
|
(3,977
|
)
|
|
$
|
274,754
|
|
Subprime
|
|
|
77,486
|
|
|
|
3
|
|
|
|
(13,555
|
)
|
|
|
63,934
|
|
Commercial mortgage-backed securities
|
|
|
64,383
|
|
|
|
1
|
|
|
|
(7,339
|
)
|
|
|
57,045
|
|
Alt-A and other
|
|
|
38,675
|
|
|
|
7
|
|
|
|
(8,856
|
)
|
|
|
29,826
|
|
Fannie Mae.
|
|
|
40,194
|
|
|
|
243
|
|
|
|
(471
|
)
|
|
|
39,966
|
|
Obligations of state and political subdivisions
|
|
|
13,072
|
|
|
|
8
|
|
|
|
(1,635
|
)
|
|
|
11,445
|
|
Manufactured housing
|
|
|
1,030
|
|
|
|
73
|
|
|
|
(58
|
)
|
|
|
1,045
|
|
Ginnie Mae
|
|
|
381
|
|
|
|
18
|
|
|
|
(1
|
)
|
|
|
398
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total mortgage-related securities
|
|
|
512,320
|
|
|
|
1,985
|
|
|
|
(35,892
|
)
|
|
|
478,413
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and investments portfolio:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-mortgage-related securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Asset-backed securities
|
|
|
10,407
|
|
|
|
3
|
|
|
|
|
|
|
|
10,410
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total non-mortgage-related securities
|
|
|
10,407
|
|
|
|
3
|
|
|
|
|
|
|
|
10,410
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
available-for-sale
securities
|
|
$
|
522,727
|
|
|
$
|
1,988
|
|
|
$
|
(35,892
|
)
|
|
$
|
488,823
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Retained portfolio:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage-related securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Freddie Mac
|
|
$
|
346,569
|
|
|
$
|
2,981
|
|
|
$
|
(2,583
|
)
|
|
$
|
346,967
|
|
Subprime
|
|
|
101,278
|
|
|
|
12
|
|
|
|
(8,584
|
)
|
|
|
92,706
|
|
Commercial mortgage-backed securities
|
|
|
64,965
|
|
|
|
515
|
|
|
|
(681
|
)
|
|
|
64,799
|
|
Alt-A and other
|
|
|
51,456
|
|
|
|
15
|
|
|
|
(2,543
|
)
|
|
|
48,928
|
|
Fannie Mae
|
|
|
45,688
|
|
|
|
513
|
|
|
|
(344
|
)
|
|
|
45,857
|
|
Obligations of state and political subdivisions
|
|
|
14,783
|
|
|
|
146
|
|
|
|
(351
|
)
|
|
|
14,578
|
|
Manufactured housing
|
|
|
1,149
|
|
|
|
131
|
|
|
|
(12
|
)
|
|
|
1,268
|
|
Ginnie Mae
|
|
|
545
|
|
|
|
19
|
|
|
|
(2
|
)
|
|
|
562
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total mortgage-related securities
|
|
|
626,433
|
|
|
|
4,332
|
|
|
|
(15,100
|
)
|
|
|
615,665
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and investments portfolio:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-mortgage-related securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Asset-backed securities
|
|
|
16,644
|
|
|
|
25
|
|
|
|
(81
|
)
|
|
|
16,588
|
|
Commercial paper
|
|
|
18,513
|
|
|
|
|
|
|
|
|
|
|
|
18,513
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total non-mortgage-related securities
|
|
|
35,157
|
|
|
|
25
|
|
|
|
(81
|
)
|
|
|
35,101
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
available-for-sale
securities
|
|
$
|
661,590
|
|
|
$
|
4,357
|
|
|
$
|
(15,181
|
)
|
|
$
|
650,766
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other-Than-Temporary
Impairments
Our evaluation of unrealized losses on our
available-for-sale
portfolio for
other-than-temporary
impairment contemplates numerous factors. We performed an
evaluation on a
security-by-security
basis considering all available information. Important factors
include the length of time and extent to which the fair value of
the security has been less than book value; the impact of
changes in credit ratings (i.e., rating agency
downgrades); our intent and ability to retain the security in
order to allow for a recovery in fair value; and an analysis of
the performance of the underlying collateral relative to its
credit
enhancements using techniques that require assumptions about
future default, prepayment and borrower behavior. The impairment
analysis identified securities backed by subprime and
Alt-A and
other loans, including MTA loans, with $21.7 billion of
unpaid principal balance for which it was probable that we would
not recover all of our contractual principal and interest due to
a significant recent and sustained deterioration in the
performance of the underlying collateral of these securities,
considerably more pessimistic expectations around future
performance due to the unprecedented deterioration in economic
conditions since the second quarter, and decreased confidence in
the credit enhancements related to two monoline bond insurers
where we have determined that it is both probable a principal
and interest shortfall will occur on the insured securities and
that in such a case, there is substantial uncertainty
surrounding the insurers ability to pay all future claims.
We rely on monoline bond insurance, including secondary
coverage, to provide credit protection on some of our securities
held in our mortgage-related investment portfolio as well as our
non-mortgage-related investment portfolio. Monolines are
companies that provide credit insurance principally covering
securitized assets in both the primary issuance and secondary
markets. Accordingly, we recorded other-than-temporary security
impairments on securities backed by subprime and
Alt-A loans,
including MTA loans, of $8.9 billion and $9.7 billion
for the three and nine months ended September 30, 2008. The
recent deterioration has not impacted our ability and intent to
hold these securities. We estimate that the future expected
principal and interest shortfall on these securities will be
significantly less than the impairment loss required to be
recorded under GAAP. The portion of the other-than-temporary
impairment charges associated with these expected recoveries
will be accreted back through net interest income in future
periods.
We also recognized impairment charges of $244 million and
$458 million for the three and nine months ended
September 30, 2008 related to our short-term
available-for-sale non-mortgage-related securities, as
management could no longer assert the positive intent to hold
these securities to recovery. The decision to impair these
securities is consistent with our consideration of sales of
securities from the cash and investments portfolio as a
contingent source of liquidity.
We recorded security impairments on available-for-sale
securities for the three and nine months ended
September 30, 2007 of $1 million and
$351 million, respectively.
Table 4.2 shows the fair value of available-for-sale
securities as of September 30, 2008 and December 31,
2007 that have been in a gross unrealized loss position less
than 12 months or greater than 12 months.
Table 4.2
Available-For-Sale Securities in a Gross Unrealized Loss
Position
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less than 12 months
|
|
|
12 months or Greater
|
|
|
Total
|
|
|
|
|
|
|
Gross
|
|
|
|
|
|
Gross
|
|
|
|
|
|
Gross
|
|
|
|
|
|
|
Unrealized
|
|
|
|
|
|
Unrealized
|
|
|
|
|
|
Unrealized
|
|
|
|
Fair Value
|
|
|
Losses
|
|
|
Fair Value
|
|
|
Losses
|
|
|
Fair Value
|
|
|
Losses
|
|
|
|
(in millions)
|
|
September 30, 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Retained portfolio:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage-related securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Freddie Mac
|
|
$
|
130,561
|
|
|
$
|
(1,777
|
)
|
|
$
|
44,243
|
|
|
$
|
(2,200
|
)
|
|
$
|
174,804
|
|
|
$
|
(3,977
|
)
|
Subprime
|
|
|
6,084
|
|
|
|
(1,677
|
)
|
|
|
54,697
|
|
|
|
(11,878
|
)
|
|
|
60,781
|
|
|
|
(13,555
|
)
|
Commercial mortgage-backed securities
|
|
|
30,765
|
|
|
|
(4,290
|
)
|
|
|
26,204
|
|
|
|
(3,049
|
)
|
|
|
56,969
|
|
|
|
(7,339
|
)
|
Alt-A and
other
|
|
|
3,601
|
|
|
|
(1,320
|
)
|
|
|
16,352
|
|
|
|
(7,536
|
)
|
|
|
19,953
|
|
|
|
(8,856
|
)
|
Fannie Mae
|
|
|
20,961
|
|
|
|
(220
|
)
|
|
|
7,269
|
|
|
|
(251
|
)
|
|
|
28,230
|
|
|
|
(471
|
)
|
Obligations of state and political subdivisions
|
|
|
5,790
|
|
|
|
(513
|
)
|
|
|
4,990
|
|
|
|
(1,122
|
)
|
|
|
10,780
|
|
|
|
(1,635
|
)
|
Manufactured housing
|
|
|
553
|
|
|
|
(50
|
)
|
|
|
36
|
|
|
|
(8
|
)
|
|
|
589
|
|
|
|
(58
|
)
|
Ginnie Mae
|
|
|
51
|
|
|
|
(1
|
)
|
|
|
1
|
|
|
|
|
|
|
|
52
|
|
|
|
(1
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total mortgage-related securities
|
|
|
198,366
|
|
|
|
(9,848
|
)
|
|
|
153,792
|
|
|
|
(26,044
|
)
|
|
|
352,158
|
|
|
|
(35,892
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total available-for-sale securities in a gross unrealized loss
position
|
|
$
|
198,366
|
|
|
$
|
(9,848
|
)
|
|
$
|
153,792
|
|
|
$
|
(26,044
|
)
|
|
$
|
352,158
|
|
|
$
|
(35,892
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Retained portfolio:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage-related securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Freddie Mac
|
|
$
|
22,546
|
|
|
$
|
(254
|
)
|
|
$
|
135,966
|
|
|
$
|
(2,329
|
)
|
|
$
|
158,512
|
|
|
$
|
(2,583
|
)
|
Subprime
|
|
|
87,004
|
|
|
|
(8,021
|
)
|
|
|
5,213
|
|
|
|
(563
|
)
|
|
|
92,217
|
|
|
|
(8,584
|
)
|
Commercial mortgage-backed securities
|
|
|
8,652
|
|
|
|
(154
|
)
|
|
|
26,207
|
|
|
|
(527
|
)
|
|
|
34,859
|
|
|
|
(681
|
)
|
Alt-A and
other
|
|
|
33,509
|
|
|
|
(2,029
|
)
|
|
|
14,525
|
|
|
|
(514
|
)
|
|
|
48,034
|
|
|
|
(2,543
|
)
|
Fannie Mae
|
|
|
4,728
|
|
|
|
(17
|
)
|
|
|
15,214
|
|
|
|
(327
|
)
|
|
|
19,942
|
|
|
|
(344
|
)
|
Obligations of state and political subdivisions
|
|
|
7,735
|
|
|
|
(264
|
)
|
|
|
1,286
|
|
|
|
(87
|
)
|
|
|
9,021
|
|
|
|
(351
|
)
|
Manufactured housing
|
|
|
435
|
|
|
|
(11
|
)
|
|
|
24
|
|
|
|
(1
|
)
|
|
|
459
|
|
|
|
(12
|
)
|
Ginnie Mae
|
|
|
2
|
|
|
|
|
|
|
|
74
|
|
|
|
(2
|
)
|
|
|
76
|
|
|
|
(2
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total mortgage-related securities
|
|
|
164,611
|
|
|
|
(10,750
|
)
|
|
|
198,509
|
|
|
|
(4,350
|
)
|
|
|
363,120
|
|
|
|
(15,100
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and investments portfolio:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-mortgage-related securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Asset-backed securities
|
|
|
8,236
|
|
|
|
(63
|
)
|
|
|
3,222
|
|
|
|
(18
|
)
|
|
|
11,458
|
|
|
|
(81
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total non-mortgage-related securities
|
|
|
8,236
|
|
|
|
(63
|
)
|
|
|
3,222
|
|
|
|
(18
|
)
|
|
|
11,458
|
|
|
|
(81
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total available-for-sale securities in a gross unrealized loss
position
|
|
$
|
172,847
|
|
|
$
|
(10,813
|
)
|
|
$
|
201,731
|
|
|
$
|
(4,368
|
)
|
|
$
|
374,578
|
|
|
$
|
(15,181
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At September 30, 2008, our gross unrealized losses on
available-for-sale mortgage-related securities were
$35.9 billion. Included in these losses are gross
unrealized losses of $29.8 billion related to non-agency
mortgage-related securities backed
by subprime,
Alt-A and
other loans and commercial mortgage-backed securities.
Approximately 84% of our non-agency mortgage-related securities
backed by subprime,
Alt-A and
other loans and commercial mortgage-backed securities were
investment grade (i.e., rated BBB− or better on a
Standard & Poors or equivalent scale) at
November 10, 2008. We believe that these unrealized losses
on non-agency mortgage-related securities as of
September 30, 2008, were principally a result of decreased
liquidity and larger risk premiums in the non-agency mortgage
market. While it is possible that under certain conditions,
defaults and severity of losses on these securities could exceed
our subordination and credit enhancement levels and a principal
and interest loss could occur, we do not believe that those
conditions are probable at September 30, 2008. As a result
of our reviews, we have not identified any securities in our
available-for-sale portfolio that are probable of incurring a
contractual principal or interest loss. Based on our ability and
intent to hold our available-for-sale securities for a
sufficient time to recover all unrealized losses and our
consideration of all available information, we have concluded
that, other than the securities for which impairment has already
been recorded, the reduction in fair value of these securities
is temporary at September 30, 2008.
Table 4.3 below illustrates the gross realized gains and
gross realized losses from the sale of available-for-sale
securities.
Table 4.3
Gross Realized Gains and Gross Realized Losses on
Available-For-Sale
Securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
|
|
(in millions)
|
|
|
Retained portfolio:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage-related securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Obligations of states and political subdivisions
|
|
$
|
7
|
|
|
$
|
|
|
|
$
|
74
|
|
|
$
|
|
|
Freddie Mac
|
|
|
223
|
|
|
|
320
|
|
|
|
415
|
|
|
|
432
|
|
Fannie Mae
|
|
|
58
|
|
|
|
|
|
|
|
67
|
|
|
|
|
|
Commercial mortgage-backed securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3
|
|
Subprime
|
|
|
|
|
|
|
4
|
|
|
|
|
|
|
|
4
|
|
Manufactured Housing
|
|
|
|
|
|
|
11
|
|
|
|
|
|
|
|
11
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total mortgage-related securities gross realized gains
|
|
|
288
|
|
|
|
335
|
|
|
|
556
|
|
|
|
450
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and investments portfolio:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-mortgage-related securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Asset-backed securities
|
|
|
1
|
|
|
|
|
|
|
|
1
|
|
|
|
|
|
Obligations of state and political subdivisions
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total non-mortgage-related securities gross realized gains
|
|
|
1
|
|
|
|
|
|
|
|
1
|
|
|
|
1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross realized gains
|
|
|
289
|
|
|
|
335
|
|
|
|
557
|
|
|
|
451
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Retained portfolio:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage-related securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Obligations of states and political subdivisions
|
|
|
|
|
|
|
|
|
|
|
(4
|
)
|
|
|
|
|
Freddie Mac
|
|
|
(1
|
)
|
|
|
(55
|
)
|
|
|
(12
|
)
|
|
|
(372
|
)
|
Fannie Mae
|
|
|
(1
|
)
|
|
|
|
|
|
|
(1
|
)
|
|
|
(9
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total mortgage-related securities gross realized losses
|
|
|
(2
|
)
|
|
|
(55
|
)
|
|
|
(17
|
)
|
|
|
(381
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and investments portfolio:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-mortgage-related securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Asset-backed securities
|
|
|
|
|
|
|
(52
|
)
|
|
|
|
|
|
|
(57
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total non-mortgage-related securities gross realized losses
|
|
|
|
|
|
|
(52
|
)
|
|
|
|
|
|
|
(57
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross realized losses
|
|
|
(2
|
)
|
|
|
(107
|
)
|
|
|
(17
|
)
|
|
|
(438
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net realized gains (losses)
|
|
$
|
287
|
|
|
$
|
228
|
|
|
$
|
540
|
|
|
$
|
13
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Table 4.4 presents the changes in AOCI, net of taxes,
related to available-for-sale securities. The net unrealized
holding (losses), net of tax, represents the net fair value
adjustments recorded on available-for-sale securities throughout
the period, after the effects of our federal statutory tax rate
of 35%. The net reclassification adjustment for realized losses,
net of tax, represents the amount of those fair value
adjustments, after the effects of our federal statutory tax rate
of 35%, that have been recognized in earnings due to the sale of
an
available-for-sale
security or the recognition of an other-than-temporary
impairment loss.
Table 4.4
AOCI, Net of Taxes, Related to
Available-For-Sale
Securities
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended
|
|
|
|
September 30,
|
|
|
|
2008
|
|
|
2007
|
|
|
|
(in millions)
|
|
|
Beginning balance
|
|
$
|
(7,040
|
)
|
|
$
|
(3,332
|
)
|
Adjustment to initially apply
SFAS 159(1)
|
|
|
(854
|
)
|
|
|
|
|
Net unrealized holding (losses), net of
tax(2)
|
|
|
(20,434
|
)
|
|
|
(1,687
|
)
|
Net reclassification adjustment for realized losses, net of
tax(3)(4)
|
|
|
6,291
|
|
|
|
218
|
|
|
|
|
|
|
|
|
|
|
Ending balance
|
|
$
|
(22,037
|
)
|
|
$
|
(4,801
|
)
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
Net of tax benefit of
$460 million for the nine months ended September 30,
2008.
|
(2)
|
Net of tax benefit of
$11.0 billion and $908 million for the nine months
ended September 30, 2008 and 2007, respectively.
|
(3)
|
Net of tax benefit of
$3.4 billion and $117 million for the nine months
ended September 30, 2008 and 2007, respectively.
|
(4)
|
Includes the reversal of previously
recorded unrealized losses that have been recognized on our
consolidated statement of income as impairment losses on
available-for-sale securities of $6.6 billion and
$226 million, net of tax, for the nine months ended
September 30, 2008 and 2007, respectively.
|
Table 4.5 summarizes the estimated fair values by major
security type for trading securities held in our retained
portfolio.
Table 4.5
Trading Securities in our Retained Portfolio
|
|
|
|
|
|
|
|
|
|
|
September 30, 2008
|
|
|
December 31, 2007
|
|
|
|
(in millions)
|
|
|
Mortgage-related securities issued by:
|
|
|
|
|
|
|
|
|
Freddie Mac
|
|
$
|
100,484
|
|
|
$
|
12,216
|
|
Fannie Mae
|
|
|
17,267
|
|
|
|
1,697
|
|
Ginnie Mae
|
|
|
197
|
|
|
|
175
|
|
Other
|
|
|
54
|
|
|
|
1
|
|
|
|
|
|
|
|
|
|
|
Total trading securities in our retained portfolio
|
|
$
|
118,002
|
|
|
$
|
14,089
|
|
|
|
|
|
|
|
|
|
|
For the three months ended September 30, 2008 and 2007, we
recorded net unrealized gains (losses) on trading securities
held at September 30, 2008 and 2007 of $(976) million
and $257 million, respectively. For the nine months ended
September 30, 2008 and 2007, we recorded net unrealized
gains (losses) on trading securities held at September 30,
2008 and 2007 of $(1.5) billion and $302 million,
respectively.
Total trading securities in our retained portfolio include
$3.7 billion and $4.2 billion of
SFAS No. 155, Accounting for Certain Hybrid
Financial Instruments and amendment of FASB Statement
No. 133 and 140, or SFAS 155, related assets
as of September 30, 2008 and December 31, 2007,
respectively. Gains (losses) on trading securities include
losses of $(80) million and $(104) million,
respectively, related to these SFAS 155 trading securities
for the three and nine months ended September 30, 2008.
Gains (losses) on trading securities include gains of
$209 million and $110 million related to these
SFAS 155 trading securities for the three and nine months
ended September 30, 2007, respectively.
Impact of
the Purchase Agreement on the Retained Portfolio
Under the Purchase Agreement, our retained mortgage and
mortgage-backed securities portfolio as of December 31,
2009 may not exceed $850 billion, and must decline by 10%
per year thereafter until it reaches $250 billion.
Retained
Portfolio Voluntary Growth Limit
As of March 1, 2008, we are no longer subject to the
voluntary growth limit on our retained portfolio of 2% annually.
Collateral
Pledged
Collateral
Pledged to Freddie Mac
Our counterparties are required to pledge collateral for reverse
repurchase transactions and most derivative transactions subject
to collateral posting thresholds generally related to a
counterpartys credit rating. Although it is our practice
not to repledge assets held as collateral, a portion of the
collateral may be repledged based on master agreements related
to our derivative transactions. At September 30, 2008 and
December 31, 2007, we did not have collateral in the form
of securities pledged to and held by us under interest-rate swap
agreements.
Collateral
Pledged by Freddie Mac
We are also required to pledge collateral for margin
requirements with third-party custodians in connection with
secured financings, interest-rate swap agreements, futures and
daily trade activities with some counterparties. The level of
collateral pledged related to our interest-rate swap agreements
is determined after giving consideration to our credit rating.
As of September 30, 2008, we had two uncommitted intraday
lines of credit with third parties, both of which are secured,
in connection with the Federal Reserve Boards revised
payments system risk policy, which restricts or eliminates
daylight overdrafts by the GSEs in connection with our use of
the Fedwire system. In certain limited circumstances, the line
of credit agreements give the secured parties the right to
repledge the securities underlying our financing to other third
parties, including the Federal Reserve Bank. See
NOTE 7: DEBT SECURITIES AND SUBORDINATED
BORROWINGS
Lending Agreement for a discussion of our GSE Credit
Facility. We pledge collateral to meet these requirements upon a
demand by the respective counterparty.
Table 4.6 summarizes all securities pledged as collateral
by us, including assets that the secured party may repledge and
those that may not be repledged.
Table 4.6
Collateral in the Form of Securities Pledged
|
|
|
|
|
|
|
|
|
|
|
September 30, 2008
|
|
|
December 31, 2007
|
|
|
|
(in millions)
|
|
|
Securities pledged with ability for secured party to repledge
|
|
|
|
|
|
|
|
|
Available-for-sale
|
|
$
|
22,659
|
|
|
$
|
17,010
|
|
Securities pledged without ability for secured party to repledge
|
|
|
|
|
|
|
|
|
Available-for-sale
|
|
|
437
|
|
|
|
793
|
|
|
|
|
|
|
|
|
|
|
Total securities pledged
|
|
$
|
23,096
|
|
|
$
|
17,803
|
|
|
|
|
|
|
|
|
|
|
NOTE 5:
MORTGAGE LOANS AND LOAN LOSS RESERVES
We own both single-family mortgage loans, which are secured by
one-to-four family residential properties, and multifamily
mortgage loans, which are secured by properties with five or
more residential rental units.
Table 5.1 summarizes the types of loans within our retained
mortgage loan portfolio at September 30, 2008 and
December 31, 2007. These balances do not include mortgage
loans underlying our guaranteed PCs and Structured Securities,
since these are not consolidated on our balance sheets. See
NOTE 2: FINANCIAL GUARANTEES AND SECURITIZED
INTERESTS IN MORTGAGE-RELATED ASSETS for information on
our securitized mortgage loans.
Table 5.1
Mortgage Loans within the Retained Portfolio
|
|
|
|
|
|
|
|
|
|
|
September 30, 2008
|
|
|
December 31, 2007
|
|
|
|
(in millions)
|
|
|
Single-family(1):
|
|
|
|
|
|
|
|
|
Conventional
|
|
|
|
|
|
|
|
|
Fixed-rate
|
|
$
|
29,108
|
|
|
$
|
20,707
|
|
Adjustable-rate
|
|
|
1,586
|
|
|
|
2,700
|
|
|
|
|
|
|
|
|
|
|
Total conventional
|
|
|
30,694
|
|
|
|
23,407
|
|
FHA/VA Fixed-rate
|
|
|
480
|
|
|
|
311
|
|
Rural Housing Service and other federally guaranteed loans
|
|
|
832
|
|
|
|
871
|
|
|
|
|
|
|
|
|
|
|
Total single-family
|
|
|
32,006
|
|
|
|
24,589
|
|
|
|
|
|
|
|
|
|
|
Multifamily(1):
|
|
|
|
|
|
|
|
|
Conventional
|
|
|
|
|
|
|
|
|
Fixed-rate
|
|
|
63,074
|
|
|
|
53,111
|
|
Adjustable-rate
|
|
|
5,229
|
|
|
|
4,455
|
|
|
|
|
|
|
|
|
|
|
Total conventional
|
|
|
68,303
|
|
|
|
57,566
|
|
Rural Housing Service
|
|
|
3
|
|
|
|
3
|
|
|
|
|
|
|
|
|
|
|
Total multifamily
|
|
|
68,306
|
|
|
|
57,569
|
|
|
|
|
|
|
|
|
|
|
Total unpaid principal balance of mortgage loans
|
|
|
100,312
|
|
|
|
82,158
|
|
|
|
|
|
|
|
|
|
|
Deferred fees, unamortized premiums, discounts and other cost
basis adjustments
|
|
|
(1,625
|
)
|
|
|
(1,868
|
)
|
Lower of cost or market adjustments on loans
held-for-sale
|
|
|
(25
|
)
|
|
|
(2
|
)
|
Allowance for loan losses on loans
held-for-investment
|
|
|
(459
|
)
|
|
|
(256
|
)
|
|
|
|
|
|
|
|
|
|
Total mortgage loans, net of allowance for loan losses
|
|
$
|
98,203
|
|
|
$
|
80,032
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
Based on unpaid principal balances
and excluding mortgage loans traded, but not yet settled.
|
For the nine months ended September 30, 2008 and 2007, we
transferred $ million and $40 million,
respectively, of
held-for-sale
mortgage loans to
held-for-investment.
Loan Loss
Reserves
We maintain an allowance for loan losses on mortgage loans in
our retained portfolio that we classify as held-for-investment
and a reserve for guarantee losses associated with mortgage
loans that underlie our guaranteed PCs and Structured
Securities, collectively referred to as loan loss reserves. For
loans subject to Statement of Position
No. 03-3,
Accounting for Certain Loans or Debt Securities
Acquired in a Transfer, or
SOP 03-3,
loan loss reserves are only established when it becomes probable
that we will be unable to collect all cash flows which we
expected to collect when we acquired the loan. Our allowance for
loan losses held-for-investment related to single-family and
multifamily mortgage loans was $383 million and
$76 million, respectively, as of September 30, 2008.
The amount of our total loan loss reserves that related to
single-family and multifamily mortgage loans was
$10.1 billion and $87 million, respectively, as of
September 30, 2008.
Table 5.2 summarizes loan loss reserve activity during the
periods presented.
Table 5.2
Detail of Loan Loss Reserves
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
|
|
|
2008
|
|
|
2007
|
|
|
|
Allowance for
|
|
|
Reserve for
|
|
|
Total Loan
|
|
|
Allowance for
|
|
|
Reserve for
|
|
|
Total Loan
|
|
|
|
Loan Losses
|
|
|
Guarantee Losses
|
|
|
Loss Reserves
|
|
|
Loan Losses
|
|
|
Guarantee Losses
|
|
|
Loss Reserves
|
|
|
|
(in millions)
|
|
|
Beginning balance
|
|
$
|
468
|
|
|
$
|
5,345
|
|
|
$
|
5,813
|
|
|
$
|
118
|
|
|
$
|
1,020
|
|
|
$
|
1,138
|
|
Provision for credit losses
|
|
|
44
|
|
|
|
5,658
|
|
|
|
5,702
|
|
|
|
138
|
|
|
|
1,234
|
|
|
|
1,372
|
|
Charge-offs(1)(2)
|
|
|
(112
|
)
|
|
|
(985
|
)
|
|
|
(1,097
|
)
|
|
|
(92
|
)
|
|
|
(3
|
)
|
|
|
(95
|
)
|
Recoveries(1)
|
|
|
59
|
|
|
|
177
|
|
|
|
236
|
|
|
|
61
|
|
|
|
|
|
|
|
61
|
|
Transfers,
net(3)
|
|
|
|
|
|
|
(434
|
)
|
|
|
(434
|
)
|
|
|
|
|
|
|
(164
|
)
|
|
|
(164
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending balance
|
|
$
|
459
|
|
|
$
|
9,761
|
|
|
$
|
10,220
|
|
|
$
|
225
|
|
|
$
|
2,087
|
|
|
$
|
2,312
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30,
|
|
|
|
2008
|
|
|
2007
|
|
|
|
Allowance for
|
|
|
Reserve for
|
|
|
Total Loan
|
|
|
Allowance for
|
|
|
Reserve for
|
|
|
Total Loan
|
|
|
|
Loan Losses
|
|
|
Guarantee Losses
|
|
|
Loss Reserves
|
|
|
Loan Losses
|
|
|
Guarantee Losses
|
|
|
Loss Reserves
|
|
|
|
(in millions)
|
|
|
Beginning balance
|
|
$
|
256
|
|
|
$
|
2,566
|
|
|
$
|
2,822
|
|
|
$
|
69
|
|
|
$
|
550
|
|
|
$
|
619
|
|
Provision for credit losses
|
|
|
339
|
|
|
|
9,140
|
|
|
|
9,479
|
|
|
|
253
|
|
|
|
1,814
|
|
|
|
2,067
|
|
Charge-offs(1)(2)
|
|
|
(351
|
)
|
|
|
(1,672
|
)
|
|
|
(2,023
|
)
|
|
|
(258
|
)
|
|
|
(3
|
)
|
|
|
(261
|
)
|
Recoveries(1)
|
|
|
215
|
|
|
|
333
|
|
|
|
548
|
|
|
|
161
|
|
|
|
|
|
|
|
161
|
|
Transfers,
net(3)
|
|
|
|
|
|
|
(606
|
)
|
|
|
(606
|
)
|
|
|
|
|
|
|
(274
|
)
|
|
|
(274
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending balance
|
|
$
|
459
|
|
|
$
|
9,761
|
|
|
$
|
10,220
|
|
|
$
|
225
|
|
|
$
|
2,087
|
|
|
$
|
2,312
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
Charge-offs related to retained mortgages represent the amount
of the unpaid principal balance of a loan that has been
discharged using the reserve balance to remove the loan from our
retained portfolio at the time of resolution. Charge-offs
exclude $81 million and $41 million for the three
months ended September 30, 2008 and 2007, respectively, and
$332 million and $82 million for the nine months
ended September 30, 2008 and 2007, respectively, related to
certain loans purchased under financial guarantees and reflected
within losses on loans purchased on our consolidated statements
of income. Recoveries of charge-offs primarily result from
foreclosure alternatives and Real Estate Owned, or REO,
acquisitions on loans where a share of default risk has been
assumed by mortgage insurers, servicers or other third parties
through credit enhancements.
|
(2)
|
Effective December 2007, we no longer automatically purchase
loans from PC pools once they become 120 days delinquent,
but rather, we purchase and effectively liquidate the loans from
PCs when: (a) the loans are modified; (b) foreclosure
sales occur; (c) the loans have been delinquent for
24 months; or (d) the loans have been 120 days
delinquent and the cost of guarantee payments to PC holders,
including advances of interest at the PC coupon, exceeds the
expected cost of holding the nonperforming mortgage in our
retained portfolio. Consequently, the increase in charge-offs in
PCs and Structured Securities during the three and nine months
ended September 30, 2008, as compared to the three and nine
months ended September 30, 2007, respectively, is due to
this operational change under which loans proceed to a loss
event (upon a foreclosure sale) while in a PC pool.
|
(3)
|
Consist primarily of: (a) the transfer of a proportional
amount of the recognized reserves for guaranteed losses related
to PC pools associated with non-performing loans purchased from
mortgage pools underlying our PCs, Structured Securities and
long-term standby agreements to establish the initial recorded
investment in these loans at the date of our purchase and
(b) amounts attributable to uncollectible interest on PCs
and Structured Securities in our retained portfolio.
|
Impaired
Loans
Single-family impaired loans include performing and
non-performing loan modifications, as well as delinquent or
modified loans that were purchased from mortgage pools
underlying our PCs and Structured Securities and long-term
standby agreements. Multifamily impaired loans include loans
whose contractual terms have previously been modified due to
credit concerns (including troubled debt restructurings),
certain loans with observable collateral deficiencies, and loans
impaired based on managements judgments concerning other
known facts and circumstances associated with those loans.
Recorded investment on impaired loans includes the unpaid
principal balance plus amortized basis adjustments, which are
modifications to the loans carrying values.
Single-family mortgage loans are aggregated based on similar
risk characteristics and measured for impairment using the
present value of the future expected cash flows. Multifamily
loans are measured individually for impairment based on the fair
value of the underlying collateral as the repayment of these
loans is generally provided from the cash flows of the
underlying collateral. Total loan loss reserves, as presented in
Table 5.2 Detail of Loan Loss
Reserves, consists of a specific valuation allowance
related to impaired mortgage loans, which is presented in
Table 5.3, and an additional reserve for other probable
incurred losses, which totaled $10.1 billion and
$2.8 billion at September 30, 2008 and
December 31, 2007, respectively. Our recorded investment in
impaired mortgage loans and the related valuation allowance are
summarized in Table 5.3. The specific allowance presented
in Table 5.3 is determined using estimates of the fair
value of the underlying collateral and insurance or other
recoveries, less estimated selling costs.
Table 5.3
Impaired Loans
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2008
|
|
|
December 31, 2007
|
|
|
|
Recorded
|
|
|
Specific
|
|
|
Net
|
|
|
Recorded
|
|
|
Specific
|
|
|
Net
|
|
|
|
Investment
|
|
|
Reserve
|
|
|
Investment
|
|
|
Investment
|
|
|
Reserve
|
|
|
Investment
|
|
|
|
(in millions)
|
|
|
Impaired loans having:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Related valuation allowance
|
|
$
|
943
|
|
|
$
|
(83
|
)
|
|
$
|
860
|
|
|
$
|
155
|
|
|
$
|
(13
|
)
|
|
$
|
142
|
|
No related valuation
allowance(1)
|
|
|
7,439
|
|
|
|
|
|
|
|
7,439
|
|
|
|
8,579
|
|
|
|
|
|
|
|
8,579
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
8,382
|
|
|
$
|
(83
|
)
|
|
$
|
8,299
|
|
|
$
|
8,734
|
|
|
$
|
(13
|
)
|
|
$
|
8,721
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
Primarily represent performing
single-family troubled debt restructuring loans and those
delinquent loans purchased out of PC pools that have not been
impaired subsequent to acquisition.
|
The average investment in impaired loans was $8.1 billion
and $7.5 billion for the nine months ended
September 30, 2008 and for the year ended December 31,
2007, respectively.
Interest income foregone on impaired loans was approximately
$58 million and $74 million for the nine months ended
September 30, 2008 and 2007, respectively.
Loans
Acquired under Financial Guarantees
We have the option under our PC agreements to purchase mortgage
loans from the loan pools that underlie our guarantees under
certain circumstances to resolve an existing or impending
delinquency or default. Prior to December 2007, our practice was
to automatically purchase the mortgage loans when the loans were
significantly past due, generally after 120 days of
delinquency. Effective December 2007, our practice is to
purchase and effectively liquidate the loans from pools when:
(a) the loans are modified; (b) foreclosure sales
occur; (c) the loans have been delinquent for
24 months; or (d) the loans have been 120 days
delinquent and the cost of guarantee payments to PC holders,
including advances of interest at the PC coupon, exceeds the
expected cost of holding the nonperforming mortgage in our
retained portfolio. Loans purchased from PC pools that underlie
our guarantees or that are covered by our standby commitments
are recorded at the lesser of their initial investment or the
loans fair value. Our estimate of the fair value of
delinquent loans purchased from pools is determined by obtaining
indicative market prices from large, experienced dealers and
using an average of these market prices to estimate the initial
fair value. We recognize losses on loans purchased in our
consolidated statements of income when, upon purchase, the fair
value is less than the acquisition cost of the loan. At
September 30, 2008 and 2007, the unpaid principal balances
of mortgage loans in our retained portfolio acquired under
financial guarantees were $6.7 billion and
$6.1 billion, respectively, while the carrying amounts of
these loans were $5.1 billion and $4.9 billion,
respectively.
We account for loans acquired in accordance with
SOP 03-3
if, at acquisition, the loans have credit deterioration and we
do not consider it probable that we will collect all contractual
cash flows from the borrowers without significant delay. We
concluded that all loans acquired under financial guarantees
during all periods presented met this criterion. Table 5.4
provides details on impaired loans acquired under financial
guarantees and accounted for in accordance with
SOP 03-3.
Table 5.4
Loans Acquired Under Financial Guarantees
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
|
|
(in millions)
|
|
|
Contractual principal and interest payments at acquisition
|
|
$
|
1,491
|
|
|
$
|
2,883
|
|
|
$
|
2,875
|
|
|
$
|
6,900
|
|
Non-accretable difference
|
|
|
(109
|
)
|
|
|
(166
|
)
|
|
|
(180
|
)
|
|
|
(312
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows expected to be collected at acquisition
|
|
|
1,382
|
|
|
|
2,717
|
|
|
|
2,695
|
|
|
|
6,588
|
|
Accretable balance
|
|
|
(519
|
)
|
|
|
(896
|
)
|
|
|
(931
|
)
|
|
|
(1,717
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Initial investment in acquired loans at acquisition
|
|
$
|
863
|
|
|
$
|
1,821
|
|
|
$
|
1,764
|
|
|
$
|
4,871
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The excess of contractual principal and interest over the
undiscounted amount of cash flows we expect to collect
represents a non-accretable difference that is neither accreted
to interest income nor displayed on the consolidated balance
sheets. The amount that may be accreted into interest income on
such loans is limited to the excess of our estimate of
undiscounted expected principal, interest and other cash flows
from the loan over our initial investment in the loan. We
consider estimated prepayments when calculating the accretable
balance and the non-accretable difference. While these loans are
seriously delinquent, no amounts are accreted to interest
income. Subsequent changes in estimated future cash flows to be
collected related to interest-rate changes are recognized
prospectively in interest income over the remaining contractual
life of the loan. We increase our allowance for loan losses if
there is a decline in estimates of future cash collections due
to further credit deterioration. Subsequent to acquisition, we
recognized an increase in provision for credit losses related to
these loans of $50 million and $11 million for the
three months ended September 30, 2008 and 2007,
respectively, and $55 million and $13 million for the
nine months ended September 30, 2008 and 2007, respectively.
Table 5.5 provides changes in the accretable balance of
loans acquired under financial guarantees and accounted for in
accordance with
SOP 03-3.
Table 5.5
Changes in Accretable Balance
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
|
|
(in millions)
|
|
|
Beginning balance
|
|
$
|
2,211
|
|
|
$
|
1,124
|
|
|
$
|
2,407
|
|
|
$
|
510
|
|
Additions from new acquisitions
|
|
|
519
|
|
|
|
896
|
|
|
|
931
|
|
|
|
1,717
|
|
Accretion during the period
|
|
|
(91
|
)
|
|
|
(59
|
)
|
|
|
(259
|
)
|
|
|
(124
|
)
|
Reductions(1)
|
|
|
(85
|
)
|
|
|
(125
|
)
|
|
|
(430
|
)
|
|
|
(233
|
)
|
Change in estimated cash
flows(2)
|
|
|
(1
|
)
|
|
|
30
|
|
|
|
105
|
|
|
|
67
|
|
Reclassifications (to) or from nonaccretable
difference(3)
|
|
|
(267
|
)
|
|
|
(76
|
)
|
|
|
(468
|
)
|
|
|
(147
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending balance
|
|
$
|
2,286
|
|
|
$
|
1,790
|
|
|
$
|
2,286
|
|
|
$
|
1,790
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
Represent the recapture of losses
previously recognized due to borrower repayment or foreclosure
on the loan.
|
(2)
|
Represents the change in expected
cash flows due to troubled debt restructurings or changes in the
prepayment assumptions of the related loans.
|
(3)
|
Represent the change in expected
cash flows due to changes in credit quality or credit
assumptions.
|
Delinquency
Rates
Table 5.6 summarizes the delinquency performance for our
total mortgage portfolio, excluding non-Freddie Mac
mortgage-related securities and that portion of Structured
Securities backed by Ginnie Mae Certificates.
Table 5.6
Delinquency Performance
|
|
|
|
|
|
|
|
|
|
|
September 30, 2008
|
|
December 31, 2007
|
|
Delinquencies:
|
|
|
|
|
|
|
|
|
Single-family:(1)
|
|
|
|
|
|
|
|
|
Non-credit-enhanced
portfolio(2)
|
|
|
|
|
|
|
|
|
Delinquency rate
|
|
|
0.87
|
%
|
|
|
0.45
|
%
|
Total number of delinquent loans
|
|
|
88,786
|
|
|
|
44,948
|
|
Credit-enhanced
portfolio(2)
|
|
|
|
|
|
|
|
|
Delinquency rate
|
|
|
2.75
|
%
|
|
|
1.62
|
%
|
Total number of delinquent loans
|
|
|
62,729
|
|
|
|
34,621
|
|
Total
portfolio(2)
|
|
|
|
|
|
|
|
|
Delinquency rate
|
|
|
1.22
|
%
|
|
|
0.65
|
%
|
Total number of delinquent loans
|
|
|
151,515
|
|
|
|
79,569
|
|
Structured
Transactions(3):
|
|
|
|
|
|
|
|
|
Delinquency rate
|
|
|
6.28
|
%
|
|
|
9.86
|
%
|
Total number of delinquent loans
|
|
|
16,292
|
|
|
|
14,122
|
|
Total single-family:
|
|
|
|
|
|
|
|
|
Delinquency rate
|
|
|
1.32
|
%
|
|
|
0.76
|
%
|
Total number of delinquent loans
|
|
|
167,807
|
|
|
|
93,691
|
|
Multifamily:
|
|
|
|
|
|
|
|
|
Total portfolio
|
|
|
|
|
|
|
|
|
Delinquency
rate(4)
|
|
|
0.04
|
%
|
|
|
0.01
|
%
|
Net carrying value of delinquent loans (in millions)
|
|
$
|
30
|
|
|
$
|
10
|
|
|
|
(1)
|
Based on the number of mortgages
90 days or more delinquent as well as those in the process
of foreclosure. Delinquencies on mortgage loans underlying
certain Structured Securities, long-term standby commitments and
Structured Transactions may be reported on a different schedule
due to variances in industry practice.
|
(2)
|
Excluding Structured Transactions.
|
(3)
|
Structured Transactions generally
have underlying mortgage loans with a variety of risk
characteristics but may provide inherent credit protections from
losses due to underlying subordination, excess interest,
overcollateralization and other features.
|
(4)
|
Multifamily delinquency performance
is based on net carrying value of mortgages 90 days or more
delinquent rather than on a unit basis and includes multifamily
Structured Transactions, which were approximately 1% of our
total multifamily portfolio at both September 30, 2008 and
December 31, 2007, respectively. Prior period delinquency
rate has been revised to conform to the current period
presentation.
|
NOTE 6:
REAL ESTATE OWNED
For periods presented below, the weighted average holding period
for our disposed properties was less than one year.
Table 6.1 provides a summary of our REO activity.
Table 6.1
REO
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
|
|
|
2008
|
|
|
2007
|
|
|
|
REO,
|
|
|
Valuation
|
|
|
REO,
|
|
|
REO,
|
|
|
Valuation
|
|
|
REO,
|
|
|
|
Gross
|
|
|
Allowance
|
|
|
Net
|
|
|
Gross
|
|
|
Allowance
|
|
|
Net
|
|
|
|
|
|
|
|
|
|
(in millions)
|
|
|
|
|
|
|
|
|
Beginning balance
|
|
$
|
3,213
|
|
|
$
|
(633
|
)
|
|
$
|
2,580
|
|
|
$
|
1,180
|
|
|
$
|
(160
|
)
|
|
$
|
1,020
|
|
Additions
|
|
|
2,235
|
|
|
|
(137
|
)
|
|
|
2,098
|
|
|
|
775
|
|
|
|
(46
|
)
|
|
|
729
|
|
Dispositions and write-downs
|
|
|
(1,365
|
)
|
|
|
(89
|
)
|
|
|
(1,454
|
)
|
|
|
(423
|
)
|
|
|
(5
|
)
|
|
|
(428
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending balance
|
|
$
|
4,083
|
|
|
$
|
(859
|
)
|
|
$
|
3,224
|
|
|
$
|
1,532
|
|
|
$
|
(211
|
)
|
|
$
|
1,321
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30,
|
|
|
|
2008
|
|
|
2007
|
|
|
|
REO,
|
|
|
Valuation
|
|
|
REO,
|
|
|
REO,
|
|
|
Valuation
|
|
|
REO,
|
|
|
|
Gross
|
|
|
Allowance
|
|
|
Net
|
|
|
Gross
|
|
|
Allowance
|
|
|
Net
|
|
|
|
|
|
|
|
|
|
(in millions)
|
|
|
|
|
|
|
|
|
Beginning balance
|
|
$
|
2,067
|
|
|
$
|
(331
|
)
|
|
$
|
1,736
|
|
|
$
|
871
|
|
|
$
|
(128
|
)
|
|
$
|
743
|
|
Additions
|
|
|
5,375
|
|
|
|
(327
|
)
|
|
|
5,048
|
|
|
|
1,841
|
|
|
|
(110
|
)
|
|
|
1,731
|
|
Dispositions and write-downs
|
|
|
(3,359
|
)
|
|
|
(201
|
)
|
|
|
(3,560
|
)
|
|
|
(1,180
|
)
|
|
|
27
|
|
|
|
(1,153
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending balance
|
|
$
|
4,083
|
|
|
$
|
(859
|
)
|
|
$
|
3,224
|
|
|
$
|
1,532
|
|
|
$
|
(211
|
)
|
|
$
|
1,321
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
We recognized losses of $191 million and $30 million
for the three months ended September 30, 2008 and 2007,
respectively, and $483 million and $63 million for the
nine months ended September 30, 2008 and 2007,
respectively, on single-family REO dispositions, which are
included in REO operations expense. The number of single-family
property additions to our REO inventory increased by 169% and
146% for the three and nine months ended September 30,
2008, compared to the three and nine months ended
September 30, 2007. Increases in our single-family REO
acquisitions have been most significant in the North Central,
West and Southeast regions. The West region represents
approximately 30% of the new acquisitions during the nine months
ended September 30, 2008, based on the number of units, and
the highest concentration in the West region is in the state of
California. At September 30, 2008, our REO inventory in
California represented approximately 30% of our total REO
inventory. We increased our valuation allowance for
single-family REO by $172 million and $404 million for
the three and nine months ended September 30, 2008, to
account for declines in home prices during these periods.
NOTE 7:
DEBT SECURITIES AND SUBORDINATED BORROWINGS
The Purchase Agreement provides that, without the prior consent
of Treasury, we may not increase our indebtedness (as defined in
the Purchase Agreement) to more than 110% of our total
indebtedness at June 30, 2008 nor may we become liable for
any subordinated indebtedness.
The Purchase Agreement defines indebtedness as follows:
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(a)
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all obligations for money borrowed;
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(b)
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all obligations evidenced by bonds, debentures, notes or similar
instruments;
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(c)
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all obligations under conditional sale or other title retention
agreements relating to property or assets purchased;
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(d)
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all obligations issued or assumed as the deferred purchase price
of property or services, other than trade accounts payable;
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(e)
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all capital lease obligations;
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(f)
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obligations, whether contingent or liquidated, in respect of
letters of credit (including standby and commercial),
bankers acceptances and similar instruments; and
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(g)
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any obligation, contingent or otherwise, guaranteeing or having
the economic effect of guaranteeing any indebtedness of the
types set forth in items (a) through (f) payable by us
other than mortgage guarantee obligations.
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Based on our interpretation of this definition, we estimate that
the balance of our indebtedness at September 30, 2008 did
not exceed 110% of the balance of indebtedness at June 30,
2008.
Debt securities are classified as either short-term or long-term
debt based on their remaining contractual maturity.
Table 7.1 summarizes the balances and effective rates for
debt securities and subordinated borrowings.
Table 7.1
Total Debt Securities
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September 30, 2008
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December 31, 2007
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Par Value
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Balance,
Net(1)
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Effective
Rate(2)
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Par Value
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Balance,
Net(1)
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Effective
Rate(2)
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(dollars in millions)
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Short-term debt:
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Reference
Bills®
securities and discount notes
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$
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210,705
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$
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209,604
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2.49
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%
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$
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198,323
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$
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196,426
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4.52
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%
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Medium-term notes
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12,025
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12,025
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2.51
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1,175
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1,175
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4.36
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Securities sold under agreements to repurchase and federal funds
purchased
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1,500
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1,500
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2.50
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Short-term debt securities
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224,230
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223,129
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2.49
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199,498
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197,601
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4.52
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Current portion of long-term debt
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96,542
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96,512
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4.36
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98,432
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98,320
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4.44
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Short-term debt
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320,772
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319,641
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3.06
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297,930
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295,921
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4.49
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Long-term debt:
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Senior
debt(3)
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489,384
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459,808
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4.67
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478,547
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438,147
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5.24
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Subordinated
debt(4)
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4,784
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4,501
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5.58
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4,784
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4,489
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5.84
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Long-term debt
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494,168
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464,309
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4.68
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483,331
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442,636
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5.25
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Total debt securities
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$
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814,940
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$
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783,950
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$
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781,261
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$
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738,557
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(1)
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Represents par value, net of
associated discounts, premiums and hedging-related basis
adjustments, with $2.0 billion of current portion of
long-term debt and $11.8 billion of long-term debt, that
represents the fair value of foreign-currency denominated debt
in accordance with SFAS 159 at September 30, 2008.
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(2)
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Represents the weighted average
effective rate that remains constant over the life of the
instrument, which includes the amortization of discounts or
premiums and issuance costs. 2008 also includes the amortization
of hedging-related basis adjustments.
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(3)
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Balance, net for senior debt
includes callable debt of $210.1 billion and
$202.0 billion at September 30, 2008 and
December 31, 2007, respectively.
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(4)
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Balance, net for subordinated debt
includes callable debt of $ at both September 30,
2008 and December 31, 2007.
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For the three and nine months ended September 30, 2008, we
recognized fair value gains (losses) of $1.5 billion and
$684 million on our foreign-currency denominated debt,
respectively, of which $1.7 billion and $539 million
are gains (losses) related to our net foreign-currency
translation, respectively. See NOTE 1: SUMMARY OF
SIGNIFICANT ACCOUNTING POLICIES for additional information
regarding our adoption of SFAS 159.
Lines of
Credit
We periodically use intraday lines of credit with third parties
to provide additional liquidity to fund our intraday activities
through the Fedwire system in connection with the Federal
Reserve Boards revised payments system risk policy, which
restricts or eliminates daylight overdrafts by GSEs, including
us. At September 30, 2008 and December 31, 2007, we
had two secured, uncommitted lines of credit totaling
$17 billion, respectively. No amounts were drawn on these
lines of credit at September 30, 2008 and December 31,
2007, respectively. We expect to continue to use these
facilities from time to time to satisfy our intraday financing
needs; however, since the lines are uncommitted, we may not be
able to draw on them if and when needed.
Lending
Agreement
On September 18, 2008, we entered into the Lending
Agreement with Treasury under which we may request loans until
December 31, 2009. Loans under the Lending Agreement
require approval from Treasury at the time of request. Treasury
is not obligated under the Lending Agreement to make, increase,
renew or extend any loan to us. The Lending Agreement does not
specify a maximum amount that may be borrowed thereunder, but
any loans made to us by Treasury pursuant to the Lending
Agreement must be collateralized by Freddie Mac or Fannie Mae
mortgage-backed securities. As of September 30, 2008, we
held approximately $410 billion of fair value in Freddie
Mac and Fannie Mae mortgage-backed securities available to be
pledged as collateral. In addition, as of that date, we held
another approximately $32 billion in single-family loans in
our mortgage portfolio that could be securitized into Freddie
Mac mortgage-backed securities and then pledged as collateral
under the Lending Agreement. Treasury may assign a reduced value
to mortgage-backed securities we provide as collateral under the
Lending Agreement, which would reduce the amount we are able to
borrow from Treasury under the Lending Agreement. Further,
unless amended or waived by Treasury, the amount we may borrow
under the Lending Agreement is limited by the restriction under
the Purchase Agreement on incurring debt in excess of 110% of
our aggregate indebtedness as of June 30, 2008.
The Lending Agreement does not specify the maturities or
interest rate of loans that may be made by Treasury under the
credit facility. In a Fact Sheet regarding the credit facility
published by Treasury on September 7, 2008, Treasury
indicated that loans made pursuant to the credit facility will
be for short-term durations and would in general be expected to
be for less than one month but no shorter than one week. The
Fact Sheet further indicated that the interest rate on loans
made pursuant to the credit facility ordinarily will be based on
the daily London Interbank Offered Rate, or LIBOR, fix for a
similar term of the loan plus 50 basis points. Given that
the interest rate we are likely to be charged under the credit
facility will be significantly higher than the rates we have
historically achieved through the sale of unsecured debt, use of
the facility
in significant amounts could have a material adverse impact on
our financial results. No amounts were borrowed under this
facility as of September 30, 2008.
Subordinated
Debt Interest and Principal Payments
In a September 23, 2008 statement concerning the
conservatorship, the Director of FHFA stated that we would
continue to make interest and principal payments on our
subordinated debt, even if we fail to maintain required capital
levels. As a result, the terms of any of our subordinated debt
that provide for us to defer payments of interest under certain
circumstances, including our failure to maintain specified
capital levels, are no longer applicable.
NOTE 8:
STOCKHOLDERS EQUITY (DEFICIT)
Purchase
Agreement
On September 7, 2008, we, through FHFA, in its capacity as
Conservator, and Treasury entered into the Purchase Agreement.
The Purchase Agreement was subsequently amended and restated on
September 26, 2008. Pursuant to the Purchase Agreement, we
agreed to issue to Treasury one million shares of senior
preferred stock with an initial liquidation preference equal to
$1,000 per share (for an aggregate liquidation preference of
$1 billion), and a warrant for the purchase of our common
stock. The terms of the senior preferred stock and warrant are
summarized in separate sections below. We did not receive any
cash proceeds from Treasury as a result of issuing the senior
preferred stock or the warrant.
The senior preferred stock and warrant were sold and issued to
Treasury as an initial commitment fee in consideration of the
commitment from Treasury to provide up to $100 billion in
funds to us under the terms and conditions set forth in the
Purchase Agreement. In addition to the issuance of the senior
preferred stock and warrant, beginning on March 31, 2010,
we are required to pay a quarterly commitment fee to Treasury.
This quarterly commitment fee will accrue from January 1,
2010. The fee, in an amount to be mutually agreed upon by us and
Treasury and to be determined with reference to the market value
of Treasurys funding commitment as then in effect, will be
determined on or before December 31, 2009, and will be
reset every five years. 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. 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.
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
$100 billion. 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 $100 billion 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
$100 billion 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.
Issuance
of Senior Preferred Stock
Pursuant to the Purchase Agreement described above, we issued
one million shares of senior preferred stock to Treasury on
September 8, 2008. The senior preferred stock was issued to
Treasury in partial consideration of Treasurys commitment
to provide up to $100 billion in funds to us under the
terms set forth in the Purchase Agreement.
Shares of the senior preferred stock have no par value, and have
a stated value and initial liquidation preference equal to
$1,000 per share. The liquidation preference of the senior
preferred stock is subject to adjustment. Dividends that are not
paid in cash for any dividend period will accrue and be added to
the liquidation preference of the senior preferred stock. In
addition, any amounts Treasury pays to us pursuant to its
funding commitment under the Purchase Agreement and any
quarterly commitment fees that are not paid in cash to Treasury
or waived by Treasury will be added to the liquidation
preference of the senior preferred stock. As described below, we
may make payments to reduce the liquidation preference of the
senior preferred stock.
Holders of the senior preferred stock are entitled to receive,
when, as and if declared by our Board of Directors, cumulative
quarterly cash dividends at the annual rate of 10% per year on
the then-current liquidation preference of the senior preferred
stock. The initial dividend, if declared, will be payable on
December 31, 2008 and will be for the period from but not
including September 8, 2008 through and including
December 31, 2008. If at any time we fail to pay cash
dividends in a timely manner, then immediately following such
failure and for all dividend periods thereafter until the
dividend period following the date on which we have paid in cash
full cumulative dividends (including any unpaid dividends added
to the liquidation preference), the dividend rate will be 12%
per year.
The senior preferred stock ranks ahead of our common stock and
all other outstanding series of our preferred stock, as well as
any capital stock we issue in the future, as to both dividends
and rights upon liquidation. The senior preferred stock provides
that we may not, at any time, declare or pay dividends on, make
distributions with respect to, or redeem, purchase or acquire,
or make a liquidation payment with respect to, any common stock
or other securities ranking junior to the senior preferred stock
unless: (1) full cumulative dividends on the outstanding
senior preferred stock (including any unpaid dividends added to
the liquidation preference) have been declared and paid in cash;
and (2) all amounts required to be paid with the net
proceeds of any issuance of capital stock for cash (as described
in the following paragraph) have been paid in cash. Shares of
the senior preferred stock are not convertible. Shares of the
senior preferred stock have no general or special voting rights,
other than those set forth in the certificate of designation for
the senior preferred stock or otherwise required by law. The
consent of holders of at least two-thirds of all outstanding
shares of senior preferred stock is generally required to amend
the terms of the senior preferred stock or to create any class
or series of stock that ranks prior to or on parity with the
senior preferred stock.
We are not permitted to redeem the senior preferred stock prior
to the termination of Treasurys funding commitment set
forth in the Purchase Agreement; however, we are permitted to
pay down the liquidation preference of the outstanding shares of
senior preferred stock to the extent of (1) accrued and
unpaid dividends previously added to the liquidation preference
and not previously paid down; and (2) quarterly commitment
fees previously added to the liquidation preference and not
previously paid down. In addition, if we issue any shares of
capital stock for cash while the senior preferred stock is
outstanding, the net proceeds of the issuance must be used to
pay down the liquidation preference of the senior preferred
stock; however, the liquidation preference of each share of
senior preferred stock may not be paid down below $1,000 per
share prior to the termination of Treasurys funding
commitment. Following the termination of Treasurys funding
commitment, we may pay down the liquidation preference of all
outstanding shares of senior preferred stock at any time, in
whole or in part. If, after termination of Treasurys
funding commitment, we pay down the liquidation preference of
each outstanding share of senior preferred stock in full, the
shares will be deemed to have been redeemed as of the payment
date.
Issuance
of Common Stock Warrant
Pursuant to the Purchase Agreement described above, on
September 7, 2008, we, through FHFA, in its capacity as
Conservator, issued a warrant to purchase common stock to
Treasury. The warrant was issued to Treasury in partial
consideration of Treasurys commitment to provide up to
$100 billion in funds to us under the terms set forth in
the Purchase Agreement.
The warrant gives Treasury the right to purchase shares of our
common stock equal to 79.9% of the total number of shares of our
common stock outstanding on a fully diluted basis on the date of
exercise. The warrant may be exercised in whole or in part at
any time on or before September 7, 2028, by delivery to us
of: (a) a notice of exercise; (b) payment of the
exercise price of $0.00001 per share; and (c) the warrant.
If the market price of one share of our common stock is greater
than the exercise price, then, instead of paying the exercise
price, Treasury may elect to receive shares equal to the value
of the warrant (or portion thereof being canceled) pursuant to
the formula specified in the warrant. Upon exercise of the
warrant, Treasury may assign the right to receive the shares of
common stock issuable upon exercise to any other person.
Purchase
Agreement Covenants
The Purchase Agreement provides that, until the senior preferred
stock is repaid or redeemed in full, we may not, without the
prior written consent of Treasury:
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Declare or pay any dividend (preferred or otherwise) or make any
other distribution with respect to any Freddie Mac equity
securities (other than with respect to the senior preferred
stock or warrant);
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Redeem, purchase, retire or otherwise acquire any Freddie Mac
equity securities (other than the senior preferred stock or
warrant);
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Sell or issue any Freddie Mac equity securities (other than the
senior preferred stock, the warrant and the common stock
issuable upon exercise of the warrant and other than as required
by the terms of any binding agreement in effect on the date of
the Purchase Agreement);
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Terminate the conservatorship (other than in connection with a
receivership);
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Sell, transfer, lease or otherwise dispose of any assets, other
than dispositions for fair market value: (a) to a limited
life regulated entity (in the context of a receivership);
(b) of assets and properties in the ordinary course of
business, consistent with past practice; (c) in connection
with our liquidation by a receiver; (d) of cash or cash
equivalents for cash or cash equivalents; or (e) to the
extent necessary to comply with the covenant described below
relating to the reduction of our portfolio of retained mortgages
and mortgage-backed securities beginning in 2010;
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Incur indebtedness that would result in our aggregate
indebtedness exceeding 110% of our aggregate indebtedness as of
June 30, 2008;
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Issue any subordinated debt;
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Enter into a corporate reorganization, recapitalization, merger,
acquisition or similar event; or
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Engage in transactions with affiliates unless the transaction is
(a) pursuant to the Purchase Agreement, the senior
preferred stock or the warrant, (b) upon arms length
terms or (c) a transaction undertaken in the ordinary
course or pursuant to a contractual obligation or customary
employment arrangement in existence on the date of the Purchase
Agreement.
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The Purchase Agreement also provides that we may not own
mortgage assets in excess of: (a) $850 billion on
December 31, 2009; or (b) on December 31 of each year
thereafter, 90% of the aggregate amount of our mortgage assets
as of December 31 of the immediately preceding calendar year,
provided that we are not required to own less than
$250 billion in mortgage assets.
In addition, the Purchase Agreement provides that we may not
enter into any new compensation arrangements or increase amounts
or benefits payable under existing compensation arrangements of
any named executive officer (as defined by SEC rules) without
the consent of the Director of FHFA, in consultation with the
Secretary of the Treasury.
We are required under the Purchase Agreement to provide annual
reports on
Form 10-K,
quarterly reports on
Form 10-Q
and current reports on
Form 8-K
to Treasury in accordance with the time periods specified in the
SECs rules. In addition, our designated representative
(which, during the conservatorship, is the Conservator) is
required to provide quarterly certifications to Treasury
certifying compliance with the covenants contained in the
Purchase Agreement and the accuracy of the representations made
pursuant to the agreement. We also are obligated to provide
prompt notice to Treasury of the occurrence of specified events,
such as the filing of a lawsuit that would reasonably be
expected to have a material adverse effect.
Warrant
Covenants
The warrant we issued to Treasury includes, among others, the
following covenants: our SEC filings under the Exchange Act will
comply in all material respects as to form with the Exchange Act
and the rules and regulations thereunder; we may not permit any
of our significant subsidiaries to issue capital stock or equity
securities, or securities convertible into or exchangeable for
such securities, or any stock appreciation rights or other
profit participation rights; we may not take any action that
will result in an increase in the par value of our common stock;
we may not take any action to avoid the observance or
performance of the terms of the warrant and we must take all
actions necessary or appropriate to protect Treasurys
rights against impairment or dilution; and we must provide
Treasury with prior notice of specified actions relating to our
common stock, such as setting a record date for a dividend
payment granting subscription or purchase rights, authorizing a
recapitalization, reclassification, merger or similar
transaction, commencing a liquidation of the company or any
other action that would trigger an adjustment in the exercise
price or number or amount of shares subject to the warrant.
Termination
Provisions
The Purchase Agreement provides that the Treasurys funding
commitment will terminate under any the following circumstances:
(1) the completion of our liquidation and fulfillment of
Treasurys obligations under its funding commitment at that
time; (2) the payment in full of, or reasonable provision
for, all of our liabilities (whether or not contingent,
including mortgage guarantee obligations); and (3) the
funding by Treasury of $100 billion under the Purchase
Agreement. In addition, Treasury may terminate its funding
commitment and declare the Purchase Agreement null and void if a
court vacates, modifies, amends, conditions, enjoins, stays or
otherwise affects the appointment of the Conservator or
otherwise curtails the Conservators powers. Treasury may
not terminate its funding commitment under the agreement solely
by reason of our being in conservatorship, receivership or other
insolvency proceeding, or due to our financial condition or any
adverse change in our financial condition.
Waivers
and Amendments
The Purchase Agreement provides that most provisions of the
agreement may be waived or amended by mutual written agreement
of the parties; however, no waiver or amendment of the agreement
is permitted that would decrease Treasurys aggregate
funding commitment or add conditions to Treasurys funding
commitment if the waiver or amendment would adversely affect in
any material respect the holders of our debt securities or
Freddie Mac mortgage guarantee obligations.
Third-party
Enforcement Rights
In the event of our default on payments with respect to our debt
securities or Freddie Mac mortgage guarantee obligations, if
Treasury fails to perform its obligations under its funding
commitment and if we
and/or the
Conservator are not diligently pursuing remedies in respect of
that failure, the holders of these debt securities or Freddie
Mac mortgage guarantee obligations may file a claim in the
United States Court of Federal Claims for relief requiring
Treasury to fund to
us the lesser of: (1) the amount necessary to cure the
payment defaults on our debt and Freddie Mac mortgage guarantee
obligations; and (2) the lesser of: (a) the deficiency
amount; and (b) $100 billion less the aggregate amount
of funding previously provided under the commitment. Any payment
that Treasury makes under those circumstances will be treated
for all purposes as a draw under the Purchase Agreement that
will increase the liquidation preference of the senior preferred
stock.
Dividends
Declared During 2008
On March 7, 2008 and June 6, 2008, our board of
directors declared a quarterly dividend on our common stock of
$0.25 per share and dividends on our preferred stock consistent
with the contractual rates and terms shown in
ITEM 13. FINANCIAL STATEMENTS AND SUPPLEMENTARY
DATA AUDITED CONSOLIDATED FINANCIAL STATEMENTS AND
ACCOMPANYING NOTES NOTE 8: STOCKHOLDERS
EQUITY Table 8.1 Preferred
Stock in our Registration Statement. No common or
preferred stock dividends were declared in the three months
ended September 30, 2008, since dividends on our common
stock and preferred stock (other than the senior preferred
stock) have been eliminated by FHFA.
NOTE 9:
REGULATORY CAPITAL
On October 9, 2008, FHFA announced that it was suspending
capital classification of us during conservatorship in light of
the Purchase Agreement. Concurrent with this announcement, FHFA
classified us as undercapitalized as of June 30, 2008 based
on discretionary authority provided by statute. FHFA noted that
although our capital calculations as of June 30, 2008
reflected that we met the statutory and FHFA-directed
requirements for capital, the continued market downturn in July
and August of 2008 raised significant questions about the
sufficiency of our capital. Factors cited by FHFA leading to the
downgrade in our capital classification and the need for
conservatorship included (a) our accelerated safety and
soundness weaknesses, especially with regard to our credit risk,
earnings outlook and capitalization, (b) continued and
substantial deterioration in equity, debt and mortgage-related
securities market conditions, (c) our current and projected
financial performance, (d) our inability to raise capital
or issue debt according to normal practices and prices,
(e) our critical importance in supporting the
U.S. residential mortgage markets and (f) concerns
over the proportion of intangible assets as part of our core
capital.
FHFA will continue to closely monitor our capital levels, but
the existing statutory and FHFA-directed regulatory capital
requirements will not be binding during conservatorship. We will
continue to provide our regular submissions to FHFA on both
minimum and risk-based capital. FHFA will publish relevant
capital figures (minimum capital requirement, core capital, and
GAAP net worth) but does not intend to publish our critical
capital, risk-based capital or subordinated debt levels during
conservatorship. Additionally, FHFA announced it will engage in
rule-making to revise our minimum capital and risk-based capital
requirements. Table 9.1 summarizes our minimum capital
requirements and surpluses, as well as our stockholders
equity position and net worth.
Table 9.1
Stockholders Equity (Deficit), Net Worth and
Capital
|
|
|
|
|
|
|
|
|
|
|
September 30, 2008
|
|
December 31, 2007
|
|
|
(in millions)
|
|
GAAP stockholders equity
(deficit)(1)
|
|
$
|
(13,795
|
)
|
|
$
|
26,724
|
|
GAAP net
worth(1)
|
|
$
|
(13,700
|
)
|
|
$
|
26,900
|
|
Core
capital(2),(3)
|
|
$
|
10,839
|
|
|
$
|
37,867
|
|
Minimum capital
requirement(2)
|
|
|
27,147
|
|
|
|
26,473
|
|
Minimum capital surplus
(deficit)(2)
|
|
$
|
(16,308
|
)
|
|
$
|
11,394
|
|
|
|
(1)
|
Net worth represents the difference
between our assets and liabilities under GAAP. Net worth is
substantially the same as stockholders equity (deficit);
however, net worth also includes the minority interests that
third parties own in our consolidated subsidiaries, which
totaled $95 million at September 30, 2008.
|
(2)
|
Core capital and minimum capital
figures for September 30, 2008 represent Freddie Mac
estimates. FHFA is the authoritative source for our regulatory
capital.
|
(3)
|
The liquidation preference of the
senior preferred stock is not included in core capital as of
September 30, 2008 because the senior preferred does not
meet the statutory definition of core capital given the
cumulative dividends. The $1 billion decrease to
additional-paid-in capital to record the initial senior
preferred stock issued to Treasury is reflected as a reduction
to core capital as of September 30, 2008.
|
FHFA has directed us to focus our risk and capital management on
maintaining a positive balance of GAAP stockholders equity
while returning to long-term profitability. FHFA is directing us
to manage to a positive stockholders equity position in
order to reduce the likelihood that we will need to make a draw
on the Purchase Agreement with Treasury. The Purchase Agreement
provides that, if FHFA determines as of quarter end that our
liabilities have exceeded our assets under GAAP, Treasury will
contribute funds to us in an amount equal to the difference
between such liabilities and assets; a higher amount may be
drawn if Treasury and Freddie Mac mutually agree that the draw
should be increased beyond the level by which liabilities exceed
assets under GAAP. The maximum aggregate amount that may be
funded under the Purchase Agreement is $100 billion. At
September 30, 2008, our liabilities exceeded our assets
under GAAP while our stockholders equity (deficit) totaled
$(13.8) billion. The Director of FHFA has submitted a
request under the Purchase Agreement in the amount of
$13.8 billion to Treasury. We expect to receive such funds
by November 29, 2008. If the Director of FHFA were to
determine in writing that our assets are, and have been for a
period of 60 days, less than our obligations to creditors and
others, FHFA would be required to place us into receivership. If
this were to occur, we would be required to obtain funding from
Treasury pursuant to its commitment under the Purchase Agreement
in order to avoid a mandatory trigger of receivership under the
Reform Act.
NOTE 10:
DERIVATIVES
We use derivatives to conduct our risk management activities. We
principally use the following types of derivatives:
|
|
|
|
|
LIBOR- and Euro Interbank Offered Rate, or Euribor-, based
interest-rate swaps;
|
|
|
|
LIBOR- and Treasury-based options (including swaptions);
|
|
|
|
LIBOR- and Treasury-based exchange-traded futures; and
|
|
|
|
Foreign-currency swaps.
|
Our derivative portfolio also includes certain purchase and sale
commitments and other contractual agreements, including credit
derivatives and swap guarantee derivatives in which we guarantee
the sponsors or the borrowers performance as a
counterparty on certain interest-rate swaps.
In the first quarter of 2008, we began designating certain
derivative positions as cash flow hedges of changes in cash
flows associated with our forecasted issuances of debt
consistent with our risk management goals. In the periods
presented prior to 2008, we only elected cash flow hedge
accounting relationships for certain commitments to sell
mortgage-related securities. We expanded this hedge accounting
strategy in an effort to reduce volatility in our consolidated
statements of income. For a derivative accounted for as a cash
flow hedge, changes in fair value were reported in AOCI, net of
taxes, on our consolidated balance sheets to the extent the
hedge was effective. The ineffective portion of changes in fair
value is reported as other income on our consolidated statements
of income. However, in conjunction with the conservatorship on
September 6, 2008, we determined that we can no longer
assert that the associated forecasted issuances of debt are
probable of occurring and as a result, we discontinued this
hedge accounting strategy. While we can no longer assert that
the associated forecasted issuances of debt are probable of
occurring, we are also unable to assert that the forecasted
issuances of debt are probable of not occurring, therefore the
previous deferred amounts related to these hedges remain in our
AOCI balance. This amount will be recognized into earnings over
the expected time period for which the originally forecasted
debt were to impact earnings. Any subsequent changes in fair
value of those derivative instruments are included in derivative
gains (losses) on our consolidated statements of income. As a
result of this discontinued hedge accounting strategy, we
transferred $27.6 billion in notional amount and
$(488) million in market value from open cash-flow hedges
to closed cash-flow hedges on September 6, 2008.
During the three and nine months ended September 30, 2008,
we recognized hedge ineffectiveness gains (losses) related to
cash flow hedges of $(20) million and $(16) million,
respectively, on our consolidated statements of income. During
the three and nine months ended September 30, 2007, we did
not recognize any hedge ineffectiveness gains (losses) related
to cash flow hedges on our consolidated statements of income. No
amounts were excluded from the assessment of hedge
effectiveness. We record changes in the fair value of
derivatives not in hedge accounting relationships as derivative
gains (losses) on our consolidated statements of income. Any
associated interest received or paid from derivatives not in
hedge accounting relationships is recognized on an accrual basis
and also recorded in derivative gains (losses) on our
consolidated statements of income. Interest received or paid
from derivatives in qualifying cash flow hedges is recognized on
an accrual basis and is recorded in net interest income on our
consolidated statements of income.
The carrying value of our derivatives on our consolidated
balance sheets is equal to their fair value, including net
derivative interest receivable or payable, net trade/settle
receivable or payable and is net of cash collateral held or
posted, where allowable by a master netting agreement.
Derivatives in a net asset position are reported as derivative
assets, net. Similarly, derivatives in a net liability position
are reported as derivative liabilities, net. Cash collateral we
obtained from counterparties to derivative contracts that has
been offset against derivative assets, net at September 30,
2008 and December 31, 2007 was $5.5 billion and
$6.5 billion, respectively. Cash collateral we posted to
counterparties to derivative contracts that has been offset
against derivative liabilities, net at September 30, 2008
and December 31, 2007 was $615 million and
$344 million, respectively.
At September 30, 2008 and December 31, 2007, there
were no amounts of cash collateral that were not offset against
derivative assets, net or derivative liabilities, net, as
applicable.
As shown in Table 10.1 the total AOCI, net of taxes,
related to derivatives designated as cash flow hedges was a loss
of $3.6 billion and $4.3 billion at September 30,
2008 and 2007, respectively, composed mainly of deferred net
losses on closed cash flow hedges. Net change in fair value
related to cash flow hedging activities, net of tax, represents
the net change in the fair value of the derivatives that were
designated as cash flow hedges, after the effects of our federal
statutory tax rate of 35%, to the extent the hedges were
effective. Net reclassifications of losses to earnings, net of
tax, represents the AOCI amount, after the effects of our
federal statutory tax rate of 35% and our deferred tax asset
valuation allowance, that was recognized in earnings as the
originally hedged forecasted transactions affected earnings,
unless it was deemed probable that
the forecasted transaction would not occur. If it is probable
that the forecasted transaction will not occur, then the
deferred gain or loss associated with the hedge related to the
forecasted transaction would be reclassified into earnings
immediately. For additional information on our deferred tax
asset valuation allowance see NOTE 12: INCOME
TAXES.
Over the next 12 months, we estimate that approximately
$796 million, net of taxes, of the $3.6 billion of
cash flow hedging losses in AOCI, net of taxes, at
September 30, 2008 will be reclassified into earnings. The
maximum remaining length of time over which we have hedged the
exposure related to the variability in future cash flows on
forecasted transactions, primarily forecasted debt issuances, is
25 years. However, over 70% and 90% of AOCI, net of taxes,
relating to closed cash flow hedges at September 30, 2008,
will be reclassified to earnings over the next five and ten
years, respectively.
Table 10.1
AOCI, Net of Taxes, Related to Cash Flow Hedge
Relationships
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended
|
|
|
|
September 30,
|
|
|
|
2008
|
|
|
2007
|
|
|
|
(in millions)
|
|
|
Beginning
balance(1)
|
|
$
|
(4,059
|
)
|
|
$
|
(5,032
|
)
|
Adjustment to initially apply
SFAS 159(2)
|
|
|
4
|
|
|
|
|
|
Net change in fair value related to cash flow hedging
activities, net of
tax(3)
|
|
|
(356
|
)
|
|
|
(18
|
)
|
Net reclassifications of losses to earnings and other, net of
tax(4)
|
|
|
857
|
|
|
|
742
|
|
|
|
|
|
|
|
|
|
|
Ending
balance(1)
|
|
$
|
(3,554
|
)
|
|
$
|
(4,308
|
)
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
Represents the effective portion of
the fair value of open derivative contracts (i.e., net
unrealized gains and losses) and net deferred gains and losses
on closed (i.e., terminated or redesignated) cash flow
hedges.
|
(2)
|
Net of tax benefit of $ for
the nine months ended September 30, 2008.
|
(3)
|
Net of tax benefit of
$190 million and $10 million for the nine months ended
September 30, 2008 and 2007, respectively.
|
(4)
|
Net of tax benefit of
$366 million and $400 million for the nine months
ended September 30, 2008 and 2007, respectively. For the
nine months ended September 30, 2008, also includes
$177 million increase due to our deferred tax asset
valuation allowance adjustment.
|
NOTE 11:
LEGAL CONTINGENCIES
We are involved as a party to a variety of legal proceedings
arising from time to time in the ordinary course of business
including, among other things, contractual disputes, personal
injury claims, employment-related litigation and other legal
proceedings incidental to our business. We are frequently
involved, directly or indirectly, in litigation involving
mortgage foreclosures. From time to time, we are also involved
in proceedings arising from our termination of a
seller/servicers eligibility to sell mortgages to, and/or
service mortgages for us. In these cases, the former
seller/servicer sometimes seeks damages against us for wrongful
termination under a variety of legal theories. In addition, we
are sometimes sued in connection with the origination or
servicing of mortgages. These suits typically involve claims
alleging wrongful actions of seller/servicers. Our contracts
with our seller/servicers generally provide for indemnification
against liability arising from their wrongful actions.
Litigation and claims resolution are subject to many
uncertainties and are not susceptible to accurate prediction. In
accordance with SFAS No. 5, Accounting for
Contingencies, or SFAS 5, we reserve for
litigation claims and assessments asserted or threatened against
us when a loss is probable and the amount of the loss can be
reasonably estimated.
Putative Securities Class Action
Lawsuits. Reimer vs. Freddie Mac, Syron, Cook,
Piszel and McQuade (Reimer) and Ohio Public
Employees Retirement System vs. Freddie Mac, Syron, et al
(OPERS). Two virtually identical putative
securities class action lawsuits were filed against Freddie Mac
and certain of our current and former officers alleging that the
defendants violated federal securities laws by making
false and misleading statements concerning our business,
risk management and the procedures we put into place to protect
the company from problems in the mortgage industry. Reimer
was filed on November 21, 2007 in the U.S. District
Court for the Southern District of New York and OPERS was filed
on January 18, 2008 in the U.S. District Court for the
Northern District of Ohio. On March 10, 2008, the Court in
Reimer granted the plaintiffs request to voluntarily
dismiss the case, and the case was dismissed. In OPERS, on
April 10, 2008, the court appointed OPERS as lead plaintiff
and approved its choice of counsel. On September 2, 2008,
defendants filed a motion to dismiss plaintiffs amended
complaint, which purportedly asserted claims on behalf of a
class of purchasers of Company stock between August 1, 2006
and November 20, 2007. On October 27, 2008, the
plaintiff filed a motion for leave to file a second amended
complaint, which removes insider-trading allegations against
Syron, Piszel, and McQuade, thereby leaving insider-trading
allegations against only Cook. The proposed second amended
complaint also seeks to extend the damages period, but not the
class period, to allow the plaintiff to rely on statements made
leading up to and following FHFAs appointment as
Conservator. The plaintiff is seeking unspecified damages and
interest, and reasonable costs and expenses, including attorney
and expert fees. At present, it is not possible to predict the
probable outcome of the OPERS lawsuit or any potential impact on
our business, financial condition, or results of operations.
Kuriakose vs. Freddie Mac, Syron, Piszel and
Cook. Another putative class action lawsuit was
filed against Freddie Mac and certain current and former
officers on August 15, 2008 in the United States District
Court for the Southern District of New York for alleged
violations of federal securities laws purportedly on behalf of a
class of purchasers of Company stock from November 21, 2007
through August 5, 2008. The plaintiff claims that
defendants made false and misleading
statements about Freddie Macs business that artificially
inflated the price of Freddie Macs common stock, and seeks
unspecified damages, costs, and attorneys fees. At
present, it is not possible to predict the probable outcome of
the lawsuit or any potential impact on our business, financial
condition, or results of operations.
Shareholder Demand Letters. In late 2007 and
early 2008, the board of directors received three letters from
purported shareholders of Freddie Mac, which together contain
allegations of corporate mismanagement and breaches of fiduciary
duty in connection with the companys risk management,
alleged false and misleading financial disclosures, and the
alleged sale of stock based on material non-public information
by certain officers and directors. One letter demands that the
board commence an independent investigation into the alleged
conduct, institute legal proceedings to recover damages from the
responsible individuals, and implement corporate governance
initiatives to ensure that the alleged problems do not recur.
The second letter demands that Freddie Mac commence legal
proceedings to recover damages from responsible board members,
senior officers, Freddie Macs outside auditors, and other
parties who allegedly aided or abetted the improper conduct. The
third letter demands relief similar to that of the second
letter, as well as recovery for unjust enrichment. The board of
directors formed a Special Litigation Committee (SLC) to
investigate the purported shareholders allegations, and
the investigation commenced and is pending. Pursuant to the
conservatorship, FHFA, as the Conservator, has succeeded to the
powers of the board of directors, including the power to conduct
investigations such as the one conducted by the SLC of the prior
board. FHFA is currently reviewing the status of these cases.
Shareholder Derivative Lawsuits. A shareholder
derivative complaint, purportedly on behalf of Freddie Mac, was
filed on March 10, 2008, in the U.S. District Court
for the Southern District of New York against certain current
and former officers and directors of Freddie Mac and a number of
third parties. An amended complaint was filed on August 21,
2008. The complaint, which was filed by Robert Bassman, an
individual who had submitted a shareholder demand letter to the
board of directors in late 2007, alleges breach of fiduciary
duty, negligence, violations of the Sarbanes-Oxley Act of 2002
and unjust enrichment in connection with various alleged
business and risk management failures. It also alleges
insider selling and false assurances by the company
regarding our financial exposure in the subprime financing
market, our risk management and our internal controls. The
plaintiff seeks unspecified damages, declaratory relief, an
accounting, injunctive relief, disgorgement, punitive damages,
attorneys fees, interest and costs. On June 16, 2008,
we filed a motion to transfer the case to the Eastern District
of Virginia, or alternatively to stay the case pending the
completion of the investigation of plaintiffs allegations
by the Special Litigation Committee appointed by the board of
directors. On August 8, 2008, the plaintiff filed a motion
to consolidate the case with the Sadowsky derivative action
discussed below, and requested that Robert Bassman be named as
the lead plaintiff in the consolidated case. The plaintiff in
Sadowsky has opposed this motion. At present, it is not possible
to predict the probable outcome of the lawsuit or any potential
impact on our business, financial condition or results of
operations.
A second shareholder derivative complaint, purportedly on behalf
of Freddie Mac, was filed on June 6, 2008, in the
U.S. District Court for the Southern District of New York
against certain current and former Freddie Mac officers and
directors by Esther Sadowsky Testamentary Trust, which had
submitted a shareholder demand letter to the board of directors
in late 2007. The complaint alleges that defendants caused the
company to violate its charter by engaging in unsafe,
unsound and improper speculation in high risk mortgages to boost
near term profits, report growth in the companys retained
portfolio and guarantee business, and take market share away
from its primary competitor, Fannie Mae. Plaintiff asserts
claims for alleged breach of fiduciary duty and declaratory and
injunctive relief. Among other things, plaintiff also seeks an
accounting, an order requiring that defendants remit all salary
and compensation received during the periods they allegedly
breached their duties, and an award of pre-judgment and
post-judgment interest, attorneys fees, expert fees and
consulting fees, and other costs and expenses. On August 8,
2008, the plaintiff in the Bassman derivative action filed a
motion to consolidate the Bassman case with this case, which the
plaintiff in this case has opposed. At present, it is not
possible to predict the probable outcome of the lawsuit or any
potential impact on our business, financial condition or results
of operations.
In addition, on July 24, 2008, The Adams Family Trust and
Kevin Tashjian filed a purported derivative lawsuit in the
U.S. District Court for the Eastern District of Virginia
against certain current and former officers and directors of
Freddie Mac, with Freddie Mac named as a nominal defendant in
the action. The Adams Family Trust and Kevin Tashjian had
previously sent a derivative demand letter to the board of
directors on March 26, 2008 requesting that it commence
legal proceedings against senior management and certain
directors to recover damages for their alleged wrongdoing.
Similar to the two other shareholder derivative actions
described above, this complaint alleges that the defendants
breached their fiduciary duties by failing to implement
and/or
maintain sufficient risk management and other controls; failing
to adequately reserve for uncollectible loans and other risks of
loss; and making false and misleading statements regarding the
companys exposure to the sub-prime market, the strength of
the companys risk management and internal controls, and
the companys underwriting standards in response to alleged
abuses in the sub-prime industry. The plaintiffs also allege
that current and former officers and directors breached their
fiduciary duties and unjustly enriched themselves through their
sale of stock based on material non-public information. On
October 15, 2008, the Court entered an order consolidating
the case with the
Louisiana Municipal Police Employees Retirement System
(LMPERS) case discussed below. On October 24,
2008, a motion was filed to have LMPERS appointed lead
plaintiff. On October 31, 2008, FHFA filed a motion to
intervene in its capacity as the Conservator. In that capacity,
FHFA also filed a motion to stay all proceedings for a period of
90 days. At present, it is not possible to predict the
probable outcome of the lawsuit or any potential impact on our
business, financial condition or results of operations.
On August 15, 2008, a fourth purported shareholder
derivative lawsuit was filed by the Louisiana Municipal Police
Employees Retirement System in the U.S. District Court for
the Eastern District of Virginia against certain current and
former officers and directors of Freddie Mac. The plaintiff
alleges that the defendants breached their fiduciary duties and
violated federal securities laws in connection with the
companys recent losses, including by unjustly enriching
themselves with salaries, bonuses, benefits and other
compensation, and through their sale of stock based on material
non-public information. The plaintiff seeks unspecified damages,
constructive trusts on proceeds associated with insider trading
and improper payments made to defendants, restitution and
disgorgement, an order requiring reform and improvement of
corporate governance, costs and attorneys fees. On
October 15, 2008, the Court entered an order consolidating
the Adams Family Trust case with this case. At present, it is
not possible to predict the probable outcome of the lawsuit or
any potential impact on our business, financial condition or
results of operations.
Antitrust Lawsuits. Consolidated lawsuits were
filed against Fannie Mae and Freddie Mac in the
U.S. District Court for the District of Columbia,
originally filed on January 10, 2005, alleging that both
companies conspired to establish and maintain artificially high
management and guarantee fees. The complaint covers the period
January 1, 2001 to the present and asserts a variety of
claims under federal and state antitrust laws, as well as claims
under consumer-protection and similar state laws. The plaintiffs
seek injunctive relief, unspecified damages (including treble
damages with respect to the antitrust claims and punitive
damages with respect to some of the state claims) and other
forms of relief. We filed a motion to dismiss the action in
October 2005. On October 29, 2008, the Court entered an
Order granting in part and denying in part our motion to
dismiss. Discovery has not yet commenced in the case, and no
trial date has been set. At present, it is not possible for us
to predict the probable outcome of the consolidated lawsuit or
any potential impact on our business, financial condition or
results of operations.
The New York Attorney Generals
Investigation. In connection with the New York
Attorney Generals suit filed against eAppraiseIT and its
parent corporation, First American, alleging appraisal fraud in
connection with loans originated by Washington Mutual, in
November 2007, the New York Attorney General demanded that we
either retain an independent examiner to investigate our
mortgage purchases from Washington Mutual supported by
appraisals conducted by eAppraiseIT, or immediately cease and
desist from purchasing or securitizing Washington Mutual loans
and any loans supported by eAppraiseIT appraisals. We also
received a subpoena from the New York Attorney Generals
office for information regarding appraisals and property
valuations as they relate to our mortgage purchases and
securitizations from January 1, 2004 to the present. In
March 2008, OFHEO, the New York Attorney General and Freddie Mac
reached a settlement in which we agreed to adopt a Home
Valuation Protection Code, effective January 1, 2009, to
enhance appraiser independence. In addition, we agreed to
provide funding for an Independent Valuation Protection
Institute. From March 14, 2008 through April 30, 2008,
market participants were afforded the opportunity to comment on
the implementation and deployment of the Code. We have reviewed
and summarized the comments received, which were submitted to
and discussed with OFHEO. Under the terms of the agreement,
OFHEO (now FHFA), the New York Attorney General and Freddie Mac
are reviewing the comments in good faith and will consider any
amendments to the Code necessary to avoid any unforeseen
consequences. The Director of FHFA has indicated that the
January 1, 2009 implementation date will not be effective
in light of the ongoing negotiations.
Government Investigations and Inquiries. On
September 26, 2008, Freddie Mac received a federal grand
jury subpoena from the U.S. Attorneys Office for the
Southern District of New York. The subpoena sought documents
relating to accounting, disclosure and corporate governance
matters for the period January 1, 2007 to the present.
Subsequently, we were informed that the subpoena was withdrawn,
and that an investigation is being conducted by the
U.S. Attorneys Office for the Eastern District of
Virginia. On September 26, 2008, Freddie Mac received
notice from the Staff of the Enforcement Division of the
U.S. Securities and Exchange Commission that it is also
conducting an inquiry, and directing the company to preserve
documents. On October 21, 2008, the SEC issued to the
company a request for documents. Freddie Mac will cooperate
fully in these matters.
By letter dated October 20, 2008, Freddie Mac received a
request from the Committee on Oversight and Government Reform of
the House of Representatives for documents to assist the
Committee in preparing for a hearing, scheduled for later this
year, on the financial collapse of Freddie Mac and [Fannie
Mae], their takeover by the federal government, and their role
in the ongoing financial crisis. Freddie Mac will
cooperate fully in this matter.
Indemnification Request. By letter dated
October 17, 2008, Freddie Mac received formal notification
of a putative class action securities lawsuit, Mark v.
Goldman, Sachs & Co., J.P. Morgan
Chase & Co., and Citigroup Global
Markets Inc., filed on September 23, 2008, in the
U.S. District Court for the Southern District of New York,
regarding the
companys November 29, 2007 public offering of 8.735%
Fixed to Floating Rate Non-Cumulative Perpetual Preferred Stock.
The plaintiff filed suit against the underwriters claiming that
the Offering Circular was materially false in its failure to
disclose and properly warn of Freddie Macs exposure to
massive mortgage-related losses; its underwriting
and risk-management deficiencies; its undercapitalization; and
its imminent insolvency. The underwriters gave notice to Freddie
Mac of their intention to seek full indemnity and contribution
under the Underwriting Agreement, including reimbursement of
fees and disbursements of their legal counsel. At present, it is
not possible for us to predict the probable outcome of the
lawsuit or any potential impact on our business, financial
condition or results of operations.
Lehman Bankruptcy. On September 15, 2008,
Lehman filed a chapter 11 bankruptcy petition in the
Bankruptcy Court for the Southern District of New York.
Thereafter, virtually all of Lehmans
U.S. subsidiaries and affiliates also filed bankruptcy
petitions (collectively, the Lehman Entities).
Freddie Mac has numerous relationships with the Lehman Entities
and affiliates, which give rise to various claims that Freddie
Mac is and will be pursuing against them.
NOTE 12:
INCOME TAXES
For the nine months ended September 30, 2008 and 2007, we
reported an income tax (expense) benefit of $(6.5) billion
and $1.3 billion, respectively, representing effective tax
rates of (33)% and 66%, respectively. Our effective tax rate was
different from the statutory rate of 35% primarily due to our
investments in LIHTC partnerships, interest earned on tax-exempt
housing-related securities, and the establishment of a
$14.1 billion valuation allowance against a portion of our
net deferred tax assets in the three months ended
September 30, 2008.
Deferred
Tax Asset
Table 12.1
Deferred Tax Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjust for Valuation
|
|
|
Adjusted
|
|
|
|
|
|
|
September 30, 2008
|
|
|
Allowance
|
|
|
September 30, 2008
|
|
|
December 31, 2007
|
|
|
|
(dollars in millions)
|
|
|
Deferred tax assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred fees
|
|
$
|
2,279
|
|
|
$
|
(2,279
|
)
|
|
$
|
|
|
|
$
|
2,210
|
|
Basis differences related to derivative instruments
|
|
|
2,422
|
|
|
|
(2,422
|
)
|
|
|
|
|
|
|
1,586
|
|
Credit-related items and reserve for loan losses
|
|
|
4,738
|
|
|
|
(4,738
|
)
|
|
|
|
|
|
|
1,854
|
|
Basis differences related to assets held for investment
|
|
|
4,471
|
|
|
|
(4,471
|
)
|
|
|
|
|
|
|
838
|
|
Unrealized (gains) losses related to available-for-sale debt
securities
|
|
|
11,866
|
|
|
|
|
|
|
|
11,866
|
|
|
|
3,791
|
|
Other items, net
|
|
|
158
|
|
|
|
(158
|
)
|
|
|
|
|
|
|
25
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total deferred tax asset
|
|
$
|
25,934
|
|
|
$
|
(14,068
|
)
|
|
$
|
11,866
|
|
|
$
|
10,304
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
We use the asset and liability method of accounting for income
taxes pursuant to SFAS 109, Accounting for Income
Taxes. Under this method, deferred tax assets and
liabilities are recognized based upon the expected future tax
consequences of existing temporary differences between the
financial reporting and the tax reporting basis of assets and
liabilities using enacted statutory tax rates. Valuation
allowances are recorded to reduce net deferred tax assets when
it is more likely than not that a tax benefit will not be
realized. The realization of our net deferred tax assets is
dependent upon the generation of sufficient taxable income or
upon our intent and ability to hold
available-for-sale
debt securities until the recovery of any temporary unrealized
losses. On a quarterly basis, our management determines whether
a valuation allowance is necessary. In so doing, our management
considers all evidence currently available, both positive and
negative, in determining whether, based on the weight of that
evidence, the net deferred tax asset will be realized and
whether a valuation allowance is necessary.
Recent events, including those described in NOTE 1:
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Conservatorship, fundamentally affect our control,
management and operations and are likely to affect our future
financial condition and results of operations. These events have
resulted in a variety of uncertainties regarding our future
operations, our business objectives and strategies and our
future profitability, the impact of which cannot be reliably
forecasted at this time. In evaluating our need for a valuation
allowance, we considered all of the events and evidence
discussed above, in addition to: (1) our three-year
cumulative loss position; (2) our carryback and
carryforward availability; (3) our difficulty in predicting
potential unsettled circumstances; and (4) our intent and
ability to hold available-for sale securities.
Based upon a thorough evaluation of all available evidence, we
determined that it was more likely than not that a portion of
our deferred tax assets would not be realized due to our
inability to generate sufficient taxable income. This
determination was as a result of the events and developments
that occurred during the third quarter of 2008 related to the
conservatorship of the company, other recent events in the
market, and our difficulty in forecasting future profit levels
on a continuing basis. As a result, in the third quarter of
2008, we recorded a $14.1 billion partial valuation
allowance against our net deferred tax assets of
$25.9 billion. After the valuation allowance, we had a net
deferred tax asset of $11.9 billion representing the tax
effect of unrealized losses on our
available-for-sale
debt securities, which management believes is more likely than
not of being realized because of our intent and ability to hold
these securities until the unrealized losses are recovered.
At September 30, 2008, we are not in a net operating loss
carryforward or tax credit carryforward position. However, we
expect that our ability to use all of the tax credits generated
by existing or future investments in LIHTC partnerships to
reduce our federal income tax liability may be limited by the
alternative minimum tax in the future.
Unrecognized
Tax Benefits
At September 30, 2008, we had total unrecognized tax
benefits, exclusive of interest, of $551 million. Included
in the $551 million are $2 million of unrecognized tax
benefits that, if recognized, would favorably affect our
effective tax rate. The unrecognized tax benefits changed from
$637 million at December 31, 2007 to $551 million
at September 30, 2008, primarily due to a settlement with
the IRS as discussed below. The settlement had a favorable
impact on our effective tax rate. The remaining
$549 million of unrecognized tax benefits at
September 30, 2008 related to tax positions for which
ultimate deductibility is highly certain, but for which there is
uncertainty as to the timing of such deductibility. Recognition
of these tax benefits, other than applicable interest, would not
affect our effective tax rate.
We continue to recognize interest and penalties, if any, in
income tax expense. As of September 30, 2008, we had total
accrued interest receivable, net of tax effect, of
$159 million. The total accrued interest receivable changed
from $55 million at December 31, 2007 to
$159 million at September 30, 2008 primarily relating
to the settlement with the IRS. Amounts included in total
accrued interest relate to: (a) unrecognized tax benefits;
(b) pending claims with the IRS for open tax years;
(c) the tax benefit related to tax refund claims; and
(d) the impact of payments made to the IRS in prior years
in anticipation of potential tax deficiencies. Of the
$159 million of accrued interest receivable as of
September 30, 2008, approximately $140 million of
accrued interest payable, net of tax effect, is allocable to
unrecognized tax benefits. We have no amount accrued for
penalties.
The period for assessment under the statute of limitations for
federal income tax purposes is open on corporate income tax
returns filed for years 1985 to 2007. Tax years 1985 to 1997 are
before the U.S. Tax Court. In June 2008, we reached
agreement with the IRS on a settlement regarding the tax
treatment of the customer relationship intangible asset
recognized upon our transition from non-taxable to taxable
status in 1985. As a result of this agreement, we re-measured
the tax benefit from this uncertain tax position and recognized
$171 million of tax and interest in the second quarter of
2008. This settlement, which was approved by the Joint Committee
on Taxation of the U.S. Congress, resolves the last matter to be
decided by the U.S. Tax Court in the current litigation.
Those matters not resolved by settlement agreement in the case,
including the favorable financing intangible asset decided
favorably by the Court in 2005, are subject to appeal.
The IRS has completed its examinations of years 1998 to 2005 and
has begun examining years 2006 and 2007. The principal matter in
controversy as the result of the 1998 to 2005 examinations
involves questions of timing and potential penalties regarding
our tax accounting method for certain hedging transactions. We
do not anticipate that significant changes in the gross balance
of unrecognized tax benefits will occur within the next
12 months that could have a material impact on income tax
expense or benefit in the period the issue is resolved.
Effect of
Internal Revenue Code Section 382, or Section 382, and
IRS Notice
2008-76 on
our Tax Positions
Section 382 of the Internal Revenue Code limits tax
deductions for net operating losses or net unrealized built-in
losses after there is a substantial change in ownership in a
corporations stock involving a 50 percentage point
increase in ownership by 5% or larger stockholders. Generally,
whenever a 5% or greater shareholder increases its stock
ownership, which is referred to as a testing date
under Section 382, a company must look back three years to
see if accumulated increases for all 5% or greater shareholders
exceed 50 percentage points during this period. It is this
testing date rule that IRS Notice
2008-76
changes.
Under IRS Notice
2008-76, IRS
and Treasury announced that they will issue regulations under
Section 382(m)
of the Internal Revenue Code that address the application of
Section 382 in the case of certain acquisitions made
pursuant to the Housing and Economic Recovery Act of 2008. These
regulations will prescribe that there will be no testing date
for acquisitions of stock or an option to acquire stock as part
of a purchase made pursuant to the Housing and Economic Recovery
Act of 2008.
Based on this notice and the resulting revised regulations, the
grant of the warrant to Treasury for 79.9% of our common stock
did not trigger Section 382 loss limitations.
Effect of
Internal Revenue Code
Section 162(m),
or
Section 162(m)
Section 162(m)
of the Internal Revenue Code generally disallows a tax deduction
for certain non-performance-based compensation payments made to
certain executive officers of publicly held corporations.
Because our common stock previously was not required to be
registered under the Exchange Act, we were not a publicly-held
corporation under
Section 162(m)
and applicable Treasury regulations. The Housing and Economic
Recovery Act of 2008 specifically eliminated the Exchange Act
registration exemption for our equity securities. Accordingly,
our stock is required to be registered under the Exchange Act,
and we are therefore subject to
Section 162(m).
We are analyzing the extent to which any payments made to
executive officers in 2008 may be subject to the deduction
disallowance provisions of
Section 162(m).
NOTE 13:
EMPLOYEE BENEFITS
We maintain a tax-qualified, funded defined benefit pension
plan, or Pension Plan, covering substantially all of our
employees. We also maintain a nonqualified, unfunded defined
benefit pension plan for our officers as part of our
Supplemental Executive Retirement Plan. We maintain a defined
benefit postretirement health care plan, or Retiree Health Plan,
that generally provides postretirement health care benefits on a
contributory basis to retired employees age 55 or older who
rendered at least 10 years of service (five years of
service if the employee was eligible to retire prior to
March 1, 2007) and who, upon separation or
termination, immediately elected to commence benefits under the
Pension Plan in the form of an annuity. Our Retiree Health Plan
is currently unfunded and the benefits are paid from our general
assets. This plan and our defined benefit pension plans are
collectively referred to as the defined benefit plans.
Effective January 1, 2008, we adopted the measurement date
provisions of SFAS 158. In accordance with SFAS 158,
we have changed the measurement date of our defined benefit plan
assets and obligations from September 30 to our fiscal
year-end date of December 31 using the
15-month
transition method. Under this approach, we used the measurements
determined in our 2007 consolidated financial statements
included in our Registration Statement to estimate the effects
of the measurement date change. As a result of adoption, we
recognized an $8 million decrease in retained earnings
(after tax) at January 1, 2008 and the impact to AOCI
(after tax) was immaterial.
Table 13.1 presents the components of the net periodic
benefit cost with respect to pension and postretirement health
care benefits for the three and nine months ended
September 30, 2008 and 2007. Net periodic benefit cost is
included in salaries and employee benefits in our consolidated
statements of income.
Table 13.1
Net Periodic Benefit Cost Detail
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
|
|
(in millions)
|
|
Pension Benefits
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Service cost
|
|
$
|
9
|
|
|
$
|
8
|
|
|
$
|
26
|
|
|
$
|
25
|
|
Interest cost on benefit obligation
|
|
|
8
|
|
|
|
8
|
|
|
|
25
|
|
|
|
23
|
|
Expected (return) loss on plan assets
|
|
|
(10
|
)
|
|
|
(9
|
)
|
|
|
(31
|
)
|
|
|
(28
|
)
|
Recognized net actuarial (gain) loss
|
|
|
|
|
|
|
1
|
|
|
|
1
|
|
|
|
3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net periodic benefit cost
|
|
$
|
7
|
|
|
$
|
8
|
|
|
$
|
21
|
|
|
$
|
23
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Postretirement Health Care Benefits
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Service cost
|
|
$
|
2
|
|
|
$
|
2
|
|
|
$
|
6
|
|
|
$
|
6
|
|
Interest cost on benefit obligation
|
|
|
2
|
|
|
|
2
|
|
|
|
6
|
|
|
|
6
|
|
Recognized net actuarial loss (gain)
|
|
|
|
|
|
|
1
|
|
|
|
|
|
|
|
1
|
|
Recognized prior service (credit) cost
|
|
|
|
|
|
|
(1
|
)
|
|
|
|
|
|
|
(1
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net periodic benefit cost
|
|
$
|
4
|
|
|
$
|
4
|
|
|
$
|
12
|
|
|
$
|
12
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
Flows Related to Defined Benefit Plans
Our general practice is to contribute to our Pension Plan an
amount at least equal to the minimum required contribution, if
any, but no more than the maximum amount deductible for federal
income tax purposes each year. During the third quarter of 2008,
we made a contribution to our Pension Plan of approximately
$16.5 million.
NOTE 14:
FAIR VALUE DISCLOSURES
Fair
Value Hierarchy
Effective January 1, 2008, we adopted SFAS 157, which
establishes a fair value hierarchy that prioritizes the inputs
to valuation techniques used to measure fair value. Fair value
is the price that would be received to sell an asset or paid to
transfer a liability in an orderly transaction between market
participants at the measurement date. Observable inputs reflect
market data obtained from independent sources. Unobservable
inputs reflect assumptions based on the best information
available under the circumstances. We use valuation techniques
that maximize the use of observable inputs, where available and
minimize the use of unobservable inputs.
The three levels of the fair value hierarchy under SFAS 157
are described below:
|
|
|
|
Level 1:
|
Quoted prices (unadjusted) in active markets that are accessible
at the measurement date for identical assets or liabilities;
|
|
|
Level 2:
|
Quoted prices for similar assets and liabilities in active
markets; quoted prices for identical or similar assets and
liabilities in markets that are not active; inputs other than
quoted market prices that are observable for the asset or
liability; and inputs that are derived principally from or
corroborated by observable market data for substantially the
full term of the assets; and
|
|
|
Level 3:
|
Unobservable inputs for the asset or liability that are
supported by little or no market activity and that are
significant to the fair values.
|
As required by SFAS 157, assets and liabilities are
classified in their entirety within the fair value hierarchy
based on the lowest level input that is significant to the fair
value measurement. Table 14.1 sets forth by level within
the fair value hierarchy assets and liabilities measured and
reported at fair value on a recurring basis in our consolidated
balance sheets at September 30, 2008.
Table 14.1
Assets and Liabilities Measured at Fair Value on a Recurring
Basis
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value at September 30, 2008
|
|
|
|
Quoted Prices
|
|
|
Significant
|
|
|
|
|
|
|
|
|
|
|
|
|
in Active
|
|
|
Other
|
|
|
Significant
|
|
|
|
|
|
|
|
|
|
Markets for
|
|
|
Observable
|
|
|
Unobservable
|
|
|
|
|
|
|
|
|
|
Identical Assets
|
|
|
Inputs
|
|
|
Inputs
|
|
|
Netting
|
|
|
|
|
|
|
(Level 1)
|
|
|
(Level 2)
|
|
|
(Level 3)
|
|
|
Adjustment(1)
|
|
|
Total
|
|
|
|
(in millions)
|
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Held-for-sale, at fair value
|
|
$
|
|
|
|
$
|
|
|
|
$
|
95
|
|
|
$
|
|
|
|
$
|
95
|
|
Mortgage-related securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Available-for-sale,
at fair value
|
|
|
|
|
|
|
349,004
|
|
|
|
129,409
|
|
|
|
|
|
|
|
478,413
|
|
Trading, at fair value
|
|
|
|
|
|
|
114,427
|
|
|
|
3,575
|
|
|
|
|
|
|
|
118,002
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total mortgage-related securities
|
|
|
|
|
|
|
463,431
|
|
|
|
132,984
|
|
|
|
|
|
|
|
596,415
|
|
Non-mortgage-related securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Available-for-sale,
at fair value
|
|
|
|
|
|
|
10,407
|
|
|
|
3
|
|
|
|
|
|
|
|
10,410
|
|
Derivative assets, net
|
|
|
107
|
|
|
|
18,847
|
|
|
|
60
|
|
|
|
(15,974
|
)
|
|
|
3,040
|
|
Guarantee asset, at fair value
|
|
|
|
|
|
|
|
|
|
|
9,679
|
|
|
|
|
|
|
|
9,679
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets carried at fair value on a recurring basis
|
|
$
|
107
|
|
|
$
|
492,685
|
|
|
$
|
142,821
|
|
|
$
|
(15,974
|
)
|
|
$
|
619,639
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Debt securities denominated in foreign currencies
|
|
$
|
|
|
|
$
|
13,701
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
13,701
|
|
Derivative liabilities, net
|
|
|
203
|
|
|
|
12,766
|
|
|
|
267
|
|
|
|
(11,877
|
)
|
|
|
1,359
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities carried at fair value on a recurring
basis
|
|
$
|
203
|
|
|
$
|
26,467
|
|
|
$
|
267
|
|
|
$
|
(11,877
|
)
|
|
$
|
15,060
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
Represents counterparty netting,
cash collateral netting, net trade/settle receivable or payable
and net derivative interest receivable or payable. The net cash
collateral held and net trade/settle payable were
$4.9 billion and $6 million, respectively, at
September 30, 2008. The net interest receivable of
derivative assets and derivative liabilities was
$805 million at September 30, 2008, which was mainly
related to interest rate swaps that we have entered into.
|
Fair
Value Measurements (Level 3)
Level 3 measurements consist of assets and liabilities that
are supported by little or no market activity where observable
inputs are not available. The fair value of these assets and
liabilities is measured using significant inputs that are
considered unobservable. Unobservable inputs reflect assumptions
based on the best information available under the circumstances.
We use valuation techniques that maximize the use of observable
inputs, where available, and minimize the use of unobservable
inputs.
Our Level 3 items mainly represent non-agency residential
mortgage-related securities, our guarantee asset and multifamily
mortgage loans held-for-sale. During 2008, the market for
non-agency securities backed by subprime and
Alt-A
mortgage loans became significantly less liquid, which resulted
in lower transaction volumes, wider credit spreads and less
transparency. We transferred our holdings of these securities
into the Level 3 category as inputs that were significant
to their valuation became limited or unavailable. We concluded
that the prices on these securities received from pricing
services and dealers were reflective of significant unobservable
inputs. Our guarantee asset is valued either through obtaining
dealer quotes on similar securities or through an expected cash
flow approach. Because of the broad range of discounts for
liquidity applied by dealers to these similar securities and
because the expected cash flow valuation approach uses
significant unobservable inputs, we classified the guarantee
asset as Level 3. See NOTE 2: FINANCIAL
GUARANTEES AND SECURITIZED INTERESTS IN MORTGAGE-RELATED
ASSETS for more information about the valuation of our
guarantee asset.
Table 14.2 provides a reconciliation of the beginning and
ending balances for assets and liabilities measured at fair
value using significant unobservable inputs (Level 3).
Table 14.2
Fair Value Measurements of Assets and Liabilities Using
Significant Unobservable Inputs
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Level 3 at Fair Value for the Three Months Ended
September 30, 2008
|
|
|
|
Mortgage Loans:
|
|
|
Mortgage-related securities
|
|
|
Non-mortgage-
|
|
|
|
|
|
|
|
|
|
Held-for-sale,
|
|
|
Available-for-sale,
|
|
|
Trading,
|
|
|
related securities:
|
|
|
Guarantee asset,
|
|
|
Net
|
|
|
|
at fair value
|
|
|
at fair value
|
|
|
at fair value
|
|
|
Available-for-sale
|
|
|
at fair
value(1)
|
|
|
derivatives(2)
|
|
|
|
(in millions)
|
|
|
Balance, June 30, 2008
|
|
$
|
|
|
|
$
|
134,737
|
|
|
$
|
3,809
|
|
|
$
|
4
|
|
|
$
|
11,019
|
|
|
$
|
(207
|
)
|
Total realized and unrealized gains (losses):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Included in
earnings(3)(4)(5)
|
|
|
(7
|
)
|
|
|
(8,855
|
)
|
|
|
(575
|
)
|
|
|
|
|
|
|
(1,290
|
)
|
|
|
(11
|
)
|
Included in other comprehensive
income(3)(4)
|
|
|
|
|
|
|
1,877
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total realized and unrealized gains (losses)
|
|
|
(7
|
)
|
|
|
(6,978
|
)
|
|
|
(575
|
)
|
|
|
|
|
|
|
(1,290
|
)
|
|
|
(8
|
)
|
Purchases, issuances, sales and settlements, net
|
|
|
102
|
|
|
|
(8,406
|
)
|
|
|
463
|
|
|
|
(1
|
)
|
|
|
(50
|
)
|
|
|
8
|
|
Net transfers in and/or out of Level 3
|
|
|
|
|
|
|
10,056
|
|
|
|
(122
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, September 30, 2008
|
|
$
|
95
|
|
|
$
|
129,409
|
|
|
$
|
3,575
|
|
|
$
|
3
|
|
|
$
|
9,679
|
|
|
$
|
(207
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized gains (losses) still
held(6)
|
|
$
|
(7
|
)
|
|
$
|
(8,861
|
)
|
|
$
|
(555
|
)
|
|
$
|
|
|
|
$
|
(1,290
|
)
|
|
$
|
(85
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Level 3 at Fair Value for the Nine Months Ended
September 30, 2008
|
|
|
|
Mortgage Loans:
|
|
|
Mortgage-related securities
|
|
|
Non-mortgage-
|
|
|
|
|
|
|
|
|
|
Held-for-sale,
|
|
|
Available-for-sale,
|
|
|
Trading,
|
|
|
related securities:
|
|
|
Guarantee asset,
|
|
|
Net
|
|
|
|
at fair value
|
|
|
at fair value
|
|
|
at fair value
|
|
|
Available-for-sale
|
|
|
at fair
value(1)
|
|
|
derivatives(2)
|
|
|
|
(in millions)
|
|
|
Balance, December 31, 2007
|
|
$
|
|
|
|
$
|
19,859
|
|
|
$
|
2,710
|
|
|
$
|
|
|
|
$
|
9,591
|
|
|
$
|
(216
|
)
|
Impact of SFAS 159
|
|
|
|
|
|
|
(443
|
)
|
|
|
443
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, January 1, 2008
|
|
|
|
|
|
|
19,416
|
|
|
|
3,153
|
|
|
|
|
|
|
|
9,591
|
|
|
|
(216
|
)
|
Total realized and unrealized gains (losses):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Included in
earnings(3)(4)(5)
|
|
|
(7
|
)
|
|
|
(9,689
|
)
|
|
|
(616
|
)
|
|
|
|
|
|
|
(620
|
)
|
|
|
13
|
|
Included in other comprehensive
income(3)(4)
|
|
|
|
|
|
|
(14,540
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total realized and unrealized gains (losses)
|
|
|
(7
|
)
|
|
|
(24,229
|
)
|
|
|
(616
|
)
|
|
|
|
|
|
|
(620
|
)
|
|
|
16
|
|
Purchases, issuances, sales and settlements, net
|
|
|
102
|
|
|
|
(21,647
|
)
|
|
|
1,123
|
|
|
|
(2
|
)
|
|
|
708
|
|
|
|
(7
|
)
|
Net transfers in and/or out of Level 3
|
|
|
|
|
|
|
155,869
|
|
|
|
(85
|
)
|
|
|
5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, September 30, 2008
|
|
$
|
95
|
|
|
$
|
129,409
|
|
|
$
|
3,575
|
|
|
$
|
3
|
|
|
$
|
9,679
|
|
|
$
|
(207
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized gains (losses) still
held(6)
|
|
$
|
(7
|
)
|
|
$
|
(9,759
|
)
|
|
$
|
(606
|
)
|
|
$
|
|
|
|
$
|
(620
|
)
|
|
$
|
(68
|
)
|
|
|
(1)
|
We estimate that all amounts
recorded for unrealized gains and losses on our guarantee asset
relate to those amounts still in position. Cash received on our
guarantee asset is presented as settlements in the table. The
amounts reflected as included in earnings represent the periodic
mark-to-fair value of our guarantee asset.
|
(2)
|
Net derivatives include derivative
assets and derivative liabilities prior to counterparty netting,
cash collateral netting, net trade/settle receivable or payable
and net derivative interest receivable or payable.
|
(3)
|
Changes in fair value for
available-for-sale investments are recorded in AOCI, net of
taxes while gains and losses from sales are recorded in gains
(losses) on investment activity on our consolidated statements
of income. For mortgage-related securities classified as
trading, the realized and unrealized gains (losses) are recorded
in gains (losses) on investment activity on our consolidated
statements of income.
|
(4)
|
Changes in fair value of
derivatives are recorded in derivative gains (losses) for those
not designated as accounting hedges, and AOCI, net of taxes for
those accounted for as a cash flow hedge to the extent the hedge
is effective. See ITEM 13. FINANCIAL STATEMENTS AND
SUPPLEMENTARY DATA AUDITED CONSOLIDATED FINANCIAL
STATEMENTS AND ACCOMPANYING NOTES NOTE 1:
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES in the
Registration Statement for additional information.
|
(5)
|
Changes in fair value of the
guarantee asset are recorded in gains (losses) on guarantee
asset on our consolidated statements of income. See
ITEM 13. FINANCIAL STATEMENTS AND SUPPLEMENTARY
DATA AUDITED CONSOLIDATED FINANCIAL STATEMENTS AND
ACCOMPANYING NOTES NOTE 1: SUMMARY OF
SIGNIFICANT ACCOUNTING POLICIES in the Registration
Statement for additional information.
|
(6)
|
Represents the amount of total
gains or losses for the period, included in earnings,
attributable to the change in unrealized gains (losses) related
to assets and liabilities classified as Level 3 that are
still held at September 30, 2008. Included in these amounts
are other-than-temporary impairments recorded on
available-for-sale securities.
|
Nonrecurring
Fair Value Changes
Certain assets are measured at fair value on our consolidated
balance sheets only if certain conditions exist as of the
balance sheet date. We consider the fair value measurement
related to these assets to be nonrecurring. These assets include
single-family held-for-sale mortgage loans, REO net, as well as
impaired held-for-investment multifamily mortgage loans. These
assets are not measured at fair value on an ongoing basis but
are subject to fair value adjustments in certain circumstances.
These adjustments to fair value usually result from the
application of lower-of-cost-or-fair-value accounting or the
write-down of individual assets to current fair value amounts
due to impairments.
Table 14.3
Assets Measured at Fair Value on a Non-Recurring Basis
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2008
|
|
|
|
|
|
|
|
|
|
Quoted Prices in
|
|
|
Significant Other
|
|
|
Significant
|
|
|
|
|
|
|
|
|
|
|
|
|
Active Markets
|
|
|
Observable
|
|
|
Unobservable
|
|
|
|
|
|
Total Gains
(Losses)(1)
|
|
|
|
for Identical
|
|
|
Inputs
|
|
|
Inputs
|
|
|
|
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
Assets (Level 1)
|
|
|
(Level 2)
|
|
|
(Level 3)
|
|
|
Total
|
|
|
September 30, 2008
|
|
|
September 30, 2008
|
|
|
|
(in millions)
|
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage
loans:(2)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Held-for-investment
|
|
$
|
|
|
|
$
|
|
|
|
$
|
54
|
|
|
$
|
54
|
|
|
$
|
(2
|
)
|
|
$
|
(4
|
)
|
Held-for-sale
|
|
|
|
|
|
|
|
|
|
|
2,084
|
|
|
|
2,084
|
|
|
|
(16
|
)
|
|
|
(13
|
)
|
REO,
net(3)
|
|
|
|
|
|
|
|
|
|
|
2,092
|
|
|
|
2,092
|
|
|
|
(172
|
)
|
|
|
(404
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets carried at fair value on a non-recurring
basis
|
|
$
|
|
|
|
$
|
|
|
|
$
|
4,230
|
|
|
$
|
4,230
|
|
|
$
|
(190
|
)
|
|
$
|
(421
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
Represents the total gains (losses)
recorded on items measured at fair value on a non-recurring
basis as of September 30, 2008.
|
(2)
|
Represent carrying value and
related write-downs of loans for which adjustments are based on
the fair value amounts. These loans include held-for-sale
mortgage loans where the fair value is below cost and impaired
multifamily mortgage loans, which are classified as
held-for-investment and have related valuation allowance.
|
(3)
|
Represents the fair value and
related losses of foreclosed properties that were measured at
fair value subsequent to their initial classification as REO,
net. The carrying amount of REO, net was written down to fair
value of $2.1 billion, less cost to sell of
$165 million (or $1.9 billion) at September 30,
2008.
|
Fair
Value Election
On January 1, 2008, we adopted SFAS 159, which permits
entities to choose to measure many financial instruments and
certain other items at fair value that are not required to be
measured at fair value. We elected the fair value option for
certain available-for-sale mortgage-related securities,
foreign-currency denominated debt and investments in securities
classified as available-for-sale securities and identified as in
the scope of
EITF 99-20.
In addition, we elected the fair value option for multifamily
held-for-sale mortgage loans in the third quarter of 2008. For
additional information regarding the adoption of SFAS 159,
see NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES Change in Accounting Principles.
Certain
Available-For-Sale Securities with Fair Value Option
Elected
We elected the fair value option for certain available-for-sale
securities held in our retained portfolio to better reflect the
natural offset these securities provide to fair value changes
recorded on our guarantee asset. We record fair value changes on
our guarantee asset through our consolidated statements of
income. However, we historically classified virtually all of our
securities as available-for-sale and recorded those fair value
changes in AOCI. The securities selected for the fair value
option include principal only strips and certain pass-through
and Structured Securities that contain positive duration
features that provide offset to the negative duration associated
with our guarantee asset. We will continually evaluate new
security purchases to identify the appropriate security mix to
classify as trading to match the changing duration features of
our guarantee asset and the securities that provide offset.
For available-for-sale securities identified as within the scope
of
EITF 99-20,
we elected the fair value option to better reflect the valuation
changes that occur subsequent to impairment write-downs recorded
on these instruments. Under
EITF 99-20
for available-for-sale securities, when an impairment is
considered other-than-temporary, the impairment amount is
recorded in our consolidated statements of income and
subsequently accreted back through interest income as long as
the contractual cash flows occur. Any subsequent periodic
increases in the value of the security are recognized through
AOCI. By electing the fair value option for these instruments,
we will reflect valuation changes through our consolidated
statements of income in the period they occur, including
increases in value.
For mortgage-related securities and investments in securities
that are selected for the fair value option and classified as
trading securities subsequently, the change in fair value for
the three and nine months ended September 30, 2008 was
recorded in gains (losses) on investment activity in our
consolidated statements of income. See NOTE 4:
SECURITIES HELD IN OUR RETAINED PORTFOLIO AND CASH AND
INVESTMENTS PORTFOLIO for additional information regarding
the net unrealized gains (losses) on trading securities, which
include gains (losses) for other items that are not selected for
the fair value option. Related interest income continues to be
reported as interest income in our consolidated statements of
income using effective interest methods. See ITEM 13.
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA AUDITED
CONSOLIDATED FINANCIAL STATEMENTS AND ACCOMPANYING
NOTES NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES Investments in Securities in our
Registration Statement for additional information about the
measurement and recognition of interest income on investments in
securities.
Foreign-Currency
Denominated Debt with Fair Value Option Elected
In the case of foreign-currency denominated debt, we have
entered into derivative transactions that effectively convert
these instruments to U.S. dollar denominated floating rate
instruments. We have historically recorded the fair value
changes on these derivatives through our consolidated statements
of income in accordance with SFAS 133. However, the
corresponding offsetting change in fair value that occurred in
the debt as a result of changes in interest rates was not
permitted to be recorded in our consolidated statements of
income unless we pursued hedge accounting. As a result, our
consolidated statements of income reflected only the fair value
changes of the derivatives and not the offsetting fair value
changes in the debt resulting from changes in interest rates.
Therefore, we have elected the fair value option on the debt
instruments to better reflect the economic offset that naturally
results from the debt due to changes in interest rates. We
currently do not issue foreign-currency denominated debt and use
of the fair value option in the future for these types of
instruments will be evaluated on a
case-by-case
basis for any new issuances of this type of debt.
The changes in fair value of foreign-currency denominated debt
of $1.5 billion and $684 million for the three and
nine months ended September 30, 2008, respectively, were
recorded in unrealized gains (losses) on foreign-currency
denominated debt recorded at fair value in our consolidated
statements of income. The changes in fair value related to
fluctuations in exchange rates and interest rates were
$1.4 billion and $458 million for the three and nine
months ended September 30, 2008, respectively. The
remaining changes in the fair value of $150 million and
$226 million for the three and nine months ended
September 30, 2008, respectively, were attributable to
changes in the instrument-specific credit risk.
The changes in fair value attributable to changes in
instrument-specific credit risk were determined by comparing the
total change in fair value of the debt to the total change in
fair value of the interest rate and foreign currency derivatives
used to hedge the debt. Any difference in the fair value change
of the debt compared to the fair value change in the derivatives
is attributed to instrument-specific credit risk.
The difference between the aggregate fair value and aggregate
unpaid principal balance for foreign-currency denominated debt
due after one year is $31 million at September 30,
2008. Related interest expense continues to be reported as
interest expense in our consolidated statements of income. See
ITEM 13. FINANCIAL STATEMENTS AND SUPPLEMENTARY
DATA AUDITED CONSOLIDATED FINANCIAL STATEMENTS AND
ACCOMPANYING NOTES NOTE 1: SUMMARY OF
SIGNIFICANT ACCOUNTING POLICIES Debt Securities
Issued in our Registration Statement for additional
information about the measurement and recognition of interest
expense on debt securities issued.
Multifamily
Held-For-Sale Mortgage Loans with Fair Value Option
Elected
Beginning in the third quarter of 2008, we elected the fair
value option for multifamily mortgage loans that were purchased
through our Capital Market Execution program to reflect our
strategy in this program. Under this program, we acquire loans
we intend to sell. While this is consistent with our overall
strategy to expand our multifamily loan holdings, it differs
from the traditional
buy-and-hold
strategy that we have used with respect to multifamily loans.
These multifamily mortgage loans were classified as
held-for-sale mortgage loans in our consolidated balance sheets
to reflect our intent to sell these loans in the future.
We recorded $(7) million from the change in fair value in
gains (losses) on investment activity in our consolidated
statements of income for both the three and nine months ended
September 30, 2008. The fair value changes that were
attributable to changes in the instrument-specific credit risk
were $(8) million for the three and nine months ended
September 30, 2008. The gains and losses attributable to
changes in instrument specific credit risk were determined
primarily from the changes in OAS level.
The difference between the aggregate fair value and the
aggregate unpaid principal balance for multifamily held-for-sale
loans with fair value option elected was $7 million at
September 30, 2008. Related interest income continues to be
reported as interest income in our consolidated statements of
income. See ITEM 13: FINANCIAL STATEMENTS AND
SUPPLEMENTARY DATA AUDITED CONSOLIDATED FINANCIAL
STATEMENTS AND ACCOMPANYING NOTES NOTE 1:
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Mortgage
Loans in our Registration Statement for additional
information about the measurement and recognition of interest
income on our mortgage loans.
Valuation
Methods and Assumptions Subject to Fair Value
Hierarchy
We categorize assets and liabilities in the scope of
SFAS 157 within the fair value hierarchy based on the
valuation process used to derive the fair value and our judgment
regarding the observability of the related inputs. Those
judgments are based on our knowledge and observations of the
markets relevant to the individual assets and liabilities and
may vary based on current market conditions. In applying our
judgments, we look to ranges of third party prices, transaction
volumes and discussions with pricing service vendors to
understand and assess the extent of market benchmarks available
and the judgments or modeling required in their processes. Based
on these factors, we determine whether the fair values are
observable in active markets or that the markets are inactive.
We have reviewed FSP
SFAS 157-3,
Determining the Fair Value of a Financial Asset When
the Market for that Asset is Not Active for products
with inactive markets, and continue to classify these products
as Level 3 in the fair-value hierarchy, while still relying
on pricing services and dealer quotes. Even though market
information is limited due to market inactivity, the sources we
use have access to transaction information, bid lists, spread
indications, market inquiry information, asset performance,
rating agency information and feedback from their clients. We
believe leveraging all sources available
gives us the most access to market information possible, which
we then analyze and evaluate, maximizing the quality of
information used to determine our fair values.
Our Level 1 financial instruments consist of
exchange-traded derivatives where quoted prices exist for the
exact instrument in an active market. Our Level 2
instruments generally consist of high credit quality agency
mortgage-related securities, commercial mortgage-backed
securities, non-mortgage-related asset-backed securities,
interest-rate swaps, option-based derivatives and
foreign-currency denominated debt. These instruments are
generally valued through one of the following methods:
(a) dealer or pricing service values derived by comparison
to recent transactions or similar securities and adjusting for
differences in prepayment or liquidity characteristics; or
(b) modeled through an industry standard modeling technique
that relies upon observable inputs such as discount rates and
prepayment assumptions.
Our Level 3 assets primarily consist of non-agency
residential mortgage-related securities, our guarantee asset and
multifamily mortgage loans held-for-sale. While the non-agency
mortgage-related securities market has become significantly less
liquid, resulting in lower transaction volumes, wider credit
spreads and less transparency in 2008, we value our non-agency
mortgage-related securities based primarily on prices received
from third party pricing services and prices received from
dealers. The techniques used to value these instruments
generally are either (a) a comparison to transactions of
instruments with similar collateral and risk profiles; or
(b) industry standard modeling such as the discounted cash
flow model. For a description of how we determine the fair value
of our guarantee asset, see NOTE 2: FINANCIAL
GUARANTEES AND SECURITIZED INTERESTS IN MORTGAGE-RELATED
ASSETS.
Mortgage
Loans, Held-for-Investment
Mortgage loans, held for investment include impaired multifamily
mortgage loans, which are not measured at fair value on an
ongoing basis but have been written down to fair value due to
impairment. We classify these impaired multifamily mortgage
loans as Level 3 in the fair value hierarchy as their
valuation includes significant unobservable inputs.
Mortgage
Loans, Held-for-Sale
Mortgage loans, held-for-sale represent single-family and
multifamily mortgage loans held in our retained portfolio. For
single-family mortgage loans, we determine the fair value of
these mortgage loans to calculate lower-of-cost-or-fair-value
adjustments for mortgages classified as held-for-sale for GAAP
purposes, therefore they are measured at fair value on a
non-recurring basis and subject to classification under the fair
value hierarchy. Beginning in the third quarter of 2008, we
elected the fair value option for multifamily mortgage loans
that were purchased through our Capital Market Execution program
to reflect our strategy in this program. Thus, these multifamily
mortgage loans are measured at fair value on a recurring basis.
We determine the fair value of single-family mortgage loans,
excluding delinquent single-family loans purchased out of pools,
based on comparisons to actively traded mortgage-related
securities with similar characteristics. For single-family
mortgage loans, we include adjustments for yield, credit and
liquidity differences to calculate the fair value. For
single-family mortgage loans, part of the adjustments for yield,
credit and liquidity differences represent an implied management
and guarantee fee. To accomplish this, the fair value of the
single-family mortgage loans, excluding delinquent single-family
loans purchased out of pools, includes an adjustment
representing the estimated present value of the additional cash
flows on the mortgage coupon in excess of the coupon expected on
the notional mortgage-related securities. The implied management
and guarantee fee for single-family mortgage loans is also net
of the related credit and other components inherent in our
guarantee obligation. The process for estimating the related
credit and other guarantee obligation components is described in
the Guarantee Obligation section below. Since
the fair values are derived from observable prices with
adjustments that may be significant, they are classified as
Level 3 under the fair value hierarchy.
The fair value of multifamily mortgage loans is generally based
on market prices obtained from third-party pricing service
providers for similar mortgages, adjusted for differences in
contractual terms. However, given the relative illiquidity in
the market place for these loans, and differences in contractual
terms, we classified these loans as Level 3 in the fair
value hierarchy.
Mortgage-Related
and Non-Mortgage-Related Securities
Mortgage-related securities represent pass-throughs and other
mortgage-related securities issued by us, Fannie Mae and Ginnie
Mae, as well as non-agency mortgage-related securities. They are
classified as available-for-sale or trading, and are already
reflected at fair value on our GAAP consolidated balance sheets.
Effective January 1, 2008, we elected the fair value option
for selected mortgage-related securities that were classified as
available-for-sale securities and securities identified as in
the scope of impairment analysis under
EITF 99-20
and classified as available-for-sale securities. In conjunction
with our adoption of SFAS 159 we reclassified these
securities from available-for-sale securities to trading
securities on our GAAP consolidated balance sheets and recorded
the changes in fair value during the period for such securities
to gains (losses) on investment activities as incurred. For
additional information on the election of the fair value option
and SFAS 159, see NOTE 1: SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES Change in Accounting
Principles.
The fair value of securities with readily available third-party
market prices is generally based on market prices obtained from
broker/dealers or reliable third-party pricing service
providers. Such fair values may be measured by using third-party
quotes for similar instruments, adjusted for differences in
contractual terms. Generally, these fair values are classified
as Level 2 in the fair value hierarchy. For other
securities, a market OAS approach based on observable market
parameters is used to estimate fair value. OAS for certain
securities are estimated by deriving the OAS for the most
closely comparable security with an available market price,
using proprietary interest-rate and prepayment models. If
necessary, our judgment is applied to estimate the impact of
differences in prepayment uncertainty or other unique cash flow
characteristics related to that particular security. Fair values
for these securities are then estimated by using the estimated
OAS as an input to the interest-rate and prepayment models and
estimating the net present value of the projected cash flows.
The remaining instruments are priced using other modeling
techniques or by using other securities as proxies. These
securities may be classified as Level 2 or 3 depending on
the significance of the inputs that are not observable.
Certain available-for-sale non-agency mortgage-related
securities whose fair value is determined by reference to prices
obtained from broker/dealers or pricing services were changed
from a Level 2 classification to a Level 3
classification in the first quarter of 2008. Previously, these
valuations relied on observed trades, as evidenced by both
activity observed in the market, and similar prices obtained
from multiple sources. In late 2007, however, the divergence
among prices obtained from these sources increased, and became
significant in the first quarter of 2008. This, combined with
the observed significant reduction in transaction volumes and
widening of credit spreads, led us to conclude that the prices
received from pricing services and dealers were reflective of
significant unobservable inputs. While we believe these prices
to be the best available under the fair value hierarchy, the
classification was changed to Level 3 and remains as such
at September 30, 2008 as these conditions continue to
persist.
Derivative
Assets, Net
Derivative assets largely consist of interest-rate swaps,
option-based derivatives, futures and forward purchase and sale
commitments that we account for as derivatives. The carrying
value of our derivatives on our consolidated balance sheets is
equal to their fair value, including net derivative interest
receivable or payable, trade settle receivable or payable and is
net of cash collateral held or posted, where allowable by a
master netting agreement. Derivatives in a net unrealized gain
position are reported as derivative assets, net. Similarly,
derivatives in a net unrealized loss position are reported as
derivative liabilities, net.
The fair values of interest-rate swaps are determined by using
the appropriate yield curves to calculate and discount the
expected cash flows for both the fixed-rate and variable-rate
components of the swap contracts. Option-based derivatives,
which principally include call and put swaptions, are valued
using an option-pricing model. This model uses market interest
rates and market-implied option volatilities, where available,
to calculate the options fair value. Market-implied option
volatilities are based on information obtained from
broker/dealers. Since swaps and option-based derivatives fair
values are determined through models that use observable inputs,
these are generally classified as Level 2 under the fair
value hierarchy. To the extent we have determined that any of
the significant inputs are considered unobservable, these
amounts have been classified as Level 3 under the fair
value hierarchy.
The fair value of exchange-traded futures and options is based
on end-of-day closing prices obtained from third-party pricing
services, therefore they are classified as Level 1 under
the fair value hierarchy.
The fair value of derivative assets considers the impact of
institutional credit risk in the event that the counterparty
does not honor its payment obligation. Additionally, the fair
value of derivative liabilities considers the impact of our
institutional credit risk. Our fair value of derivatives is not
adjusted for expected credit losses because we obtain collateral
from most counterparties, typically within one business day of
the daily market value calculation, and substantially all of our
credit risk arises from counterparties with investment-grade
credit ratings of A or above.
Certain purchase and sale commitments are also considered to be
derivatives and are classified as Level 2 or Level 3
under the fair value hierarchy, depending on the fair value
hierarchy classification of the purchased or sold item, whether
security or loan. Such valuation methodologies and fair value
hierarchy classifications are further discussed in the
Mortgage-Related and Non-Mortgage-Related
Securities and the Mortgage Loans,
Held-for-Sale sections above.
Guarantee
Asset, at Fair Value
For a description of how we determine the fair value of our
guarantee asset, see NOTE 2: FINANCIAL GUARANTEES AND
SECURITIZED INTERESTS IN MORTGAGE-RELATED ASSETS. Since
its valuation technique is model based with significant inputs
that are not observable, our guarantee asset is classified as
Level 3 in the fair value hierarchy.
REO,
Net
For GAAP purposes, REO is subsequently carried at the lower of
its carrying amount or fair value less cost to sell. The
subsequent fair value less cost to sell is an estimated value
based on relevant historical factors, which are considered to be
unobservable inputs. As a result REO is classified as
Level 3 under the fair value hierarchy.
Debt
Securities Denominated in Foreign Currencies
Foreign-currency denominated debt instruments are measured at
fair value pursuant to our fair value option election. We
determine the fair value of these instruments by obtaining
multiple quotes from dealers. Since the prices provided by the
dealers consider only observable data such as interest rates and
exchange rates, these fair values are classified as Level 2
under the fair value hierarchy.
Derivative
Liabilities, Net
See discussion under Derivative Assets, Net
above.
Consolidated
Fair Value Balance Sheets
The supplemental consolidated fair value balance sheets in
Table 14.4 present our estimates of the fair value of our
recorded financial assets and liabilities and off-balance sheet
financial instruments at September 30, 2008 and
December 31, 2007. Our consolidated fair value balance
sheets include the estimated fair values of financial
instruments recorded on our consolidated balance sheets prepared
in accordance with GAAP, as well as off-balance sheet financial
instruments that represent our assets or liabilities that are
not recorded on our GAAP consolidated balance sheets. These
off-balance sheet items predominantly consist of: (a) the
unrecognized guarantee asset and guarantee obligation associated
with our PCs issued through our guarantor swap program prior to
the implementation of FIN 45, (b) certain commitments
to purchase mortgage loans and (c) certain credit
enhancements on manufactured housing asset-backed securities.
The fair value balance sheets also include certain assets and
liabilities that are not financial instruments (such as property
and equipment and real estate owned, which are included in other
assets) at their carrying value in accordance with GAAP. The
valuations of financial instruments on our consolidated fair
value balance sheets are in accordance with GAAP fair value
guidelines prescribed by SFAS 107, Disclosures
about Fair Value of Financial Instruments, and other
relevant pronouncements.
During the nine months ended September 30, 2008, our fair
value results were impacted by several changes in our approach
for estimating the fair value of certain financial instruments,
primarily related to our valuation of our guarantee obligation
as a result of the adoption of SFAS 157 on January 1,
2008 and other improvements to our methodology during the first,
second and third quarters of 2008. During the third quarter of
2008, we made adjustments to our guarantee obligation model,
including increases to our observed delinquency trends. These
changes resulted in net after-tax changes in the fair value of
total net assets of approximately $4.6 billion,
$(1.2) billion and $(1.4) billion at March 31,
2008, June 30, 2008 and September 30, 2008,
respectively. For a further discussion of our adoption of
SFAS 157 and information concerning our valuation approach
related to our guarantee obligation, see NOTE 1:
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Change in
Accounting Principles and Valuation Methods and
Assumptions Not Subject to Fair Value Hierarchy
Guarantee Obligation.
Table 14.4
Consolidated Fair Value Balance
Sheets(1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2008
|
|
|
December 31, 2007
|
|
|
|
Carrying
|
|
|
|
|
|
Carrying
|
|
|
|
|
|
|
Amount(2)
|
|
|
Fair Value
|
|
|
Amount(2)
|
|
|
Fair Value
|
|
|
|
(in billions)
|
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage loans
|
|
$
|
98.2
|
|
|
$
|
92.4
|
|
|
$
|
80.0
|
|
|
$
|
76.8
|
|
Mortgage-related securities
|
|
|
596.4
|
|
|
|
596.4
|
|
|
|
629.8
|
|
|
|
629.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Retained portfolio
|
|
|
694.6
|
|
|
|
688.8
|
|
|
|
709.8
|
|
|
|
706.6
|
|
Cash and cash equivalents
|
|
|
50.2
|
|
|
|
50.2
|
|
|
|
8.6
|
|
|
|
8.6
|
|
Non-mortgage-related securities
|
|
|
10.4
|
|
|
|
10.4
|
|
|
|
35.1
|
|
|
|
35.1
|
|
Securities purchased under agreements to resell and federal
funds sold
|
|
|
8.0
|
|
|
|
8.0
|
|
|
|
6.6
|
|
|
|
6.6
|
|
Derivative assets, net
|
|
|
3.0
|
|
|
|
3.0
|
|
|
|
0.8
|
|
|
|
0.8
|
|
Guarantee
asset(3)
|
|
|
9.7
|
|
|
|
10.4
|
|
|
|
9.6
|
|
|
|
10.4
|
|
Other assets
|
|
|
28.5
|
|
|
|
29.2
|
|
|
|
23.9
|
|
|
|
31.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
804.4
|
|
|
$
|
800.0
|
|
|
$
|
794.4
|
|
|
$
|
799.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities and minority interests
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total debt securities, net
|
|
$
|
783.9
|
|
|
$
|
789.7
|
|
|
$
|
738.6
|
|
|
$
|
749.3
|
|
Guarantee obligation
|
|
|
13.9
|
|
|
|
42.8
|
|
|
|
13.7
|
|
|
|
26.2
|
|
Derivative liabilities, net
|
|
|
1.4
|
|
|
|
1.4
|
|
|
|
0.6
|
|
|
|
0.6
|
|
Reserve for guarantee losses on PCs
|
|
|
9.8
|
|
|
|
|
|
|
|
2.6
|
|
|
|
|
|
Other liabilities
|
|
|
9.1
|
|
|
|
8.5
|
|
|
|
12.0
|
|
|
|
11.0
|
|
Minority interests in consolidated subsidiaries
|
|
|
0.1
|
|
|
|
|
|
|
|
0.2
|
|
|
|
0.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and minority interests
|
|
|
818.2
|
|
|
|
842.4
|
|
|
|
767.7
|
|
|
|
787.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net assets attributable to stockholders
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Senior preferred stockholders
|
|
|
1.0
|
|
|
|
1.0
|
|
|
|
|
|
|
|
|
|
Preferred stockholders
|
|
|
14.1
|
|
|
|
0.7
|
|
|
|
14.1
|
|
|
|
12.3
|
|
Common stockholders
|
|
|
(28.9
|
)
|
|
|
(44.1
|
)
|
|
|
12.6
|
|
|
|
0.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net assets
|
|
|
(13.8
|
)
|
|
|
(42.4
|
)
|
|
|
26.7
|
|
|
|
12.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities, minority interests and net assets
|
|
$
|
804.4
|
|
|
$
|
800.0
|
|
|
$
|
794.4
|
|
|
$
|
799.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
The consolidated fair value balance
sheets do not purport to present our net realizable, liquidation
or market value as a whole. Furthermore, amounts we ultimately
realize from the disposition of assets or settlement of
liabilities may vary significantly from the fair values
presented.
|
(2)
|
Equals the amount reported on our
GAAP consolidated balance sheets.
|
(3)
|
The fair value of our guarantee
asset reported exceeds the carrying value primarily because the
fair value includes our guarantee asset related to PCs that were
issued prior to the implementation of FIN 45 in 2003 and
thus are not recognized on our GAAP consolidated balance sheets.
|
Limitations
Our consolidated fair value balance sheets do not capture all
elements of value that are implicit in our operations as a going
concern because our consolidated fair value balance sheets only
capture the values of the current investment and securitization
portfolios. For example, our consolidated fair value balance
sheets do not capture the value of new investment and
securitization business that would likely replace prepayments as
they occur. Thus, the fair value of net assets attributable to
stockholders presented on our consolidated fair value balance
sheets does not represent an estimate of our net realizable,
liquidation or market value as a whole.
We report certain assets and liabilities that are not financial
instruments (such as property and equipment and real estate
owned), as well as certain financial instruments that are not
covered by the SFAS 107 disclosure requirements (such as
pension liabilities) at their carrying amounts in accordance
with GAAP on our consolidated fair value balance sheets. We
believe these items do not have a significant impact on our
overall fair value results. Other non-financial assets and
liabilities on our GAAP consolidated balance sheets represent
deferrals of costs and revenues that are amortized in accordance
with GAAP, such as deferred debt issuance costs and deferred
credit fees. Cash receipts and payments related to these items
are generally recognized in the fair value of net assets when
received or paid, with no basis reflected on our fair value
balance sheets.
Valuation
Methods and Assumptions Not Subject to Fair Value
Hierarchy
The following are valuation assumptions and methods for items
not subject to the fair value hierarchy either because they are
not measured at fair value other than on the fair value balance
sheet or are only measured at fair value at inception.
Mortgage
Loans
Mortgage loans represent single-family and multifamily mortgage
loans held in our retained portfolio. For GAAP purposes, we must
determine the fair value of these mortgage loans to calculate
lower-of-cost-or-fair-value adjustments for single-family
mortgages classified as held-for-sale. For fair value balance
sheet purposes, we use a similar approach when determining the
fair value of mortgage loans, including those
held-for-investment. The fair value of multifamily mortgage
loans is generally based on market prices obtained from reliable
third-party pricing service providers for similar mortgages,
adjusted for differences in contractual terms.
Cash
and Cash Equivalents
Cash and cash equivalents largely consists of highly liquid
investment securities with an original maturity of three months
or less used for cash management purposes, as well as cash
collateral posted by our derivative counterparties. Given that
these assets are short-term in nature with limited market value
volatility, the carrying amount on our GAAP consolidated balance
sheets is deemed to be a reasonable approximation of fair value.
Securities
Purchased Under Agreements to Resell and Federal Funds
Sold
Securities purchased under agreements to resell and federal
funds sold principally consists of short-term contractual
agreements such as reverse repurchase agreements involving
Treasury and agency securities, federal funds sold and
Eurodollar time deposits. Given that these assets are short-term
in nature, the carrying amount on our GAAP consolidated balance
sheets is deemed to be a reasonable approximation of fair value.
Other
Assets
Other assets consists of investments in qualified LIHTC
partnerships that are eligible for federal tax credits, credit
enhancement contracts related to PCs and Structured Securities
(pool insurance and recourse
and/or
indemnification agreements), financial guarantee contracts for
additional credit enhancements on certain manufactured housing
asset-backed securities, REO, property and equipment and other
miscellaneous assets.
Our investments in LIHTC partnerships, reported as consolidated
entities or equity method investments in the GAAP financial
statements, are not within the scope of SFAS 107 disclosure
requirements. However, we present the fair value of these
investments in other assets on our consolidated fair value
balance sheets. For the LIHTC partnerships, the fair value of
expected tax benefits is estimated using expected cash flows
discounted using our estimated cost of funds.
For the credit enhancement contracts related to PCs and
Structured Securities (pool insurance and recourse
and/or
indemnification agreements), fair value is estimated using an
expected cash flow approach, and is intended to reflect the
estimated amount that a third party would be willing to pay for
the contracts. On our consolidated fair value balance sheets,
these contracts are reported at fair value at each balance sheet
date based on current market conditions. On our GAAP
consolidated balance sheets, these contracts are initially
recorded at fair value at inception, then amortized to expense.
For the credit enhancements on manufactured housing asset-backed
securities, the fair value is based on the difference between
the market price of non-credit-impaired manufactured housing
securities and credit-impaired manufactured housing securities
that are likely to produce future credit losses, as adjusted for
our estimate of a risk premium attributable to the financial
guarantee contracts. The value of the contracts, over time, will
be determined by the actual credit-related losses incurred and,
therefore, may have a value that is higher or lower than our
market-based estimate. On our GAAP consolidated financial
statements, these contracts are recognized as cash is received.
The other categories of assets that comprise other assets are
not financial instruments required to be valued at fair value
under SFAS 107, such as property and equipment. For the
majority of these non-financial instruments in other assets, we
use the carrying amounts from our GAAP consolidated balance
sheets as the reported values on our consolidated fair value
balance sheets, without any adjustment. These assets represent
an insignificant portion of our GAAP consolidated balance
sheets. Certain non-financial assets in other assets on our GAAP
consolidated balance sheets are assigned a zero value on our
consolidated fair value balance sheets. This treatment is
applied to deferred items such as deferred debt issuance costs.
We adjust the GAAP-basis deferred taxes reflected on our
consolidated fair value balance sheets to include estimated
income taxes on the difference between our consolidated fair
value balance sheets net assets attributable to common
stockholders, including deferred taxes from our GAAP
consolidated balance sheets, and our GAAP consolidated balance
sheets equity attributable to common stockholders. To the extent
the adjusted deferred taxes are a net asset, this amount is
included in other assets. In addition, if our deferred tax asset
on our consolidated fair value balance sheet, calculated as
described above, exceeds our deferred tax asset on our GAAP
consolidated balance sheet that has been reduced by a valuation
allowance, our deferred tax asset on our consolidated fair value
balance sheet is limited to the amount of our deferred tax asset
on our GAAP consolidated balance sheet. If the adjusted deferred
taxes are a net liability, this amount is included in other
liabilities.
Total
Debt Securities, Net
Total debt securities, net represent short-term and long-term
debt used to finance our assets. On our consolidated GAAP
balance sheets, debt securities, excluding debt securities
denominated in foreign currencies, are reported at amortized
cost, which is net of deferred items, including premiums,
discounts and hedging-related basis adjustments. This item
includes both non-callable and callable debt, as well as
short-term zero-coupon discount notes. The fair value of the
short-term zero-coupon discount notes is based on a discounted
cash flow model with market inputs. The valuation of other debt
securities represents the proceeds that we would receive from
the issuance of debt and is generally based on market prices
obtained from broker/dealers, reliable third-party pricing
service providers or direct market observations. We elected the
fair value
option for debt securities denominated in foreign currencies and
reported them at fair value on our GAAP consolidated balance
sheets effective January 1, 2008.
Guarantee
Obligation
We did not establish a guarantee obligation for GAAP purposes
for PCs and Structured Securities that were issued through our
guarantor swap program prior to adoption of FIN 45. In
addition, after it is initially recorded at fair value the
guarantee obligation is not subsequently carried at fair value
for GAAP purposes. On our consolidated fair value balance
sheets, the guarantee obligation reflects the fair value of our
guarantee obligation on all PCs regardless of when they were
issued. Additionally, for fair value balance sheet purposes, our
guarantee obligation is valued using a model that is calibrated
to entry pricing information to estimate the fair value on our
seasoned guarantee obligation. Entry pricing information used in
our model includes the spot delivery fee and management and
guarantee fee used to determine the amount charged to customers
for executing our new securitizations. For information
concerning our valuation approach and accounting policies
related to our guarantees of mortgage assets for GAAP purposes,
see NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES and NOTE 2: FINANCIAL GUARANTEES AND
SECURITIZED INTERESTS IN MORTGAGE-RELATED ASSETS.
Reserve
for Guarantee Losses on PCs
The carrying amount of the reserve for guarantee losses on PCs
on our GAAP consolidated balance sheets represents the
contingent losses contained in the loans that back our PCs. This
line item has no basis on our consolidated fair value balance
sheets, because the estimated fair value of all expected default
losses (both contingent and non-contingent) is included in the
guarantee obligation reported on our consolidated fair value
balance sheets.
Other
Liabilities
Other liabilities principally consist of funding liabilities
associated with investments in LIHTC partnerships, accrued
interest payable on debt securities and other miscellaneous
obligations of less than one year. We believe the carrying
amount of these liabilities is a reasonable approximation of
their fair value, except for funding liabilities associated with
investments in LIHTC partnerships, for which fair value is
estimated using expected cash flows discounted at a market-based
yield. Furthermore, certain deferred items reported as other
liabilities on our GAAP consolidated balance sheets are assigned
zero value on our consolidated fair value balance sheets, such
as deferred credit fees. Also, as discussed in Other
Assets, other liabilities may include a deferred tax
liability adjusted for fair value balance sheet purposes.
Minority
Interests in Consolidated Subsidiaries
Minority interests in consolidated subsidiaries primarily
represent preferred stock interests that third parties hold in
our two majority-owned real estate investment trust, or REIT
subsidiaries. In accordance with GAAP, we consolidated the
REITs. The preferred stock interests are not within the scope of
SFAS 107 disclosure requirements. However, we present the
fair value of these interests on our consolidated fair value
balance sheets. The fair value of the third-party minority
interests in these REITs was based on the estimated value of the
underlying REIT preferred stock we determined based on a
valuation model.
Net
Assets Attributable to Senior Preferred
Stockholders
The fair value of our senior preferred stock, issued in
connection with the Purchase Agreement, is at liquidation
preference, which is our best estimate of fair value.
Net
Assets Attributable to Preferred Stockholders
To determine the preferred stock fair value, we use a
market-based approach incorporating quoted dealer prices.
Net
Assets Attributable to Common Stockholders
Net assets attributable to common stockholders is equal to the
difference between the fair value of total assets and the sum of
total liabilities and minority interests reported on our
consolidated fair value balance sheets, less the fair value of
net assets attributable to senior preferred stockholders and
preferred stockholders.
NOTE 15:
CONCENTRATION OF CREDIT AND OTHER RISKS
Mortgages
and Mortgage-Related Securities
Our business activity is to participate in and support the
residential mortgage market in the United States, which we
pursue by both issuing guaranteed mortgage securities and
investing in mortgage loans and mortgage-related securities.
Table 15.1 summarizes the geographical concentration of
mortgages and mortgage-related securities that we held in our
retained portfolio or that underlie our guaranteed PCs and
Structured Securities, held by third parties, excluding:
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$1.1 billion and $1.3 billion of mortgage-related
securities issued by Ginnie Mae that back Structured Securities
at September 30, 2008 and December 31, 2007,
respectively, because these securities do not expose us to
meaningful amounts of credit risk;
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$57.1 billion and $47.8 billion of agency
mortgage-related securities at September 30, 2008 and
December 31, 2007, respectively, because these securities
do not expose us to meaningful amounts of credit risk; and
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$204.5 billion and $233.8 billion of non-agency
mortgage-related securities held in our retained portfolio at
September 30, 2008 and December 31, 2007,
respectively, because geographic information regarding these
securities is not available. With respect to these securities,
we look to third-party credit enhancements (e.g., bond
insurance) or other credit enhancements resulting from the
securitization structure supporting such securities
(e.g., subordination levels) as a primary means of
managing credit risk.
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See NOTE 4: SECURITIES HELD IN OUR RETAINED PORTFOLIO
AND CASH AND INVESTMENTS PORTFOLIO for more information
about the securities we hold.
Table 15.1
Concentration of Credit
Risk(1)
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September 30, 2008
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December 31, 2007
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Amount
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Percentage
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Amount
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Percentage
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(dollars in millions)
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By
Region(2)
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West
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$
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500,975
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26
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%
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$
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455,051
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25
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%
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Northeast
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471,988
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24
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443,813
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24
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North Central
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359,517
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19
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353,522
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19
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Southeast
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354,456
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18
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335,386
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19
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Southwest
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246,682
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13
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231,951
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13
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$
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1,933,618
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100
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%
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$
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1,819,723
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100
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%
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By State
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California
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$
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271,315
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14
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%
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$
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243,225
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13
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%
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Florida
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129,975
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7
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124,092
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7
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Texas
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98,112
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5
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91,130
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5
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New York
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96,960
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5
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90,686
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5
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Illinois
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96,733
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5
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91,835
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5
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All others
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1,240,523
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64
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1,178,755
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65
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$
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1,933,618
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100
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%
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$
|
1,819,723
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100
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%
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(1)
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Based on unpaid principal balances.
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(2)
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Region designation: West (AK, AZ,
CA, GU, HI, ID, MT, NV, OR, UT, WA); Northeast (CT, DE, DC, MA,
ME, MD, NH, NJ, NY, PA, RI, VT, VA, WV); North Central (IL, IN,
IA, MI, MN, ND, OH, SD, WI); Southeast (AL, FL, GA, KY, MS, NC,
PR, SC, TN, VI); Southwest (AR, CO, KS, LA, MO, NE, NM, OK,
TX, WY).
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Higher-Risk
Mortgage Loans
There are residential loan products originated in recent years
that are designed to offer borrowers greater choices in their
payment terms. For example, interest-only mortgages allow the
borrower to pay only interest for a fixed period of time before
the loan begins to amortize. Option ARM loans permit a variety
of repayment options, which include minimum, interest-only,
fully amortizing
30-year and
fully amortizing
15-year
payments. The minimum payment alternative for option ARM loans
allows the borrower to make monthly payments that may be less
than the interest accrued for the period. The unpaid interest,
known as negative amortization, is added to the principal
balance of the loan, which increases the outstanding loan
balance. At both September 30, 2008 and December 31,
2007, interest-only and option ARM loans collectively
represented approximately 10% of loans underlying our
single-family issued guaranteed PCs and Structured Securities.
In addition to these products, there are also types of
residential mortgage loans originated in the market with lower
or alternative documentation requirements than full
documentation mortgage loans. These reduced documentation
mortgages have been categorized in the mortgage industry as
Alt-A loans.
We have classified mortgage loans as
Alt-A if the
lender that delivers them to us has classified the loans as
Alt-A, or if
the loans had reduced documentation requirements that indicate
that the loans should be classified as
Alt-A. At
September 30, 2008 and December 31, 2007,
approximately 10% and 11% of our single-family PCs and
Structured Securities were backed by
Alt-A
mortgage loans, respectively.
Mortgage
Lenders, or Seller/Servicers
A significant portion of our single-family mortgage purchase
volume is generated from several key mortgage lenders with whom
we have entered into business arrangements. These arrangements
generally involve a lenders commitment to sell a
significant proportion of its conforming mortgage origination
volume to us. We are exposed to institutional credit risk
arising from the insolvency or non-performance by our
seller/servicers, including non-performance of their repurchase
obligations arising from the representations and warranties made
to us for loans that they underwrote and sold to us. Our
seller/servicers also have a significant role in servicing
single-family loans in our retained portfolio and those
underlying our PCs, which includes having an active role in our
loss mitigation efforts. During the nine months ended
September 30, 2008, three mortgage lenders, Bank of
America, N.A. (including Countrywide Home Loans, Inc. which it
purchased on July 1, 2008), Wells Fargo Bank, N.A.
(including Wachovia Corporation, the parent of our customers
Wachovia Bank, N.A. and Wachovia Mortgage, FSB which
Wells Fargo purchased in September 2008) and JPMorgan Chase
and its subsidiary Chase
Home Finance LLC, our customer, (including Washington
Mutual Bank which was acquired by JPMorgan Chase in September
2008), each accounted for 10% or more of our mortgage purchase
volume, and collectively accounted for approximately 61% of our
total single-family mortgage purchase volume. These top lenders
are among the largest mortgage loan originators in the U.S. in
the single-family market. We are exposed to the risk that we
could lose purchase volume to the extent these arrangements are
terminated without replacement from other lenders. We also have
exposure to seller/servicers to the extent we fail to realize
the anticipated benefits of our loss mitigation plans, or that
we experience a lower realized rate of seller/servicer
repurchases. Either of these conditions could lead to default
rates that exceed our current estimates and could cause our
losses to be significantly higher than those estimated within
our loan loss reserves.
Due to the current challenging market conditions, the financial
condition and performance of many of our seller/servicers has
deteriorated. Many of these seller/servicers have experienced
multiple ratings downgrades and liquidity constraints. In July
2008, one of these seller/servicers, IndyMac Bank, FSB, or
IndyMac, was closed by the Office of Thrift Supervision, with
the Federal Deposit Insurance Corporation, or FDIC, named as
receiver. The FDIC then rechartered IndyMac and is currently
operating it as a conservator. IndyMacs lending division
accounted for 0.4% of our mortgage purchase volume in 2008. In
September 2008, Washington Mutual Bank, which accounted for 7%
of our single-family mortgage purchase volume during the nine
months ended September 30, 2008, was closed by the Office
of Thrift Supervision and the FDIC was named receiver and all of
its deposits, assets and certain liabilities of its banking
operations were acquired by JPMorgan Chase Bank, NA. JPMorgan
Chase has asserted that, as successor servicer of mortgages for
us and formerly serviced by Washington Mutual, JPMorgan Chase
will not be responsible for Washington Mutuals existing
and future obligations to repurchase mortgages sold to us by
Washington Mutual and later found to be inconsistent with
representations and warranties made at the time of sale. We have
informed JPMorgan Chase that we are unwilling to consent to it
being successor servicer unless it assumes the Washington Mutual
repurchase obligations. Chase Home Finance LLC, a
subsidiary of JPMorgan Chase, is also a significant
seller/servicer and provided 9% of our single-family mortgage
purchase volume during the nine months ended September 30,
2008. In addition, Wachovia Corporation, the parent of our
customers Wachovia Bank, N.A. and Wachovia Mortgage, FSB, which
together accounted for 2% of our single-family mortgage purchase
volume during the nine months ended September 30, 2008,
agreed to be acquired by Wells Fargo & Company in
September 2008. Wells Fargo Bank N.A., a subsidiary of
Wells Fargo & Company, is also a significant
seller/servicer and provided 20% of our single-family mortgage
purchase volume during the nine months ended September 30,
2008. We are monitoring these developments and are working to
ensure that our servicing arrangements, in accordance with their
terms, will not be affected, although there are unresolved
issues relating to some servicing arrangements. Similarly, in
cases where we have long-term mortgage purchase commitment
contracts in place with both of the merged parties, the
agreements continue until their stated expiration date.
During the nine months ended September 30, 2008, our top
four multifamily lenders each accounted for more than 9% of our
mortgage purchase volume, and represented approximately 45% of
our multifamily purchase volume. These top lenders are among the
largest mortgage loan originators in the U.S. in the multifamily
markets. We are exposed to the risk that we could lose purchase
volume to the extent these arrangements are terminated without
replacement from other lenders.
In addition, we are exposed to risk from our mortgage
seller/services for credit losses realized on mortgages. In
order to manage this risk, we rely on primary mortgage
insurance, our right to demand repurchase of mortgages that are
inconsistent with representations and warranties made by
seller/servicers when we purchased the loans, and, to a lesser
extent, recourse agreements (under which we may require a lender
to repurchase delinquent loans) and indemnification agreements
(under which we may require a lender to reimburse us for credit
losses on mortgages), as well as pool insurance.
Mortgage
and Bond Insurers
We have institutional credit risk relating to the potential
insolvency or non-performance of mortgage insurers that insure
mortgages we purchase or guarantee. At September 30, 2008,
these insurers provided coverage, with maximum loss limits of
$66 billion, for $345 billion of unpaid principal
balances in connection with our single-family mortgage
portfolio, excluding those backing Structured Transactions.
Excluding bond insurers, which provide loss insurance for our
non-agency mortgage-related securities portfolio, our top five
mortgage insurer counterparties, Mortgage Guaranty Insurance
Corporation (or MGIC), Radian Guaranty Inc. (or Radian),
Genworth Mortgage Insurance Corporation, PMI Mortgage
Insurance Co. (or PMI), and United Guaranty Residential
Insurance Co. (or UGRI), each accounted for more than 9% of
our maximum exposure to mortgage insurers at September 30,
2008. Recently, many mortgage insurers have had financial
difficulty and have received several downgrades in their credit
rating by nationally recognized statistical rating
organizations. Triad Guaranty Insurance Corporation (or Triad),
one of our mortgage insurance counterparties, announced that it
ceased issuing new insurance effective July 15, 2008. In
accordance with our insurer eligibility requirements, we
suspended Triad as a Freddie Mac-approved insurer and informed
our customers that mortgages with commitments of insurance from
Triad dated after July 14, 2008 are not eligible for sale
to us. Several of our mortgage insurance counterparties,
including MGIC, Radian,
UGRI and PMI, were also downgraded below the AA rating category.
To date, no mortgage insurer has failed to meet its obligations
to us.
We also obtain bond insurance as an additional credit
enhancement with either primary or secondary policies to cover
non-agency securities held in either our retained or
non-mortgage investment portfolio. At September 30, 2008,
we had coverage, including secondary policies on securities,
totaling $18 billion of unpaid principal balance. At
September 30, 2008, the top four of our bond insurers,
Ambac Assurance Corporation, Financial Guaranty Insurance
Company, Financial Security Assurance Inc., and MBIA Insurance
Corp., each accounted for more than 10% of our overall bond
insurance coverage and collectively represented approximately
91% of our total coverage. Three of our bond insurers have had
their credit rating downgraded below investment grade by at
least one major rating agency.
Based upon currently available information, we expect that most
of our mortgage and bond insurance counterparties possess
adequate financial strength and capital to meet their
obligations to us for the near term. For our exposure to
mortgage insurers, we evaluate the recovery from insurance
policies for mortgage loans in our retained portfolio as well as
loans underlying our PCs and Structured Securities as part of
the estimate of our loan loss reserves. We evaluate the recovery
from primary monoline bond insurance policies as part of our
impairment analysis for our investments in securities. We
recognized significant impairment losses on certain of these
securities covered by bond insurance during the second and third
quarters of 2008. If a monoline bond insurer fails to meet its
obligations on securities in our retained portfolio, then the
fair values of our securities would further decline and result
in additional financial losses to us, which could have a
material adverse effect on our earnings, financial condition and
capital position. To date, none of our bond insurers has failed
to meet its obligations concerning any of our non-agency
securities.
Derivative
Portfolio
On an ongoing basis, we review the credit fundamentals of all of
our derivative counterparties to confirm that they continue to
meet our internal standards. We assign internal ratings, credit
capital and exposure limits to each counterparty based on
quantitative and qualitative analysis, which we update and
monitor on a regular basis. We conduct additional reviews when
market conditions dictate or events affecting an individual
counterparty occur. Six of our derivative counterparties each
accounted for greater than 10% and collectively accounted for
85% of our net uncollateralized exposure, excluding commitments,
at September 30, 2008. These counterparties included The
Royal Bank of Scotland, Bank of America, N.A., Barclays
Bank PLC, Citibank N.A., JP Morgan Chase Bank and
UBS AG, all rated AA, except The Royal Bank of Scotland and
UBS AG, which were rated AA− at November 10,
2008.
An entity affiliated with Lehman was our counterparty in certain
swap transactions. We terminated the transactions and requested
payment of the settlement amount, which the entity failed to
pay. We then exercised our right to seize collateral previously
posted by the entity in connection with the transactions. The
collateral was insufficient to cover the settlement amount,
leaving a shortfall of approximately $30 million, plus
interest. During the third quarter of 2008, we recorded a
$27 million reduction to our derivative assets which
represents an estimate of the probable loss on this transaction.
Other
Risks
As part of our role as trust administrator for the trusts
associated with our PCs and Structured Securities, we
periodically make short-term investments using funds of the
trusts. The amount we invest each month varies with the size of
interest and principal repayments on the related mortgage loans
underlying these securities. Our exposure to the trust and its
institutional counterparties for any investment losses is for
the full amount of these investments for the trust. We have also
provided liquidity guarantees to third-parties associated with
our issuance of multifamily housing revenue bonds for which we
have off-balance sheet exposure to credit risk. See
NOTE 2 FINANCIAL GUARANTEES AND
SECURITIZED INTEREST IN MORTGAGE RELATED ASSETS for more
information about our exposures from these activities.
NOTE 16:
SEGMENT REPORTING
Effective December 1, 2007, management determined that our
operations consist of three reportable segments. As discussed
below, we use Segment Earnings to measure and assess the
financial performance of our segments. Segment Earnings is
calculated for the segments by adjusting GAAP net income (loss)
for certain investment-related activities and credit
guarantee-related activities. The Segment Earnings measure is
provided to the chief operating decision maker. Prior to
December 1, 2007, we reported as a single segment using
GAAP-basis income. We have revised the financial information and
disclosures for prior periods to reflect the segment disclosures
as if they had been in effect throughout all periods reported.
We conduct our operations solely in the U.S. and its
territories. Therefore, we do not generate any revenue from
geographic locations outside of the U.S. and its
territories.
Segments
Our business operations include three reportable segments, which
are based on the type of business activities each
performs Investments, Single-family Guarantee and
Multifamily. Certain activities that are not part of a segment
are included in the All Other category, which primarily includes
certain unallocated corporate items, such as costs associated
with remediating our internal controls and near-term
restructuring costs, costs related to the resolution of certain
legal matters and certain income tax items. We evaluate our
performance and allocate resources based on Segment Earnings,
which we describe and present in this note, subject to the
conduct of our business under the direction of the Conservator.
See NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES Conservatorship for further
information about the conservatorship. We do not consider our
assets by segment when making these evaluations or allocations.
Investments
Segment
In this segment, we invest principally in mortgage-related
securities and single-family mortgage loans through our
mortgage-related investment portfolio. Segment Earnings consists
primarily of the returns on these investments, less the related
financing costs and administrative expenses. Within this
segment, our activities may include the purchase of mortgage
loans and mortgage-related securities with less attractive
investment returns and with high incremental risk in order to
achieve our affordable housing goals and subgoals. We maintain a
cash and a non-mortgage-related securities investment portfolio
in this segment to help manage our liquidity. We finance these
activities primarily through issuances of short- and long-term
debt in the public markets. Results also include derivative
transactions we enter into to help manage interest-rate and
other market risks associated with our debt financing and
mortgage-related investment portfolio.
Single-Family
Guarantee Segment
In this segment, we guarantee the payment of principal and
interest on single-family mortgage-related securities, including
those held in our retained portfolio, in exchange for management
and guarantee fees received over time and other up-front
compensation. Earnings for this segment consist of management
and guarantee fee revenues and trust management income less the
related credit costs (i.e., provision for credit losses)
and operating expenses. Also included is the interest earned on
assets held in our Investments segment related to single-family
guarantee activities, net of allocated funding costs.
Multifamily
Segment
In this segment, we purchase multifamily mortgages for our
retained portfolio and guarantee the payment of principal and
interest on multifamily mortgage-related securities and
mortgages underlying multifamily housing revenue bonds. These
activities support our mission to supply financing for
affordable rental housing. This segment includes certain equity
investments in various limited partnerships that sponsor low-
and moderate-income multifamily rental apartments, which benefit
from LIHTCs. Also included is the interest earned on assets held
in our Investments segment related to multifamily guarantee
activities, net of allocated funding costs.
All
Other
All Other includes corporate-level expenses not allocated to any
of our reportable segments such as costs associated with
remediating our internal controls and near-term restructuring as
well as costs related to the resolution of certain legal matters
and certain income tax items.
Segment
Allocations
Results of each reportable segment include directly attributable
revenues and expenses. Administrative expenses that are not
directly attributable to a segment are allocated ratably using
alternative, quantifiable measures such as headcount
distribution or segment usage if considered semi-direct or on a
pre-determined basis if considered indirect. Expenses not
allocated to segments consist primarily of costs associated with
remediating our internal controls and near-term restructuring
costs and are included in the All Other category. Net interest
income for each segment includes an allocation related to
investments and debt based on each segments assets and
off-balance sheet obligations. The LIHTC partnerships tax
benefit is allocated to the Multifamily segment. All remaining
taxes are calculated based on a 35% federal statutory rate as
applied to Segment Earnings.
Segment
Earnings
In managing our business, we present the operating performance
of our segments using Segment Earnings. Segment Earnings differs
significantly from and should not be used as a substitute for
GAAP net income (loss) before cumulative effect of change in
accounting principle or net income (loss) as determined in
accordance with GAAP. There are important limitations to using
Segment Earnings as a measure of our financial performance.
Among them, our regulatory capital measures are based on our
GAAP results, as is the need to obtain funding under the
Purchase Agreement. Segment Earnings adjusts for the effects of
certain gains and losses and mark-to-fair-value items, which
depending on market circumstances, can significantly affect,
positively or negatively, our GAAP results and have in recent
periods caused us to record significant GAAP net losses. GAAP
net losses will adversely impact our GAAP stockholders
equity (deficit), as well as our need for funding under the
Purchase Agreement, regardless of results reflected in Segment
Earnings. Also, our definition of Segment Earnings may differ
from similar measures used by other companies. However, we
believe that the presentation of Segment Earnings highlights the
results from ongoing operations and the underlying results of
the segments in a manner that is useful to the way we manage and
evaluate the performance of our business.
Segment Earnings present our results on an accrual basis as the
cash flows from our segments are earned over time. The objective
of Segment Earnings is to present our results in a manner more
consistent with our business models. The business model for our
investment activity is one where we generally buy and hold our
investments in mortgage-related assets for the long term, fund
our investments with debt and use derivatives to minimize
interest rate risk, thus generating net interest income in line
with our return on equity objectives. We believe it is
meaningful to measure the performance of our investment business
using long-term returns, not short-term value. The business
model for our credit guarantee activity is one where we are a
long-term guarantor in the conforming mortgage markets, manage
credit risk and generate guarantee and credit fees, net of
incurred credit losses. As a result of these business models, we
believe that this accrual-based metric is a meaningful way to
present our results as actual cash flows are realized, net of
credit losses and impairments. We believe Segment Earnings
provides us with a view of our financial results that is more
consistent with our business objectives and helps us better
evaluate the performance of our business, both from
period-to-period
and over the longer term.
As described below, Segment Earnings is calculated for the
segments by adjusting GAAP net income (loss) for certain
investment-related activities and credit guarantee-related
activities. Segment Earnings includes certain reclassifications
among income and expense categories that have no impact on net
income (loss) but provide us with a meaningful metric to assess
the performance of each segment and our company as a whole.
Investment
Activity-Related Adjustments
The most significant risk inherent in our investing activities
is interest-rate risk, including duration, convexity and
volatility. We actively manage these risks through asset
selection and structuring, financing asset purchases with a
broad range of both callable and non-callable debt and the use
of interest-rate derivatives, designed to economically hedge a
significant portion of our interest-rate exposure. Our
interest-rate derivatives include interest-rate swaps,
exchange-traded futures and both purchased and written options
(including swaptions). GAAP-basis earnings related to investment
activities of our Investments segment, and to a lesser extent,
our Multifamily segment, are subject to significant
period-to-period variability, which we believe is not
necessarily indicative of the risk management techniques that we
employ and the performance of these segments.
Our derivative instruments not in hedge accounting relationships
are adjusted to fair value under GAAP with resulting gains or
losses recorded in GAAP-basis income. Certain other assets are
also adjusted to fair value under GAAP with resulting gains or
losses recorded in GAAP-basis income. These assets consist
primarily of mortgage-related securities classified as trading
and mortgage-related securities classified as available-for-sale
when a decline in fair value of available-for-sale securities is
deemed to be other than temporary.
To help us assess the performance of our investment-related
activities, we make the following adjustments to earnings as
determined under GAAP. We believe this measure of performance,
which we call Segment Earnings, enhances the understanding of
operating performance for specific periods, as well as trends in
results over multiple periods, as this measure is consistent
with assessing our performance against our investment objectives
and the related risk-management activities.
|
|
|
|
|
Derivative and foreign-currency denominated debt-related
adjustments:
|
|
|
|
|
|
Fair value adjustments on derivative positions, recorded
pursuant to GAAP, are not recognized in Segment Earnings as
these positions economically hedge the volatility in fair value
of our investment activities and debt financing that are not
recognized in GAAP earnings.
|
|
|
|
Payments or receipts to terminate derivative positions are
amortized prospectively into Segment Earnings on a straight-line
basis over the associated term of the derivative instrument.
|
|
|
|
The accrual of periodic cash settlements of all derivatives not
in qualifying hedge accounting relationships is reclassified
from derivative gains (losses) into net interest income for
Segment Earnings as the interest component of the derivative is
used to economically hedge the interest associated with the debt.
|
|
|
|
Payments of up-front premiums (e.g., payments made to
third parties related to purchased swaptions) are amortized
prospectively on a straight-line basis into Segment Earnings
over the contractual life of the instrument. The up-front
payments, primarily for option premiums, are amortized to
reflect the periodic cost associated with the protection
provided by the option contract.
|
|
|
|
Foreign-currency translation gains and losses as well as the
unrealized fair value adjustments associated with
foreign-currency denominated debt along with the
foreign-currency derivatives gains and losses are excluded from
Segment Earnings because the fair value adjustments on the
foreign-currency swaps that we use to manage foreign-currency
exposure are also excluded through the fair value adjustment on
derivative positions as described above as the foreign-currency
exposure is economically hedged.
|
|
|
|
|
|
Investment sales, debt retirements and fair value-related
adjustments:
|
|
|
|
|
|
Gains and losses on investment sales and debt retirements that
are recognized at the time of the transaction pursuant to GAAP
are not immediately recognized in Segment Earnings. Gains and
losses on securities sold out of our retained portfolio and cash
and investments portfolio are amortized prospectively into
Segment Earnings on a straight-line basis over five years and
three years, respectively. Gains and losses on debt retirements
are amortized prospectively into Segment Earnings on a
straight-line basis over the original terms of the repurchased
debt.
|
|
|
|
Trading losses or impairments that reflect expected or realized
credit losses are recognized immediately pursuant to GAAP and in
Segment Earnings since they are not economically hedged. Fair
value adjustments to trading securities related to investments
that are economically hedged are not included in Segment
Earnings. Similarly, non-credit related security impairment
losses as well as GAAP-basis accretion income that may result
from impairment adjustments are not included in Segment Earnings.
|
|
|
|
|
|
Fully taxable-equivalent adjustment:
|
|
|
|
|
|
Interest income generated from tax-exempt investments is
adjusted in Segment Earnings to reflect its equivalent yield on
a fully taxable basis.
|
We fund our investment assets with debt and derivatives to
manage interest-rate risk as evidenced by our Portfolio Market
Value Sensitivity, or PMVS, and duration gap metrics. As a
result, in situations where we record gains and losses on
derivatives, securities or debt buybacks, these gains and losses
are offset by economic hedges that we do not mark-to-fair-value
for GAAP purposes. For example, when we realize a gain on the
sale of a security, the debt which is funding the security has
an embedded loss that is not recognized under GAAP, but instead
over time as we realize the interest expense on the debt. As a
result, in Segment Earnings, we defer and amortize the security
gain to interest income to match the interest expense on the
debt that funded the asset. Because of our risk management
strategies, we believe that amortizing gains or losses on
economically hedged positions in the same periods as the
offsetting gains or losses is a meaningful way to assess
performance of our investment activities.
We believe it is useful to measure our performance using
long-term returns, not on a short-term fair value basis. Fair
value fluctuations in the short-term are not an accurate
indication of long-term returns. In calculating Segment
Earnings, we make adjustments to our GAAP-basis results that are
designed to provide a more consistent view of our financial
results, which helps us better assess the performance of our
business segments, both from period-to-period and over the
longer term. The adjustments we make to present our Segment
Earnings are consistent with the financial objectives of our
investment activities and related hedging transactions and
provide us with a view of expected investment returns and
effectiveness of our risk management strategies that we believe
is useful in managing and evaluating our investment-related
activities. Although we seek to mitigate the interest-rate risk
inherent in our investment-related activities, our hedging and
portfolio management activities do not eliminate risk. We
believe that a relevant measure of performance should closely
reflect the economic impact of our risk management activities.
Thus, we amortize the impact of terminated derivatives, as well
as gains and losses on asset sales and debt retirements, into
Segment Earnings. Although our interest-rate risk and
asset/liability management processes ordinarily involve active
management of derivatives, asset sales and debt retirements, we
believe that Segment Earnings, although it differs significantly
from, and should not be used as a substitute for GAAP-basis
results, is indicative of the longer-term time horizon inherent
in our investment-related activities.
Credit
Guarantee Activity-Related Adjustments
Credit guarantee activities consist largely of our guarantee of
the payment of principal and interest on mortgages and
mortgage-related securities in exchange for management and
guarantee and other fees. Over the longer-term, earnings consist
almost entirely of our management and guarantee fee revenues,
which include management guarantee fees collected throughout the
life of the loan and up-front compensation received, trust
management fees less related credit costs (i.e.,
provision for credit losses) and operating expenses. Our measure
of Segment Earnings for these activities consists primarily of
these elements of revenue and expense. We believe this measure
is a relevant indicator of operating performance for specific
periods, as well as trends in results over multiple periods
because it more closely aligns with how we manage and evaluate
the performance of the credit guarantee business.
We purchase mortgages from sellers/servicers in order to
securitize and issue PCs and Structured Securities. See
ITEM 13. FINANCIAL STATEMENTS AND SUPPLEMENTARY
DATA AUDITED CONSOLIDATED FINANCIAL STATEMENTS AND
ACCOMPANYING NOTES NOTE 1: SUMMARY OF
SIGNIFICANT ACCOUNTING POLICIES in our Registration
Statement for a discussion of the accounting treatment of these
transactions. In addition to the components of earnings noted
above, GAAP-basis earnings for these activities include gains or
losses upon the execution of such transactions, subsequent fair
value adjustments to the guarantee asset and amortization of the
guarantee obligation.
Our credit-guarantee activities also include the purchase of
significantly past due mortgage loans from loan pools that
underlie our guarantees. Pursuant to GAAP, at the time of our
purchase the loans are recorded at fair value. To the extent the
adjustment of a purchased loan to fair value exceeds our own
estimate of the losses we will ultimately realize on the loan,
as reflected in our loan loss reserve, an additional loss is
recorded in our GAAP-basis results.
When we determine Segment Earnings for our credit
guarantee-related activities, the adjustments we apply to
earnings computed on a GAAP-basis include the following:
|
|
|
|
|
Amortization and valuation adjustments pertaining to the
guarantee asset and guarantee obligation are excluded from
Segment Earnings. Cash compensation exchanged at the time of
securitization, excluding
buy-up and
buy-down fees, is amortized into earnings.
|
|
|
|
The initial recognition of gains and losses recorded prior to
January 1, 2008 and in connection with the execution of
either securitization transactions that qualify as sales or
guarantor swap transactions, such as losses on certain credit
guarantees, is excluded from Segment Earnings.
|
|
|
|
Fair value adjustments recorded upon the purchase of delinquent
loans from pools that underlie our guarantees are excluded from
Segment Earnings. However, for Segment Earnings reporting, our
GAAP-basis loan loss provision is adjusted to reflect our own
estimate of the losses we will ultimately realize on such items.
|
While both GAAP-basis results and Segment Earnings reflect a
provision for credit losses determined in accordance with
SFAS 5, GAAP-basis results also include, as noted above,
measures of future cash flows (the guarantee asset) that are
recorded at fair value and, therefore, are subject to
significant adjustment from period-to-period as market
conditions, such as interest rates, change. Over the
longer-term, Segment Earnings and GAAP-basis income both capture
the aggregate cash flows associated with our guarantee-related
activities. Although Segment Earnings differs significantly
from, and should not be used as a substitute for GAAP-basis
income, we believe that excluding the impact of changes in the
fair value of expected future cash flows from our Segment
Earnings provides a meaningful measure of performance for a
given period as well as trends in performance over multiple
periods because it more closely aligns with how we manage and
evaluate the performance of our credit guarantee business.
Table 16.1 reconciles Segment Earnings (loss) to GAAP net
income (loss).
Table 16.1
Reconciliation of Segment Earnings (Loss) to GAAP Net
Income (Loss)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
|
|
|
|
|
(in millions)
|
|
|
|
|
|
Segment Earnings (loss) after taxes:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investments
|
|
$
|
(1,119
|
)
|
|
$
|
503
|
|
|
$
|
(213
|
)
|
|
$
|
1,588
|
|
Single-family Guarantee
|
|
|
(3,501
|
)
|
|
|
(483
|
)
|
|
|
(5,347
|
)
|
|
|
(130
|
)
|
Multifamily
|
|
|
135
|
|
|
|
83
|
|
|
|
351
|
|
|
|
292
|
|
All Other
|
|
|
(6
|
)
|
|
|
(45
|
)
|
|
|
134
|
|
|
|
(104
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Segment Earnings (loss), net of taxes
|
|
|
(4,491
|
)
|
|
|
58
|
|
|
|
(5,075
|
)
|
|
|
1,646
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reconciliation to GAAP net loss:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative- and foreign-currency denominated debt-related
adjustments
|
|
|
(1,292
|
)
|
|
|
(1,725
|
)
|
|
|
(1,959
|
)
|
|
|
(3,278
|
)
|
Credit guarantee-related adjustments
|
|
|
(1,076
|
)
|
|
|
(925
|
)
|
|
|
568
|
|
|
|
(596
|
)
|
Investment sales, debt retirements and fair value-related
adjustments
|
|
|
(7,717
|
)
|
|
|
659
|
|
|
|
(9,288
|
)
|
|
|
349
|
|
Fully taxable-equivalent adjustments
|
|
|
(103
|
)
|
|
|
(98
|
)
|
|
|
(318
|
)
|
|
|
(288
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total pre-tax adjustments
|
|
|
(10,188
|
)
|
|
|
(2,089
|
)
|
|
|
(10,997
|
)
|
|
|
(3,813
|
)
|
Tax-related
adjustments(1)
|
|
|
(10,616
|
)
|
|
|
793
|
|
|
|
(10,195
|
)
|
|
|
1,525
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total reconciling items, net of taxes
|
|
|
(20,804
|
)
|
|
|
(1,296
|
)
|
|
|
(21,192
|
)
|
|
|
(2,288
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
GAAP net loss
|
|
$
|
(25,295
|
)
|
|
$
|
(1,238
|
)
|
|
$
|
(26,267
|
)
|
|
$
|
(642
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
Includes a non-cash charge related
to the establishment of a partial valuation allowance against
our deferred tax assets of $14.3 billion that is not
included in Segment Earnings.
|
Table 16.2 presents certain financial information for our
reportable segments and All Other.
Table 16.2
Segment Earnings and Reconciliation to
GAAP Results
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30, 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
|
|
|
|
|
|
|
Net Interest
|
|
|
Management
|
|
|
Other
|
|
|
|
|
|
Provision
|
|
|
REO
|
|
|
|
|
|
Other
|
|
|
LIHTC
|
|
|
Tax
|
|
|
|
|
|
|
Income
|
|
|
and Guarantee
|
|
|
Non-Interest
|
|
|
Administrative
|
|
|
for Credit
|
|
|
Operations
|
|
|
LIHTC
|
|
|
Non-Interest
|
|
|
Partnerships
|
|
|
(Expense)
|
|
|
Net
|
|
|
|
(Expense)
|
|
|
Income
|
|
|
Income (Loss)
|
|
|
Expenses
|
|
|
Losses
|
|
|
Expense
|
|
|
Partnerships
|
|
|
Expense
|
|
|
Tax Benefit
|
|
|
Benefit
|
|
|
Income (Loss)
|
|
|
|
(in millions)
|
|
|
Investments
|
|
$
|
1,343
|
|
|
$
|
|
|
|
$
|
(1,871
|
)
|
|
$
|
(104
|
)
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
(1,089
|
)
|
|
$
|
|
|
|
$
|
602
|
|
|
$
|
(1,119
|
)
|
Single-family Guarantee
|
|
|
52
|
|
|
|
883
|
|
|
|
94
|
|
|
|
(164
|
)
|
|
|
(5,899
|
)
|
|
|
(333
|
)
|
|
|
|
|
|
|
(20
|
)
|
|
|
|
|
|
|
1,886
|
|
|
|
(3,501
|
)
|
Multifamily
|
|
|
120
|
|
|
|
20
|
|
|
|
16
|
|
|
|
(37
|
)
|
|
|
(14
|
)
|
|
|
|
|
|
|
(121
|
)
|
|
|
(3
|
)
|
|
|
147
|
|
|
|
7
|
|
|
|
135
|
|
All Other
|
|
|
|
|
|
|
|
|
|
|
(3
|
)
|
|
|
(3
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(3
|
)
|
|
|
|
|
|
|
3
|
|
|
|
(6
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Segment Earnings (loss), net of taxes
|
|
|
1,515
|
|
|
|
903
|
|
|
|
(1,764
|
)
|
|
|
(308
|
)
|
|
|
(5,913
|
)
|
|
|
(333
|
)
|
|
|
(121
|
)
|
|
|
(1,115
|
)
|
|
|
147
|
|
|
|
2,498
|
|
|
|
(4,491
|
)
|
Reconciliation to GAAP net income (loss):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative- and foreign-currency denominated debt-related
adjustments
|
|
|
8
|
|
|
|
|
|
|
|
(1,300
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,292
|
)
|
Credit guarantee-related adjustments
|
|
|
20
|
|
|
|
(124
|
)
|
|
|
(834
|
)
|
|
|
|
|
|
|
169
|
|
|
|
|
|
|
|
|
|
|
|
(307
|
)
|
|
|
|
|
|
|
|
|
|
|
(1,076
|
)
|
Investment sales, debt retirements and fair value-related
adjustments
|
|
|
140
|
|
|
|
|
|
|
|
(7,857
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(7,717
|
)
|
Fully taxable-equivalent adjustments
|
|
|
(103
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(103
|
)
|
Reclassifications(1)
|
|
|
264
|
|
|
|
53
|
|
|
|
(359
|
)
|
|
|
|
|
|
|
42
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tax-related
adjustments(2)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(10,616
|
)
|
|
|
(10,616
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total reconciling items, net of taxes
|
|
|
329
|
|
|
|
(71
|
)
|
|
|
(10,350
|
)
|
|
|
|
|
|
|
211
|
|
|
|
|
|
|
|
|
|
|
|
(307
|
)
|
|
|
|
|
|
|
(10,616
|
)
|
|
|
(20,804
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total per consolidated statement of income
|
|
$
|
1,844
|
|
|
$
|
832
|
|
|
$
|
(12,114
|
)
|
|
$
|
(308
|
)
|
|
$
|
(5,702
|
)
|
|
$
|
(333
|
)
|
|
$
|
(121
|
)
|
|
$
|
(1,422
|
)
|
|
$
|
147
|
|
|
$
|
(8,118
|
)
|
|
$
|
(25,295
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30, 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
|
|
|
|
|
|
|
Net Interest
|
|
|
Management
|
|
|
Other
|
|
|
|
|
|
Provision
|
|
|
REO
|
|
|
|
|
|
Other
|
|
|
LIHTC
|
|
|
Tax
|
|
|
|
|
|
|
Income
|
|
|
and Guarantee
|
|
|
Non-Interest
|
|
|
Administrative
|
|
|
for Credit
|
|
|
Operations
|
|
|
LIHTC
|
|
|
Non-Interest
|
|
|
Partnerships
|
|
|
(Expense)
|
|
|
Net
|
|
|
|
(Expense)
|
|
|
Income
|
|
|
Income (Loss)
|
|
|
Expenses
|
|
|
Losses
|
|
|
Expense
|
|
|
Partnerships
|
|
|
Expense
|
|
|
Tax Benefit
|
|
|
Benefit
|
|
|
Income (Loss)
|
|
|
|
(in millions)
|
|
|
Investments
|
|
$
|
3,123
|
|
|
$
|
|
|
|
$
|
(1,981
|
)
|
|
$
|
(365
|
)
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
(1,105
|
)
|
|
$
|
|
|
|
$
|
115
|
|
|
$
|
(213
|
)
|
Single-family Guarantee
|
|
|
187
|
|
|
|
2,618
|
|
|
|
301
|
|
|
|
(580
|
)
|
|
|
(9,878
|
)
|
|
|
(806
|
)
|
|
|
|
|
|
|
(68
|
)
|
|
|
|
|
|
|
2,879
|
|
|
|
(5,347
|
)
|
Multifamily
|
|
|
293
|
|
|
|
54
|
|
|
|
31
|
|
|
|
(135
|
)
|
|
|
(30
|
)
|
|
|
|
|
|
|
(346
|
)
|
|
|
(12
|
)
|
|
|
445
|
|
|
|
51
|
|
|
|
351
|
|
All Other
|
|
|
|
|
|
|
|
|
|
|
(2
|
)
|
|
|
(29
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(23
|
)
|
|
|
|
|
|
|
188
|
|
|
|
134
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Segment Earnings (loss), net of taxes
|
|
|
3,603
|
|
|
|
2,672
|
|
|
|
(1,651
|
)
|
|
|
(1,109
|
)
|
|
|
(9,908
|
)
|
|
|
(806
|
)
|
|
|
(346
|
)
|
|
|
(1,208
|
)
|
|
|
445
|
|
|
|
3,233
|
|
|
|
(5,075
|
)
|
Reconciliation to GAAP net income (loss):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative- and foreign-currency denominated debt-related
adjustments.
|
|
|
(484
|
)
|
|
|
|
|
|
|
(1,475
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,959
|
)
|
Credit guarantee-related adjustments
|
|
|
50
|
|
|
|
(441
|
)
|
|
|
1,224
|
|
|
|
|
|
|
|
321
|
|
|
|
|
|
|
|
|
|
|
|
(586
|
)
|
|
|
|
|
|
|
|
|
|
|
568
|
|
Investment sales, debt retirements and fair value-related
adjustments
|
|
|
316
|
|
|
|
|
|
|
|
(9,604
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(9,288
|
)
|
Fully taxable-equivalent adjustments
|
|
|
(318
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(318
|
)
|
Reclassifications(1)
|
|
|
1,004
|
|
|
|
147
|
|
|
|
(1,259
|
)
|
|
|
|
|
|
|
108
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tax-related
adjustments(2)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(10,195
|
)
|
|
|
(10,195
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total reconciling items, net of taxes
|
|
|
568
|
|
|
|
(294
|
)
|
|
|
(11,114
|
)
|
|
|
|
|
|
|
429
|
|
|
|
|
|
|
|
|
|
|
|
(586
|
)
|
|
|
|
|
|
|
(10,195
|
)
|
|
|
(21,192
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total per consolidated statement of income
|
|
$
|
4,171
|
|
|
$
|
2,378
|
|
|
$
|
(12,765
|
)
|
|
$
|
(1,109
|
)
|
|
$
|
(9,479
|
)
|
|
$
|
(806
|
)
|
|
$
|
(346
|
)
|
|
$
|
(1,794
|
)
|
|
$
|
445
|
|
|
$
|
(6,962
|
)
|
|
$
|
(26,267
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30, 2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
|
|
|
|
|
|
|
Net Interest
|
|
|
Management
|
|
|
Other
|
|
|
|
|
|
Provision
|
|
|
REO
|
|
|
|
|
|
Other
|
|
|
LIHTC
|
|
|
Tax
|
|
|
|
|
|
|
Income
|
|
|
and Guarantee
|
|
|
Non-Interest
|
|
|
Administrative
|
|
|
for Credit
|
|
|
Operations
|
|
|
LIHTC
|
|
|
Non-Interest
|
|
|
Partnerships
|
|
|
(Expense)
|
|
|
Net
|
|
|
|
(Expense)
|
|
|
Income
|
|
|
Income (Loss)
|
|
|
Expenses
|
|
|
Losses
|
|
|
Expense
|
|
|
Partnerships
|
|
|
Expense
|
|
|
Tax Benefit
|
|
|
Benefit
|
|
|
Income (Loss)
|
|
|
|
(in millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investments
|
|
$
|
909
|
|
|
$
|
|
|
|
$
|
(4
|
)
|
|
$
|
(125
|
)
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
(7
|
)
|
|
$
|
|
|
|
$
|
(270
|
)
|
|
$
|
503
|
|
Single-family Guarantee
|
|
|
181
|
|
|
|
738
|
|
|
|
27
|
|
|
|
(203
|
)
|
|
|
(1,417
|
)
|
|
|
(50
|
)
|
|
|
|
|
|
|
(18
|
)
|
|
|
|
|
|
|
259
|
|
|
|
(483
|
)
|
Multifamily
|
|
|
88
|
|
|
|
14
|
|
|
|
7
|
|
|
|
(48
|
)
|
|
|
(16
|
)
|
|
|
(1
|
)
|
|
|
(111
|
)
|
|
|
(4
|
)
|
|
|
129
|
|
|
|
25
|
|
|
|
83
|
|
All Other
|
|
|
1
|
|
|
|
|
|
|
|
5
|
|
|
|
(52
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(17
|
)
|
|
|
|
|
|
|
18
|
|
|
|
(45
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Segment Earnings (loss), net of taxes
|
|
|
1,179
|
|
|
|
752
|
|
|
|
35
|
|
|
|
(428
|
)
|
|
|
(1,433
|
)
|
|
|
(51
|
)
|
|
|
(111
|
)
|
|
|
(46
|
)
|
|
|
129
|
|
|
|
32
|
|
|
|
58
|
|
Reconciliation to GAAP net income (loss):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative- and foreign-currency denominated debt-related
adjustments.
|
|
|
(261
|
)
|
|
|
|
|
|
|
(1,464
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,725
|
)
|
Credit guarantee-related
adjustments(3)
|
|
|
11
|
|
|
|
(41
|
)
|
|
|
141
|
|
|
|
|
|
|
|
26
|
|
|
|
|
|
|
|
|
|
|
|
(1,062
|
)
|
|
|
|
|
|
|
|
|
|
|
(925
|
)
|
Investment sales, debt retirements and fair value-related
adjustments
|
|
|
84
|
|
|
|
|
|
|
|
575
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
659
|
|
Fully taxable-equivalent adjustments
|
|
|
(98
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(98
|
)
|
Reclassifications(1)(3)
|
|
|
(154
|
)
|
|
|
7
|
|
|
|
112
|
|
|
|
|
|
|
|
35
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tax-related adjustments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
793
|
|
|
|
793
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total reconciling items, net of taxes
|
|
|
(418
|
)
|
|
|
(34
|
)
|
|
|
(636
|
)
|
|
|
|
|
|
|
61
|
|
|
|
|
|
|
|
|
|
|
|
(1,062
|
)
|
|
|
|
|
|
|
793
|
|
|
|
(1,296
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total per consolidated statement of income
|
|
$
|
761
|
|
|
$
|
718
|
|
|
$
|
(601
|
)
|
|
$
|
(428
|
)
|
|
$
|
(1,372
|
)
|
|
$
|
(51
|
)
|
|
$
|
(111
|
)
|
|
$
|
(1,108
|
)
|
|
$
|
129
|
|
|
$
|
825
|
|
|
$
|
(1,238
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30, 2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
|
|
|
|
|
|
|
Net Interest
|
|
|
Management
|
|
|
Other
|
|
|
|
|
|
Provision
|
|
|
REO
|
|
|
|
|
|
Other
|
|
|
LIHTC
|
|
|
Tax
|
|
|
|
|
|
|
Income
|
|
|
and Guarantee
|
|
|
Non-Interest
|
|
|
Administrative
|
|
|
for Credit
|
|
|
Operations
|
|
|
LIHTC
|
|
|
Non-Interest
|
|
|
Partnerships
|
|
|
(Expense)
|
|
|
Net
|
|
|
|
(Expense)
|
|
|
Income
|
|
|
Income (Loss)
|
|
|
Expenses
|
|
|
Losses
|
|
|
Expense
|
|
|
Partnerships
|
|
|
Expense
|
|
|
Tax Benefit
|
|
|
Benefit
|
|
|
Income (Loss)
|
|
|
|
(in millions)
|
|
|
Investments
|
|
$
|
2,801
|
|
|
$
|
|
|
|
$
|
50
|
|
|
$
|
(386
|
)
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
(22
|
)
|
|
$
|
|
|
|
$
|
(855
|
)
|
|
$
|
1,588
|
|
Single-family Guarantee
|
|
|
528
|
|
|
|
2,119
|
|
|
|
77
|
|
|
|
(611
|
)
|
|
|
(2,175
|
)
|
|
|
(80
|
)
|
|
|
|
|
|
|
(58
|
)
|
|
|
|
|
|
|
70
|
|
|
|
(130
|
)
|
Multifamily
|
|
|
305
|
|
|
|
44
|
|
|
|
16
|
|
|
|
(142
|
)
|
|
|
(20
|
)
|
|
|
(1
|
)
|
|
|
(354
|
)
|
|
|
(16
|
)
|
|
|
402
|
|
|
|
58
|
|
|
|
292
|
|
All Other
|
|
|
|
|
|
|
|
|
|
|
7
|
|
|
|
(134
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(34
|
)
|
|
|
|
|
|
|
57
|
|
|
|
(104
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Segment Earnings (loss), net of taxes
|
|
|
3,634
|
|
|
|
2,163
|
|
|
|
150
|
|
|
|
(1,273
|
)
|
|
|
(2,195
|
)
|
|
|
(81
|
)
|
|
|
(354
|
)
|
|
|
(130
|
)
|
|
|
402
|
|
|
|
(670
|
)
|
|
|
1,646
|
|
Reconciliation to GAAP net income (loss):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative- and foreign-currency denominated debt-related
adjustments
|
|
|
(910
|
)
|
|
|
|
|
|
|
(2,368
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(3,278
|
)
|
Credit guarantee-related
adjustments(3)
|
|
|
24
|
|
|
|
(240
|
)
|
|
|
1,474
|
|
|
|
|
|
|
|
54
|
|
|
|
|
|
|
|
|
|
|
|
(1,908
|
)
|
|
|
|
|
|
|
|
|
|
|
(596
|
)
|
Investment sales, debt retirements and fair value-related
adjustments
|
|
|
198
|
|
|
|
|
|
|
|
151
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
349
|
|
Fully taxable-equivalent adjustments
|
|
|
(288
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(288
|
)
|
Reclassifications(1)(3)
|
|
|
(333
|
)
|
|
|
14
|
|
|
|
245
|
|
|
|
|
|
|
|
74
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tax-related adjustments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,525
|
|
|
|
1,525
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total reconciling items, net of taxes
|
|
|
(1,309
|
)
|
|
|
(226
|
)
|
|
|
(498
|
)
|
|
|
|
|
|
|
128
|
|
|
|
|
|
|
|
|
|
|
|
(1,908
|
)
|
|
|
|
|
|
|
1,525
|
|
|
|
(2,288
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total per consolidated statement of income
|
|
$
|
2,325
|
|
|
$
|
1,937
|
|
|
$
|
(348
|
)
|
|
$
|
(1,273
|
)
|
|
$
|
(2,067
|
)
|
|
$
|
(81
|
)
|
|
$
|
(354
|
)
|
|
$
|
(2,038
|
)
|
|
$
|
402
|
|
|
$
|
855
|
|
|
$
|
(642
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
Include the reclassification of:
(a) the accrual of periodic cash settlements of all
derivatives not in qualifying hedge accounting relationships
from other non-interest income (loss) to net interest income
(expense) within our Investments segment; (b) implied
management and guarantee fees from net interest income (expense)
to other non-interest income (loss) within our Single-family
Guarantee and Multifamily segments; (c) net
buy-up and
buy-down fees from management and guarantee income to net
interest income (expense) within the Investments segment;
(d) interest income foregone on impaired loans from net
interest income (expense) to provision for credit losses within
our Single-family Guarantee segment; and (e) certain hedged
interest benefit (cost) amounts related to trust management
income from other non-interest income (loss) to net interest
income (expense) within our Investments segment.
|
(2)
|
Includes a non-cash charge related
to the establishment of a partial valuation allowance against
our deferred tax assets of $14.3 billion that is not
included in Segment Earnings.
|
(3)
|
Certain prior period amounts within
net interest income and provision for credit losses previously
reported as a component of credit guarantee-related adjustments
have been reclassified to reclassifications to conform to the
current period presentation.
|
NOTE 17:
EARNINGS (LOSS) PER SHARE
We have participating securities related to options with
dividend equivalent rights that receive dividends as declared on
an equal basis with common shares, but are not obligated to
participate in undistributed net losses. Consequently, in
accordance with
EITF 03-6,
Participating Securities and the Two-Class Method
under FASB Statement No. 128, we use the
two-class method of computing earnings per share.
Basic earnings per common share are computed by dividing net
income (loss) available per common share by weighted average
common shares outstanding basic for the period. The
weighted average common shares outstanding basic
during the three and nine months ended September 30, 2008
includes the weighted average number of shares during the
periods that are associated with the warrant for our common
stock issued to Treasury as part of the Purchase Agreement since
it is unconditionally exercisable by the holder at a minimal
cost. See NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES Conservatorship for further
information.
Diluted earnings (loss) per share are computed as net income
(loss) available to common stockholders divided by weighted
average common shares outstanding diluted for the
period, which considers the effect of dilutive common equivalent
shares outstanding. For periods with net income the effect of
dilutive common equivalent shares outstanding includes:
(a) the weighted average shares related to stock options
(including the Employee Stock Purchase Plan); and (b) the
weighted average of non-vested restricted shares and non-vested
restricted stock units. Such items are included in the
calculation of weighted average common shares
outstanding diluted during periods of net income,
when the assumed conversion of the share equivalents has a
dilutive effect. Such items are excluded from the weighted
average common shares outstanding basic.
Table 17.1
Earnings (Loss) Per Common Share Basic and
Diluted
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
|
|
(dollars in millions,
|
|
|
|
except per share amounts)
|
|
|
Net loss
|
|
$
|
(25,295
|
)
|
|
$
|
(1,238
|
)
|
|
$
|
(26,267
|
)
|
|
$
|
(642
|
)
|
Preferred stock dividends and issuance costs on redeemed
preferred stock
|
|
|
(6
|
)
|
|
|
(102
|
)
|
|
|
(509
|
)
|
|
|
(292
|
)
|
Amounts allocated to participating security option
holders(1)
|
|
|
|
|
|
|
(2
|
)
|
|
|
(1
|
)
|
|
|
(4
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss applicable to common shareholders
basic(2)
|
|
$
|
(25,301
|
)
|
|
$
|
(1,342
|
)
|
|
$
|
(26,777
|
)
|
|
$
|
(938
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding
basic(3)
(in thousands)
|
|
|
1,301,430
|
|
|
|
647,377
|
|
|
|
866,472
|
|
|
|
653,825
|
|
Dilutive potential common shares (in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding diluted
(in thousands)
|
|
|
1,301,430
|
|
|
|
647,377
|
|
|
|
866,472
|
|
|
|
653,825
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic loss per common share
|
|
$
|
(19.44
|
)
|
|
$
|
(2.07
|
)
|
|
$
|
(30.90
|
)
|
|
$
|
(1.43
|
)
|
Diluted loss per common share
|
|
$
|
(19.44
|
)
|
|
$
|
(2.07
|
)
|
|
$
|
(30.90
|
)
|
|
$
|
(1.43
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Antidilutive potential common shares excluded from the
computation of dilutive potential common shares (in thousands)
|
|
|
11,462
|
|
|
|
8,609
|
|
|
|
10,611
|
|
|
|
8,580
|
|
|
|
(1)
|
Represents distributed earnings
during periods of net losses.
|
(2)
|
Includes distributed and
undistributed earnings to common shareholders.
|
(3)
|
Includes the weighted average
number of shares during the 2008 periods that are associated
with the warrant for our common stock issued to Treasury as part
of the Purchase Agreement. This warrant is included in shares
outstanding basic, since it is unconditionally
exercisable by the holder at a minimal cost of $.00001 per share.
|
NOTE 18:
MINORITY INTERESTS
The equity and net earnings attributable to the minority
stockholder interests in consolidated subsidiaries are reported
on our consolidated balance sheets as minority interests in
consolidated subsidiaries and on our consolidated statements of
income as minority interests in earnings of consolidated
subsidiaries. The majority of the balances in these accounts
relate to our two majority-owned REITs.
In February 1997, we formed two majority-owned REIT subsidiaries
funded through the issuance of common stock (99.9% of which is
held by us) and a total of $4.0 billion of perpetual,
step-down preferred stock issued to outside investors. The
dividend rate on the step-down preferred stock was 13.3% from
initial issuance through December 2006 (the initial term).
Beginning in 2007, the dividend rate on the step-down preferred
stock was reduced to 1.0%. Dividends on this preferred stock
accrue in arrears. The balance of the two step-down preferred
stock issuances as recorded within minority interests in
consolidated subsidiaries on our consolidated balance sheets
totaled $88 million and $167 million at
September 30, 2008 and December 31, 2007,
respectively. The preferred stock continues to be redeemable by
the REITs under certain circumstances described in the preferred
stock offering documents as a tax event redemption.
On September 19, 2008, the Director of FHFA, as
Conservator, advised us of FHFAs determination that no
further common or preferred stock dividends should be paid by
our REIT subsidiaries. FHFA specifically directed us, as the
controlling shareholder of both REIT subsidiaries, and the
boards of directors of both companies not to declare or pay any
dividends on the step-down preferred stock of the REITs until
FHFA directs otherwise. With regard to dividends on the step-
down preferred stock of the REITs held by third parties, there
were $2 million of dividends in arrears as of
September 30, 2008.
NOTE 19:
SUBSEQUENT EVENTS
At September 30, 2008, our liabilities exceeded our assets
under GAAP by $(13.7) billion while our stockholders
equity (deficit) totaled $(13.8) billion. The Director of
FHFA has submitted a request under the Purchase Agreement in the
amount of $13.8 billion to Treasury. We expect to receive
such funds by November 29, 2008. If the Director of FHFA
were to determine in writing that our assets are, and have been
for a period of 60 days, less than our obligations to
creditors and others, FHFA would be required to place us into
receivership. Upon receipt of this draw, the aggregate
liquidation preference of the senior preferred stock will
increase to $14.8 billion, and our annual aggregate
dividend payment to Treasury, at the 10% dividend rate, would
increase to $1.5 billion. If we are unable to pay such
dividend in cash in any quarter, the unpaid amount will be added
to the aggregate liquidation preference of the senior preferred
stock and the dividend rate on the unpaid liquidation preference
will increase to 12% per year.
PART
II OTHER INFORMATION
ITEM 1.
LEGAL PROCEEDINGS
We are involved as a party to a variety of legal proceedings
arising from time to time in the ordinary course of business.
See NOTE 11: LEGAL CONTINGENCIES to our
consolidated financial statements for more information regarding
our involvement as a party to various legal proceedings.
ITEM 1A.
RISK FACTORS
This
Form 10-Q
should be read together with the ITEM 1A. RISK
FACTORS section in our
Form 10-Q
for the quarter ended June 30, 2008 and our Registration
Statement, which describes various risks and uncertainties to
which we are or may become subject, and is supplemented by the
discussion below. These risks and uncertainties could, directly
or indirectly, adversely affect our business, financial
condition, results of operations, cash flows, strategies
and/or
prospects.
Recent
events fundamentally affecting the control, management and
operation of the company, including the establishment of the
conservatorship, are likely to affect our strategic objectives,
as well as our future financial condition and results of
operations.
We are under the control of FHFA, acting as Conservator, and
have a new chief executive officer and a new non-executive
chairman of our board of directors, appointed by the Director of
FHFA. In announcing the conservatorship, the Director of FHFA
stated his conclusion that Freddie Mac could not continue to
operate safely and soundly and fulfill its mission without
significant action. At the same time, the Secretary of Treasury
stated that because Freddie Mac is in conservatorship, it will
no longer be managed with a strategy to maximize common
shareholder returns. Further, FHFA, as Conservator, has directed
the company to focus on managing to a positive
stockholders equity. In view of the conservatorship and
the reasons stated by FHFA for its establishment, it is likely
that our business model and strategic objectives will change,
possibly significantly. Among other things, we could experience
significant changes in the size, growth and characteristics of
our guarantor and portfolio investment activities, and we could
materially change our operational objectives, including our
pricing strategy in our core mortgage guarantee business.
Accordingly, our strategic and operational focus going forward
may not be consistent with the investment objectives of our
shareholders. It is possible that we will make material changes
to our capital strategy and to our accounting policies, methods,
and estimates. It is also possible that the company could be
restructured and its statutory mission revised. In addition, we
are subject to limitations under the Purchase Agreement that
affect the amount of indebtedness we may incur, the size of our
retained portfolio and the circumstances in which we may pay
dividends, raise capital and pay down the liquidation preference
on the senior preferred stock. These changes and other factors
could have material effects on, among other things, our
portfolio growth, capital, credit losses, net interest income,
guarantee fee income, deferred tax assets, and loan loss
reserves, and could have a material adverse effect on our future
results of operations and financial condition. In light of the
significant uncertainty surrounding these changes, there can be
no assurances regarding the amount or timing of our future
profitability.
The
conservatorship is indefinite in duration and the timing,
conditions and likelihood of our emerging from conservatorship
are uncertain.
FHFA has stated that there is no exact time frame as to when the
conservatorship may end. Under the conservatorship, FHFA
controls Freddie Mac and has all rights, titles, powers and
privileges of Freddie Mac and of any stockholder, officer, or
director of Freddie Mac with respect to Freddie Mac and its
assets, as well as title to all books, records, and assets of
any other legal custodian of Freddie Mac. While the Director of
FHFA has stated that he intends to terminate the conservatorship
upon his determination that FHFAs plan to restore Freddie
Mac to a safe and solvent condition has been completed
successfully, there can be no assurance as to the timing of the
completion of such plan, that such plan will be able to be
completed successfully or that, upon successful completion
Freddie Mac will retain its current structure. Further, it is
possible that the company could be placed into receivership by
FHFA pursuant to its authority under the Reform Act, which would
require the company to be liquidated. Termination of the
conservatorship also requires Treasurys consent under the
Purchase Agreement. There can be no assurance as to when, and
under what circumstances, Treasury would give such consent.
In addition to the existing conservatorship, Treasury has the
ability to acquire a majority of our common stock by exercising
the warrant we issued to it pursuant to the Purchase Agreement.
Consequently, the company could effectively remain under the
control of the U.S. government even if the conservatorship was
ended and the voting rights of common stockholders restored. The
warrant held by Treasury and the senior status of the senior
preferred stock issued to Treasury under the Purchase Agreement,
if the senior 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.
Our
regulator is authorized to place us into receivership under
certain conditions, which would result in the liquidation of our
assets and terminate all rights and claims that our shareholders
and creditors may have against our assets or under our
charter.
Under the Regulatory Reform Act, FHFA must place us into
receivership if our assets are less than our obligations or if
we have not been paying our debts, in either case, for a period
of 60 days. In addition, we could be put in receivership at
the discretion of the Director of FHFA at any time for other
reasons, including conditions that FHFA has already asserted
existed at the time the Director of FHFA placed into
conservatorship. These include: a substantial dissipation of
assets or earnings due to unsafe or unsound practices; the
existence of an unsafe or unsound condition to transact
business; an inability to meet our obligations in the ordinary
course of business; a weakening of our condition due to unsafe
or unsound practices or conditions; critical
undercapitalization; the likelihood of losses that will deplete
substantially all of our capital; or by consent. A receivership
would terminate the conservatorship. In addition to the powers
FHFA has as Conservator, the appointment of FHFA as our receiver
would terminate all rights and claims that our shareholders and
creditors may have against our assets or under our charter
arising as a result of their status as shareholders or
creditors. Unlike a conservatorship, the purpose of which is to
conserve our assets and return us to a sound and solvent
condition, the purpose of a receivership is to liquidate our
assets and resolve claims against us. It should be noted that,
even in receivership, the ability to draw on Treasurys
funding commitment under the Purchase Agreement remains.
In the event of a liquidation of our assets, only after paying
the secured and unsecured claims of the company, the
administrative expenses of the receiver and the liquidation
preference of the senior preferred stock would any liquidation
proceeds be available to repay the liquidation preference on any
other series of preferred stock. Finally, only after the
liquidation preference on all series of preferred stock is
repaid would any liquidation proceeds be available for
distribution to the holders of our common stock. There can be no
assurance that there would be sufficient proceeds to repay the
liquidation preference of any series of our preferred stock or
to make any distribution to the holders of our common stock. To
the extent that we are placed in receivership and do not or
cannot fulfill our guarantee to the holders of our
mortgage-backed securities, they could become unsecured
creditors of our with respect claims made under our guarantee.
We
have a variety of different, and potentially conflicting,
objectives that may adversely affect our ability to maintain a
positive net worth and extend the period of time until we might
be able to return to profitability.
Based our charter, public statements from Treasury officials and
guidance from our Conservator, we have a variety of different,
and potentially conflicting, objectives. These objectives
include providing liquidity, stability and affordability in the
mortgage market; immediately providing additional assistance to
the struggling housing and mortgage markets; reducing the need
to draw funds from Treasury pursuant to the Purchase Agreement;
returning to long-term profitability; and protecting the
interests of the taxpayers. These objectives create conflicts in
strategic and day-to-day decision making that will likely lead
to less than optimal outcomes for one or more, or possibly all,
of these objectives.
Recent
events fundamentally affecting the management and operation of
the company, including the establishment of the conservatorship
and significant turnover in our senior management and board of
directors, increases our control risks.
With FHFA in a new role as our Conservator, a new Chief
Executive Officer and new non-executive Chairman of our Board of
Directors, the departure of eight members from our Board of
Directors, and other recent changes to our senior management,
including the departures of our former Chief Financial Officer
and our former Chief Business Officer and the appointment of an
Acting Chief Financial Officer and Acting Principal Accounting
Officer, control failures may arise from these changes and
transitions in the operation of the company and in board and
senior management oversight. The magnitude of these changes and
the short time interval in which they have occurred add to the
risks of an operational failure, including a failure in the
effective operation of the companys internal control over
financial reporting or its disclosure controls and procedures.
As discussed under CONTROLS AND PROCEDURES, we have
determined that we do not have effective independent audit
committee oversight of our financial reporting process, and we
have not yet updated the design of our disclosure controls and
procedures to take account of the conservatorship, which we
consider to be material weaknesses in internal control over
financial reporting. Such risks could result in material adverse
effects on the companys financial condition and results of
operations.
Legislative
and regulatory developments could materially affect our business
and prospects.
The future status and role of Freddie Mac could be affected by
legislative and regulatory action that alters the ownership,
structure and mission of the company. The Reform Act provides
FHFA with more expansive regulatory authority over us than was
held by OFHEO and the manner in which this authority will be
implemented currently is unclear. FHFA has stated that it
intends to work expeditiously on the many regulations needed to
implement the Reform Act, including with respect to capital
standards, prudential safety and soundness standards and
portfolio limits. These developments, such as the HOPE for
Homeowners Program, as well as future legislative actions, could
materially affect our operations, our ability or intent to
retain investments, the size and growth of our total mortgage
portfolio, our capital, future earnings, and the fair value of
our assets.
We expect that the financial services and mortgage industries
will face increased regulation, whether by legislation or
regulatory actions. Our business activities may be directly
affected by any such legislative and regulatory actions. We may
also be indirectly affected to the extent any such actions
affect the activities of banks, savings institutions, insurance
companies, securities dealers and other regulated entities that
constitute a significant part of our customer base or
counterparties.
If we
are unable to recruit and retain employees with the necessary
skills, our ability to conduct our business activities
effectively during the conservatorship may be adversely affected
and our ability to return to long-term profitability may be
impaired.
Our ability to recruit and retain employees with the necessary
skills to conduct our business may be adversely affected by the
conservatorship, the uncertainty regarding its duration and the
potential for future legislative or regulatory actions that
could significantly affect our status as a GSE and our role in
the secondary mortgage market. Although we have established a
retention program providing for cash awards that are designed to
help retain key employees, we are not currently in a position to
offer employees financial incentives that are equity-based and,
as a result of this and other factors relating to the
conservatorship that may affect our attractiveness as an
employer, we may be at a competitive disadvantage compared to
other potential employers. Accordingly, we may not be able to
retain or replace employees with key skills and our ability to
conduct our business effectively could be adversely affected.
The
Purchase Agreement (in particular additional large draws) could
adversely affect our future financial condition.
A variety of factors could materially affect the level and
volatility of our GAAP stockholders equity (deficit) in
future periods, requiring us to make additional draws under the
Purchase Agreement. Key factors include continued deterioration
in the housing market, which could increase credit expenses;
adverse changes in interest rates, the yield curve, implied
volatility or mortgage OAS, which could increase realized and
unrealized mark-to-market losses recorded in earnings or AOCI;
dividend obligations under the Purchase Agreement; establishment
of a valuation allowance against our remaining deferred tax
assets; changes in accounting practices or standards; or changes
in business practices resulting from legislative and regulatory
developments or mission fulfillment activities or as directed by
the Conservator.
At September 30, 2008, our remaining deferred tax assets,
which could be subject to a valuation allowance in future
periods, totaled $11.9 billion. In addition, during October
2008 mortgage spreads widened significantly, resulting in
additional mark-to-market losses included in stockholders
equity.
Given these factors, it is possible that we may make additional
large draws under the Purchase Agreement, which would result in
considerably higher dividends. The maximum aggregate amount that
may be funded under the Purchase Agreement is $100 billion
while dividends on the senior preferred stock issued under the
Purchase Agreement are cumulative and accrue at a rate of 10%
per year or 12% in any quarter in which dividends are not paid
in cash. In addition, beginning in 2010, we are obligated to pay
a quarterly commitment fee to Treasury in exchange for its
continued funding commitment under the Purchase Agreement. This
fee has not yet been established and could be substantial.
To the extent we are required to make large draws under the
Purchase Agreement, our dividend obligation on the senior
preferred stock would increase considerably. A substantial
increase in our dividend obligation to Treasury will continue
indefinitely and there is no assurance that we will be able to
pay that obligation in any future period. This combined with
potentially substantial commitment fees payable to Treasury and
limited flexibility to pay down capital draws could have a
significant adverse impact on our future financial condition.
The
conservatorship and investment by Treasury has had, and will
continue to have, a material adverse effect on our common and
preferred shareholders.
No voting rights during conservatorship. The
rights and powers of our shareholders are suspended during the
conservatorship. The conservatorship has no specified
termination date. During the conservatorship, our common
shareholders do not have the ability to elect directors or to
vote on other matters unless the conservator delegates this
authority to them.
Dividends have been eliminated. The
conservator has eliminated common and preferred stock dividends
(other than dividends on the senior preferred stock) during the
conservatorship. In addition, under the terms of the senior
preferred stock purchase agreement, dividends may not be paid to
common or preferred shareholders (other than the senior
preferred stock) without the consent of Treasury, regardless of
whether or not we are in conservatorship.
No longer managed to maximize shareholder
returns. According to a statement made by the
Secretary of the Treasury on September 7, 2008, because we
are in conservatorship, we will no longer be managed with
a strategy to maximize shareholder returns.
Liquidation preference of senior preferred
stock. The senior preferred stock ranks prior to
our common stock and all other series of our preferred stock, as
well as any capital stock we issue in the future, as to both
dividends and distributions upon liquidation. Accordingly, if we
are liquidated, the senior preferred stock is entitled to its
then-current liquidation
preference, plus any accrued but unpaid dividends, before any
distribution is made to the holders of our common stock or other
preferred stock. As of November 13, 2008, the liquidation
preference on the senior preferred stock was $1 billion,
but will increase to $14.8 billion following funding of our
draw under the Purchase Agreement. The liquidation preference
could increase substantially if we make additional draws under
the Purchase Agreement, if we do not pay dividends owed on the
senior preferred stock or if we do not pay the quarterly
commitment fee under the Purchase Agreement. If we are
liquidated, there may not be sufficient funds remaining after
payment of amounts to our creditors and to Treasury as holder of
the senior preferred stock to make any distribution to holders
of our common stock and other preferred stock.
Warrant may substantially dilute investment of current
shareholders. If Treasury exercises its warrant
to purchase shares of our common stock equal to 79.9% of the
total number of shares of our common stock outstanding on a
fully diluted basis, the ownership interest in the company of
our then existing common shareholders will be substantially
diluted. It is possible that private shareholders will not own
more than 20.1% of our total common equity for the duration of
our existence.
Market price and liquidity of our common and preferred stock
has substantially declined and may decline
further. After our entry into conservatorship,
the market price for our common stock declined substantially (to
a low of less than $1 per share at times) and the investments of
our common and preferred shareholders have lost substantial
value. Our common and preferred stock may never recover their
value and we do not know if or when we will pay dividends in the
future.
We do not know when or how the conservatorship will be
terminated, and if or when the rights and powers of our
shareholders, including the voting powers of our common
shareholders, will be restored. Moreover, even if the
conservatorship is terminated, by their terms, we remain subject
to the senior preferred stock purchase agreement, senior
preferred stock and warrant. For a description of additional
restrictions on and risks to our shareholders, see
Part I Item 2
MD&A Conservatorship and Treasury
Agreements Effect of Conservatorship and Treasury
Agreements on Stockholders.
Our
limited ability to access the debt capital markets, particularly
the long-term debt markets, has had, and may continue to have, a
material adverse effect on our ability to fund our operations
and on our costs, liquidity, business, results of operations,
financial condition and net worth.
Our ability to operate our business, meet our obligations and
generate net interest income depends primarily on our ability to
issue substantial amounts of debt frequently, with a variety of
maturities and call features and at attractive rates. Since
early July 2008, market concerns about our capital position and
the future of our business (including future profitability,
future structure, regulatory actions and agency status) and the
extent of U.S. government support for our business has
adversely affected our access to the unsecured debt markets,
particularly for long-term or callable debt.
Given our significantly limited ability to issue long-term debt,
we are likely to continue to need to meet these refinancing
requirements by issuing short-term debt, increasingly exposing
us to the risk of increasing interest rates, adverse credit
market conditions and insufficient demand for our debt to meet
our refinancing needs. Due to current financial market
conditions and current market concerns about our business, we
currently expect this trend toward dependence on short-term debt
and increased rollover risk to continue.
In addition, our increasing reliance on short-term debt,
combined with limitations on the availability of a sufficient
volume of reasonably priced derivative instruments to hedge that
short-term debt position, may have an adverse impact on our
duration and interest rate risk management positions. If we are
unable to issue both short- and long-term debt securities at
attractive rates and in amounts sufficient to operate our
business and meet our obligations, it would have a continuing
material adverse effect on our liquidity, earnings, financial
condition and net worth.
Market
uncertainty and volatility will continue to adversely affect our
business, profitability and results of operations.
The mortgage credit markets have continued to experience very
difficult conditions and volatility in 2008. The deteriorating
conditions in these markets have resulted in a decrease in
availability of corporate credit and liquidity within the
mortgage industry, causing disruptions to normal operations of
major mortgage originators, including some of our largest
customers, and have resulted in the insolvency, closure or
acquisition of a number of major financial institutions. These
conditions have also resulted in less liquidity, greater
volatility, widening of credit spreads and a lack of price
transparency and have contributed to further consolidation
within the financial services industry. We operate in these
markets and continue to be subject to potential adverse effects
on our financial condition and results of operations due to our
activities involving securities, mortgages, derivatives and
other mortgage commitments with our customers.
General
economic conditions may continue to contribute to further
deterioration in the credit quality of our total mortgage
portfolio and could continue to have an adverse impact on our
business.
During 2008, the U.S. housing market has continued to experience
significant adverse trends, including accelerating price
depreciation in some markets and rising delinquency and default
rates. These conditions have led to significant increases in our
loan delinquencies and credit losses and higher provisioning for
loan losses that have adversely affected our
earnings. We expect that housing prices will experience
significant further deterioration in the remainder of 2008
continuing into 2009 with further adverse effects on our
operating results, business and financial condition.
Furthermore, a recession or depression, either in the
U.S. as a whole or in specific regions of the country,
would be likely to significantly increase the level of
delinquencies and credit losses and adversely affect our
financial condition and results of operations.
Deteriorating
market conditions increase the risk that our models will produce
unreliable results.
We use market-based information as inputs to our models, which
are used to make operational decisions as well as derive
estimates for use in our financial reporting processes. The
turmoil in the housing and credit markets creates additional
risk regarding the reliability of our models, particularly since
we are making adjustments to our models in response to rapid
changes in economic conditions. This may increase the risk that
our models could produce unreliable results or estimates that
vary widely or prove to be inaccurate.
The
liquidity crisis in the credit markets may adversely impact the
cost of funding available to us. Our profitability may also be
adversely affected as we obtain funding under the Purchase
Agreement or the Lending Agreement.
The current liquidity crisis may increase our funding costs and
reduce our earnings. In addition, our funding costs will
increase upon further draws under the Purchase Agreement or if
we borrow under the Lending Agreement. In addition, our ability
to obtain funding in the public debt markets or by pledging
mortgage-related securities as collateral to commercial
institutions could cease or change rapidly and the cost of the
available funding could increase significantly due to changes in
market confidence, as well as demand for our obligations as
compared to those of other market participants.
Our
financial condition and results of operations and our ability to
return to long-term profitability may be affected by the nature,
extent and success of the actions taken by the
U.S. government pursuant to the Emergency Economic
Stabilization Act of 2008.
Conditions in the overall economy and the mortgage markets in
particular may be affected in both the short and long-term by
the implementation of the Emergency Economic Stabilization Act
of 2008, or EESA. The effect that the implementation of this law
may have on our business is uncertain. In addition, there can be
no assurance as to the actual impact that EESA will have on the
financial markets, including the extreme levels of volatility
and limited credit availability currently being experienced. The
failure of EESA to help stabilize the financial markets and a
continuation or worsening of current financial market conditions
could materially and adversely affect our business, financial
condition, results of operations, or access to the debt markets.
The
future growth of our retained portfolio is significantly limited
under the Purchase Agreement, which will result in greater
reliance on our guarantee activities to generate
profits.
Under the Purchase Agreement, our retained mortgage and
mortgage-backed securities portfolio as of December 31,
2009 may not exceed $850 billion, and must decline by
10% per year thereafter until it reaches $250 billion. In
addition, without the prior consent of Treasury, we may not
increase total indebtedness to more than 110% of our
indebtedness as of June 30, 2008 or become liable for any
subordinated indebtedness. These limitations will reduce the
earnings capacity of our retained portfolio business and require
us to place greater emphasis on our guarantee activities to
generate earnings.
Our
financial condition or results of operations may be adversely
affected by the financial distress of our derivative and other
counterparties.
Due to recent market events some of our derivative and other
counterparties have experienced various degrees of financial
distress, including liquidity constraints, credit downgrades and
bankruptcy. Our financial condition and results of operations
may be adversely affected by the financial distress of these
derivative and other counterparties in the event that they fail
to meet their obligations to us. For example, we may incur
losses if collateral held by us cannot be realized upon or is
liquidated at prices not sufficient to recover the full amount
of the loan or derivative exposure due us.
In addition, our ability to engage in routine derivatives,
funding and other transactions could be adversely affected by
the actions and commercial soundness of other financial
institutions. Financial services institutions are interrelated
as a result of trading, clearing, counterparty or other
relationships. As a result, defaults by, or even rumors or
questions about, one or more financial services institutions, or
the financial services industry generally, could lead to
market-wide disruptions in which it may be difficult for us to
find counterparties for such transactions.
Our
financial condition or results of operations may be adversely
affected if mortgage seller/servicers fail to perform their
obligations to service loans in our single-family mortgage
portfolio as well as to repurchase loans sold to us in breach of
representations and warranties.
Our seller/servicers have a significant role in servicing loans
in our single-family mortgage portfolio, which includes an
active role in our loss mitigation efforts. We also require
seller/servicers to make certain representations and warranties
regarding the loans they sell to us. If loans are sold to us in
breach of those representations and warranties, we have the
contractual right to require the seller/servicer to repurchase
those loans from us. Our institutional credit risk exposure to
our
seller/servicer counterparties includes the risk that they will
not perform their obligation to service loans in our
single-family mortgage portfolio as well as to repurchase loans,
which could adversely affect our financial condition or results
of operations. The risk of such a failure has increased as
deteriorating market conditions have affected the liquidity and
financial condition of some of our largest seller/servicers. The
inability to realize the anticipated benefits of our loss
mitigation plans, a lower realized rate of seller/servicer
repurchases or default rates and severity that exceed our
current projections could cause our losses to be significantly
higher than those currently estimated. See
PART I ITEM 2. MD&A
CREDIT RISKS Institutional Credit Risk
Mortgage Seller/Servicers for additional
information on our institutional credit risk related to our
mortgage seller/servicers and as a result of the recent
acquisitions of certain of our seller/servicers by third parties.
Mortgage
fraud could result in significant financial losses and harm to
our reputation.
We rely on representations and warranties by seller/servicers
about the characteristics of the single-family mortgage loans we
purchase and securitize, and we do not independently verify most
borrower information that is provided to us. This exposes us to
the risk that one or more of the parties involved in a
transaction (the borrower, seller, broker, appraiser, title
agent, lender or servicer) will engage in fraud by
misrepresenting facts about a mortgage loan. We may experience
significant financial losses and reputational damage as a result
of mortgage fraud.
We may
be required to establish a valuation allowance against the
remainder of our deferred tax assets, which could materially
affect our results of operations and capital position in the
future.
In the third quarter of 2008, we recorded a $14.1 billion
partial valuation allowance against our deferred tax assets. As
of September 30, 2008, our management determined that a
valuation allowance is not necessary for the remainder of our
deferred tax assets, which are dependent upon our intent and
ability to hold available-for-sale debt securities until the
recovery of any temporary unrealized losses. The future status
and role of Freddie Mac could be affected by legislative and
regulatory action that alters the ownership, structure and
mission of the company. The uncertainty of these developments,
as well as future legislative actions, could materially affect
our operations, including our ability or intent to retain
investments until the recovery of any temporary unrealized
losses. If future events significantly differ from our current
status, a valuation allowance may need to be established for the
remaining deferred tax assets.
The
price and trading liquidity of our common stock and our
NYSE-listed issues of preferred stock may be adversely affected
if those securities are delisted from the NYSE.
Our current compliance with NYSEs continued listing
standards is uncertain due to changes in our governance
structure resulting from imposition of the conservatorship. If
we do not satisfy the minimum share price, corporate governance
and other requirements of the continued listing standards of the
NYSE, our common stock and NYSE-listed issues of preferred stock
could be delisted from the NYSE. During the quarter ended
September 30, 2008, the closing price of our common stock
on the NYSE was below $1.00 on some days. If the average closing
price of our common stock price is below $1.00 over a
consecutive
30 trading-day
period and we are not able to cure the price deficiency within
the six-month period provided by the NYSEs rules, our
common stock could be delisted from the NYSE. The delisting of
our common stock or NYSE-listed preferred stock would require
any trading in these securities to occur in the over-the-counter
market and could adversely affect the market prices and
liquidity of the markets for these securities.
FHFA
has eliminated the payment of dividends on our common and
preferred stock (other than the senior preferred stock held by
Treasury).
It is unclear whether or when we may resume paying dividends on
our common and preferred stock (other than the senior preferred
stock). Under the conservatorship, FHFA has eliminated the
payment of dividends on our common and preferred stock (other
than the senior preferred stock), adversely affecting the prices
for these securities. In addition, under the Purchase Agreement,
we may not pay any such dividends unless we receive
Treasurys prior written consent.
ITEM 2.
UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF
PROCEEDS
Recent
Sales of Unregistered Securities
The securities we issue are exempted securities
under the Securities Act of 1933, as amended. As a result, we do
not file registration statements with the SEC with respect to
offerings of our securities.
In connection with the Purchase Agreement, we issued senior
preferred stock with an initial aggregate liquidation preference
of $1 billion to Treasury as of September 8, 2008. The
terms of the senior preferred stock are set forth in the
Certificate of Creation, Designation, Powers, Preferences,
Rights, Privileges, Qualifications, Limitations, Restrictions,
Terms and Conditions of Variable Liquidation Preference Senior
Preferred Stock.
In addition, pursuant to the Purchase Agreement, we issued to
Treasury on September 7, 2008 a warrant for the purchase of
our common stock representing 79.9% of our common stock
outstanding on a fully diluted basis at a price of $0.00001 per
share.
We issued the senior preferred stock and the warrant directly to
Treasury in consideration of the commitment set forth in the
Purchase Agreement, and for no additional consideration. The
issuance of the senior preferred stock and warrant to Treasury
had no impact on total stockholders equity (deficit) as
the offset was to additional paid-in capital. The senior
preferred stock and the warrant were issued without the
participation of an underwriter or placement agent.
Following the implementation of the conservatorship, we have
suspended the operation of our Employee Stock Purchase Plan, or
ESPP, and will no longer make grants under our 2004 Stock
Compensation Plan, or 2004 Employee Plan, or our 1995
Directors Stock Compensation Plan, as amended and
restated, or Directors Plan. Under the Purchase Agreement,
we cannot issue any new options, rights to purchase,
participations or other equity interests without Treasurys
prior approval. However, grants outstanding as of the date of
the Purchase Agreement remain in effect in accordance with their
terms. Prior to the implementation of the conservatorship, we
regularly provided stock compensation to our employees and
members of our board of directors under the ESPP, the 2004
Employee Plan and the Directors Plan. Prior to the
stockholder approval of the 2004 Employee Plan, employee
stock-based compensation was awarded in accordance with the
terms of the 1995 Stock Compensation Plan, or 1995 Employee
Plan. Although grants are no longer made under the 1995 Employee
Plan, we currently have awards outstanding under this plan. We
collectively refer to the 2004 Employee Plan and 1995 Employee
Plan as the Employee Plans.
During the three months ended September 30, 2008, no stock
options were granted or exercised under our Employee Plans or
Directors Plan. Under our ESPP, options to purchase
110,112 shares of common stock were exercised and no
options to purchase shares of common stock were granted during
the three months ended September 30, 2008. Further, for the
three months ended September 30, 2008, under the Employee
Plans and Directors Plan, 65,360 restricted stock units
were granted and restrictions lapsed on 49,527 restricted
stock units. See ITEM 13. FINANCIAL STATEMENTS AND
SUPPLEMENTARY DATA AUDITED CONSOLIDATED FINANCIAL
STATEMENTS AND ACCOMPANYING NOTES NOTE 10:
STOCK-BASED COMPENSATION in our Registration Statement for
more information.
Dividend
Restrictions
Our payment of dividends is subject to the following
restrictions:
Restrictions Relating to Conservatorship. As
described in MD&A EXECUTIVE
SUMMARY Legislative and Regulatory Matters, we
are currently under conservatorship. As Conservator, FHFA
announced on September 7, 2008 that we would not pay any
dividends on the common stock or on any series of preferred
stock (other than the senior preferred stock).
Restrictions Under Purchase Agreement. The
Purchase Agreement prohibits us from declaring or paying any
dividends on Freddie Mac equity securities without the prior
written consent of Treasury.
Restrictions Under Reform Act. Under the
Reform Act, FHFA has authority to prohibit capital
distributions, including payment of dividends, if we fail to
meet our capital requirements. If FHFA classifies us as
significantly undercapitalized, approval of the Director of FHFA
is required for any dividend payment. Under the Reform Act, we
are not permitted to make a capital distribution if, after
making the distribution, we would be undercapitalized, except
the Director of FHFA may permit us to repurchase shares if the
repurchase is made in connection with the issuance of additional
shares or obligations in at least an equivalent amount and will
reduce our financial obligations or otherwise improve our
financial condition.
Restrictions Relating to Subordinated
Debt. During any period in which we defer payment
of interest on qualifying subordinated debt, we may not declare
or pay dividends on, or redeem, purchase or acquire, our common
stock or preferred stock. Our qualifying subordinated debt
provides for the deferral of the payment of interest for up to
five years if either: (i) our core capital is below 125% of
our critical capital requirement; or (ii) our core capital
is below our statutory minimum capital requirement, and the U.S.
Secretary of the Treasury, acting on our request, exercises his
or her discretionary authority pursuant to
Section 306(c)
of our charter to purchase our debt obligations. In a
September 23, 2008 statement concerning the
conservatorship, the Director of FHFA stated that we would
continue to make interest and principal payments on our
subordinated debt, even if we fail to maintain required capital
levels. As a result, the terms of any our subordinated debt that
provides for us to defer payments of interest under certain
circumstances, including its failure to maintain specified
capital levels, are no longer applicable.
Restrictions Relating to Preferred
Stock. Payment of dividends on our common stock
is also subject to the prior payment of dividends on our
24 series of preferred stock and one series of senior
preferred stock, representing an aggregate of
464,170,000 shares and 1,000,000 shares, respectively,
outstanding as of September 30, 2008. Payment of dividends
on all outstanding preferred stock, other than the senior
preferred stock, is also subject to the prior payment of
dividends on the senior preferred stock. No quarterly dividends
were declared on the shares of our preferred stock outstanding
for the quarter ended September 30, 2008.
For a description of our capital requirements, refer to
ITEM 13. FINANCIAL STATEMENTS AND SUPPLEMENTARY
DATA AUDITED CONSOLIDATED FINANCIAL STATEMENTS AND
ACCOMPANYING NOTES NOTE 9: REGULATORY
CAPITAL in our Registration Statement.
Issuer
Purchases of Equity Securities
We did not repurchase any of our common or preferred stock
during the three months ended September 30, 2008.
Additionally, we do not currently have any outstanding
authorizations to repurchase common or preferred stock. Under
the Purchase Agreement, we cannot repurchase our common or
preferred stock without Treasurys prior consent, and we
may only purchase or redeem the senior preferred stock in
certain limited circumstances set forth in the Certificate of
Creation, Designation, Powers, Preferences, Rights, Privileges,
Qualifications, Limitations, Restrictions, Terms and Conditions
of Variable Liquidation Preference Senior Preferred Stock.
Information
about Certain Securities Issuances by Freddie Mac
Pursuant to SEC regulations, public companies are required to
disclose certain information when they incur a material direct
financial obligation or become directly or contingently liable
for a material obligation under an off-balance sheet
arrangement. The disclosure must be made in a current report on
Form 8-K
under Item 2.03 or, if the obligation is incurred in
connection with certain types of securities offerings, in
prospectuses for that offering that are filed with the SEC.
Freddie Macs securities offerings are exempted from SEC
registration requirements. As a result, we are not required to
and do not file registration statements or prospectuses with the
SEC with respect to our securities offerings. To comply with the
disclosure requirements of
Form 8-K
relating to the incurrence of material financial obligations, we
report our incurrence of these types of obligations either in
offering circulars (or supplements thereto) that we post on our
website or in a current report on
Form 8-K,
in accordance with a no-action letter we received
from the SEC Staff. In cases where the information is disclosed
in an offering circular posted on our website, the document will
be posted on our website within the same time period that a
prospectus for a non-exempt securities offering would be
required to be filed with the SEC.
The website address for disclosure about our debt securities is
www.freddiemac.com/debt. From this address, investors can access
the offering circular and related supplements for debt
securities offerings under Freddie Macs global debt
facility, including pricing supplements for individual issuances
of debt securities.
Disclosure about our off-balance sheet obligations pursuant to
some of the mortgage-related securities we issue can be found at
www.freddiemac.com/mbs. From this address, investors can access
information and documents about our mortgage-related securities,
including offering circulars and related offering circular
supplements.
We are providing our website addresses and the website address
of the SEC solely for your information. Information appearing on
our website or on the SECs website is not incorporated
into this
Form 10-Q.
ITEM 3.
DEFAULTS UPON SENIOR SECURITIES
On September 19, 2008, the Director of FHFA, acting as
Conservator of Freddie Mac, advised the company of FHFAs
determination that no further preferred stock dividends should
be paid by Freddie Macs REIT subsidiaries, Home Ownership
Funding Corporation and Home Ownership Funding
Corporation II. FHFA specifically directed Freddie Mac (as
the controlling shareholder of both companies) and the boards of
directors of both companies not to declare or pay any dividends
on the Step-Down Preferred Stock of the REITs until FHFA directs
otherwise. As a result, these companies are in arrears in the
payment of dividends with respect to the preferred stock. For
more information, see NOTE 18: MINORITY
INTERESTS to our consolidated financial statements.
ITEM 5.
OTHER INFORMATION
(a) Items Not Reported Under
Form 8-K
Not applicable.
(b) Changes to Procedures for Recommending Nominees to
Board of Directors
On September 6, 2008, the Director of FHFA appointed FHFA
as Conservator of Freddie Mac in accordance with the Reform Act
and the Federal Housing Enterprises Financial Safety and
Soundness Act of 1992. During the conservatorship, the
Conservator has all powers of the shareholders and Board of
Directors of Freddie Mac. As a result, Freddie Macs common
shareholders no longer have the ability to nominate or elect the
directors of Freddie Mac pursuant to the procedures outlined in
our bylaws. For more information on the conservatorship, refer
to MD&A EXECUTIVE SUMMARY
Legislative and Regulatory Matters.
ITEM 6.
EXHIBITS
The exhibits are listed in the Exhibit Index at the end of this
Form 10-Q.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned thereunto duly authorized.
Federal Home Loan Mortgage Corporation
David M. Moffett
Chief Executive Officer
Date: November 14, 2008
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By:
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/s/ David B.
Kellermann
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David B. Kellermann
Acting Chief Financial Officer
Date: November 14, 2008
EXHIBIT
INDEX
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Exhibit No.
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Description
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3
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.1
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3
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.2
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Bylaws of the Federal Home Loan Mortgage Corporation, as amended
and restated September 4, 2008 (incorporated by reference
to Exhibit 3.1 to the Registrants Current Report on
Form 8-K as
filed on September 4, 2008)
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4
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.1
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Eighth Amended and Restated Certificate of Designation, Powers,
Preferences, Rights, Privileges, Qualifications, Limitations,
Restrictions, Terms and Conditions of Voting Common Stock (no
par value per share), dated September 10, 2008
(incorporated by reference to Exhibit 4.1 to the
Registrants Current Report on Form
8-K as filed
on September 11, 2008)
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4
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.2
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Certificate of Creation, Designation, Powers, Preferences,
Rights, Privileges, Qualifications, Limitations, Restrictions,
Terms and Conditions of Variable Liquidation Preference Senior
Preferred Stock (par value $1.00 per share), dated
September 7, 2008 (incorporated by reference to
Exhibit 4.2 to the Registrants Current Report on Form
8-K as filed
on September 11, 2008)
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4
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.3
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10
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.1
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10
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.2
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Warrant to Purchase Common Stock, dated September 7, 2008
(incorporated by reference to Exhibit 10.2 to the
Registrants Current Report on
Form 8-K
as filed on September 11, 2008)
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10
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.3
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United States Department of the Treasury Lending Agreement dated
September 18, 2008 (incorporated by reference to
Exhibit 10.1 to the Registrants Current Report on
Form 8-K
as filed on September 23, 2008)
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10
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.4
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10
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.5
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10
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.6
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10
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.7
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12
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.1
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12
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.2
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31
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.1
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31
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.2
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32
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.1
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32
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.2
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*
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This exhibit is a management
contract or compensatory plan or arrangement.
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