Freddie Detailed
Freddie Detailed
Freddie Detailed
PART I
Item 1. Business . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ............................ 1
Item 1A. Risk Factors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ............................ 45
Item 1B. Unresolved Staff Comments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ............................ 77
Item 2. Properties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ............................ 77
Item 3. Legal Proceedings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ............................ 77
Item 4. Mine Safety Disclosures. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ............................ 77
PART II
Item 5. Market for Registrants Common Equity, Related Stockholder Matters and Issuer Purchases of Equity
Securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 78
Item 6. Selected Financial Data . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 81
Item 7. Managements Discussion and Analysis of Financial Condition and Results of Operations . . . . . . . . . . . 82
Mortgage Market and Economic Conditions, and Outlook . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 82
Consolidated Results of Operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 85
Consolidated Balance Sheets Analysis . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 108
Risk Management . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 127
Liquidity and Capital Resources . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 174
Fair Value Measurements and Analysis . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 182
Off-Balance Sheet Arrangements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 187
Contractual Obligations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 188
Critical Accounting Policies and Estimates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 189
Risk Management and Disclosure Commitments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 192
Item 7A. Quantitative and Qualitative Disclosures About Market Risk . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 194
Item 8. Financial Statements and Supplementary Data . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 199
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure . . . . . . . . . . . 315
Item 9A. Controls and Procedures. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 315
Item 9B. Other Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 318
PART III
Item 10. Directors, Executive Officers and Corporate Governance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 322
Item 11. Executive Compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 330
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters . . 358
Item 13. Certain Relationships and Related Transactions, and Director Independence . . . . . . . . . . . . . . . . . . . . . . 360
Item 14. Principal Accounting Fees and Services . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 365
PART IV
Item 15. Exhibits and Financial Statement Schedules . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 366
SIGNATURES. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 367
GLOSSARY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 368
EXHIBIT INDEX . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . E-1
i Freddie Mac
MD&A TABLE REFERENCE
Table Description Page
ii Freddie Mac
Table Description Page
iv Freddie Mac
PART I
This Annual Report on Form 10-K includes forward-looking statements that are based on current expectations and
are subject to significant risks and uncertainties. These forward-looking statements are made as of the date of this
Form 10-K and we undertake no obligation to update any forward-looking statement to reflect events or circumstances
after the date of this Form 10-K. Actual results might differ significantly from those described in or implied by such
statements due to various factors and uncertainties, including those described in BUSINESS Forward-Looking
Statements, and RISK FACTORS in this Form 10-K.
Throughout this Form 10-K, we use certain acronyms and terms that are defined in the GLOSSARY.
ITEM 1. BUSINESS
Conservatorship
We continue to operate under the direction of FHFA, as our Conservator. We are also subject to certain constraints on
our business activities imposed by Treasury due to the terms of, and Treasurys rights under, the Purchase Agreement. We
are dependent upon the continued support of Treasury and FHFA in order to continue operating our business. Our ability
to access funds from Treasury under the Purchase Agreement is critical to keeping us solvent and avoiding the
appointment of a receiver by FHFA under statutory mandatory receivership provisions. The conservatorship and related
matters have had a wide-ranging impact on us, including our regulatory supervision, management, business, financial
condition, and results of operations.
As our Conservator, FHFA succeeded to all rights, titles, powers and privileges of Freddie Mac, and of any
stockholder, officer or director thereof, with respect to the company and its assets. FHFA, as Conservator, has directed and
will continue to direct certain of our business activities and strategies. FHFA has delegated certain authority to our Board
of Directors to oversee, and to management to conduct, day-to-day operations. The directors serve on behalf of, and
exercise authority as directed by, the Conservator.
There is significant uncertainty as to whether or when we will emerge from conservatorship, as it has no specified
termination date, and as to what changes may occur to our business structure during or following conservatorship,
including whether we will continue to exist. We are not aware of any current plans of our Conservator to significantly
change our business model or capital structure in the near-term. Our future structure and role will be determined by the
Administration and Congress, and there are likely to be significant changes beyond the near-term. We have no ability to
predict the outcome of these deliberations.
A number of bills have been introduced in Congress that would bring about changes in the business model of Freddie
Mac and Fannie Mae. In addition, on February 11, 2011, the Administration delivered a report to Congress that lays out
the Administrations plan to reform the U.S. housing finance market, including options for structuring the governments
long-term role in a housing finance system in which the private sector is the dominant provider of mortgage credit. The
report recommends winding down Freddie Mac and Fannie Mae, and states that the Administration will work with FHFA
to determine the best way to responsibly reduce the role of Freddie Mac and Fannie Mae in the market and ultimately
wind down both institutions. The report states that these efforts must be undertaken at a deliberate pace, which takes into
account the impact that these changes will have on borrowers and the housing market.
The report states that the government is committed to ensuring that Freddie Mac and Fannie Mae have sufficient
capital to perform under any guarantees issued now or in the future and the ability to meet any of their debt obligations,
and further states that the Administration will not pursue policies or reforms in a way that would impair the ability of
Freddie Mac and Fannie Mae to honor their obligations. The report states the Administrations belief that under the
companies senior preferred stock purchase agreements with Treasury, there is sufficient funding to ensure the orderly and
deliberate wind down of Freddie Mac and Fannie Mae, as described in the Administrations plan.
On February 2, 2012, the Administration announced that it expects to provide more detail concerning approaches to
reform the U.S. housing finance market in the spring, and that it plans to begin exploring options for legislation more
intensively with Congress. On February 21, 2012, FHFA sent to Congress a strategic plan for the next phase of the
conservatorships of Freddie Mac and Fannie Mae. For more information on current legislative and regulatory initiatives,
see Regulation and Supervision Legislative and Regulatory Developments.
Our business objectives and strategies have in some cases been altered since we were placed into conservatorship,
and may continue to change. Based on our charter, other legislation, public statements from Treasury and FHFA officials,
and guidance and directives from our Conservator, we have a variety of different, and potentially competing, objectives.
Certain changes to our business objectives and strategies are designed to provide support for the mortgage market in a
1 Freddie Mac
manner that serves our public mission and other non-financial objectives. However, these changes to our business
objectives and strategies may not contribute to our profitability. Some of these changes increase our expenses, while
others require us to forego revenue opportunities in the near-term. In addition, the objectives set forth for us under our
charter and by our Conservator, as well as the restrictions on our business under the Purchase Agreement, have adversely
impacted and may continue to adversely impact our financial results, including our segment results. For example, our
current business objectives reflect, in part, direction given to us by the Conservator. These efforts are expected to help
homeowners and the mortgage market and may help to mitigate future credit losses. However, some of our activities are
expected to have an adverse impact on our near- and long-term financial results. The Conservator and Treasury also did
not authorize us to engage in certain business activities and transactions, including the purchase or sale of certain assets,
which we believe might have had a beneficial impact on our results of operations or financial condition, if executed. Our
inability to execute such transactions may adversely affect our profitability, and thus contribute to our need to draw
additional funds under the Purchase Agreement.
We had a net worth deficit of $146 million as of December 31, 2011, and, as a result, FHFA, as Conservator, will
submit a draw request, on our behalf, to Treasury under the Purchase Agreement in the amount of $146 million. Upon
funding of the draw request: (a) our aggregate liquidation preference on the senior preferred stock owned by Treasury will
increase to $72.3 billion; and (b) the corresponding annual cash dividend owed to Treasury will increase to $7.23 billion.
Under the Purchase Agreement, our ability to repay the liquidation preference of the senior preferred stock is limited and
we will not be able to do so for the foreseeable future, if at all. The aggregate liquidation preference of the senior
preferred stock and our related dividend obligations will increase further if we receive additional draws under the
Purchase Agreement or if any dividends or quarterly commitment fees payable under the Purchase Agreement are not paid
in cash. The amounts we are obligated to pay in dividends on the senior preferred stock are substantial and will have an
adverse impact on our financial position and net worth. We expect to make additional draws under the Purchase
Agreement in future periods.
Our annual dividend obligation on the senior preferred stock exceeds our annual historical earnings in all but one
period. Although we may experience period-to-period variability in earnings and comprehensive income, it is unlikely that
we will regularly generate net income or comprehensive income in excess of our annual dividends payable to Treasury. As
a result, there is significant uncertainty as to our long-term financial sustainability. Continued cash payment of senior
preferred dividends, combined with potentially substantial quarterly commitment fees payable to Treasury under the
Purchase Agreement, will have an adverse impact on our future financial condition and net worth. The payment of
dividends on our senior preferred stock in cash reduces our net worth. For periods in which our earnings and other
changes in equity do not result in positive net worth, draws under the Purchase Agreement effectively fund the cash
payment of senior preferred dividends to Treasury.
For more information on our current business objectives, see Executive Summary Our Primary Business
Objectives. For more information on the conservatorship and government support for our business, see Executive
Summary Government Support for Our Business and Conservatorship and Related Matters.
Executive Summary
You should read this Executive Summary in conjunction with our MD&A and consolidated financial statements and
related notes for the year ended December 31, 2011.
Overview
Freddie Mac is a GSE chartered by Congress in 1970 with a public mission to provide liquidity, stability, and
affordability to the U.S. housing market. We have maintained a consistent market presence since our inception, providing
mortgage liquidity in a wide range of economic environments. During the worst housing and financial crisis since the
Great Depression, we are working to support the recovery of the housing market and the nations economy by providing
essential liquidity to the mortgage market and helping to stem the rate of foreclosures. We believe our actions are helping
communities across the country by providing Americas families with access to mortgage funding at low rates while
helping distressed borrowers keep their homes and avoid foreclosure, where feasible.
(1) Based on actions completed with borrowers for loans within our single-family credit guarantee portfolio. Excludes those modification, repayment,
and forbearance activities for which the borrower has started the required process, but the actions have not been made permanent or effective, such
as loans in modification trial periods. Also excludes certain loan workouts where our single-family seller/servicers have executed agreements in the
current or prior periods, but these have not been incorporated into certain of our operational systems, due to delays in processing. These categories
are not mutually exclusive and a loan in one category may also be included within another category in the same period.
(2) Excludes loans with long-term forbearance under a completed loan modification. Many borrowers complete a short-term forbearance agreement
before another loan workout is pursued or completed. We only report forbearance activity for a single loan once during each quarterly period;
however, a single loan may be included under separate forbearance agreements in separate periods.
We continue to directly assist troubled borrowers through targeted outreach, loan workouts, and other efforts.
Highlights of these efforts include the following:
We completed 208,274 single-family loan workouts during 2011, including 109,174 loan modifications (HAMP and
non-HAMP) and 46,163 short sales and deed in lieu of foreclosure transactions.
Based on information provided by the MHA Program administrator, our servicers had completed 152,519 loan
modifications under HAMP from the introduction of the initiative in 2009 through December 31, 2011 and, as of
December 31, 2011, 12,802 loans were in HAMP trial periods (this figure only includes borrowers who made at
least their first payment under the trial period).
4 Freddie Mac
On October 24, 2011, FHFA, Freddie Mac, and Fannie Mae announced a series of FHFA-directed changes to HARP
in an effort to allow more borrowers to participate in the program and benefit from refinancing their home mortgages. The
Acting Director of FHFA stated that the goal of pursuing these changes is to create refinancing opportunities for more
borrowers whose mortgages are owned or guaranteed by Freddie Mac and Fannie Mae while reducing risk for these
entities and bringing a measure of stability to housing markets. The revisions to HARP enable us to expand the assistance
we provide to homeowners by making their mortgage payments more affordable through one or more of the following
ways: (a) a reduction in payment; (b) a reduction in rate; (c) movement to a more stable mortgage product type (i.e., from
an adjustable-rate mortgage to a fixed-rate mortgage); or (d) a reduction in amortization term.
In November 2011, Freddie Mac and Fannie Mae issued guidance with operational details about the HARP changes
to mortgage lenders and servicers after receiving information from FHFA about the fees that we may charge associated
with the refinancing program. Since industry participation in HARP is not mandatory, we anticipate that implementation
schedules will vary as individual lenders, mortgage insurers, and other market participants modify their processes. It is too
early to estimate how many eligible borrowers are likely to refinance under the revised program.
For more information about HAMP, our new non-HAMP standard loan modification, other loan workout programs,
HARP and our relief refinance mortgage initiative, and other initiatives to help eligible borrowers keep their homes or
avoid foreclosure, see MD&A RISK MANAGEMENT Credit Risk Mortgage Credit Risk Single-Family
Mortgage Credit Risk Single-Family Loan Workouts and the MHA Program.
Year of Origination
2011 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14% 755 70% 70% 5% 0.06%
2010 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19 754 70 71 6 0.25
2009 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18 753 69 72 6 0.52
2008 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7 725 74 92 36 5.65
2007 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10 705 77 113 61 11.58
2006 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7 710 75 112 56 10.82
2005 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8 716 73 96 39 6.51
2004 and prior . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17 719 71 61 9 2.83
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 100% 735 72 80 20 3.58
(1) Based on the loans remaining in the portfolio at December 31, 2011, which totaled $1,746 billion, rather than all loans originally guaranteed by us
and originated in the respective year.
(2) Based on FICO score of the borrower as of the date of loan origination and may not be indicative of the borrowers creditworthiness at
December 31, 2011. Excludes approximately $10 billion in UPB of loans where the FICO scores at origination were not available at December 31,
2011.
(3) See endnote (4) to Table 45 Characteristics of the Single-Family Credit Guarantee Portfolio for information on our calculation of original LTV
ratios.
(4) We estimate current market values by adjusting the value of the property at origination based on changes in the market value of homes in the same
geographical area since origination. See endnote (5) of Table 45 Characteristics of the Single-Family Credit Guarantee Portfolio for additional
information on our calculation of current LTV ratios.
(5) Calculated as a percentage of the aggregate UPB of loans with LTV ratios greater than 100% in relation to the total UPB of loans in the category.
(6) See MD&A RISK MANAGEMENT Credit Risk Mortgage Credit Risk Single-family Mortgage Credit Risk Delinquencies for further
information about our reported serious delinquency rates.
Mortgages originated after 2008, including relief refinance mortgages, represent a growing proportion of our single-
family credit guarantee portfolio. The UPB of loans originated in 2005 to 2008 within our single-family credit guarantee
portfolio continues to decline due to liquidations, which include prepayments, refinancing activity, foreclosure alternatives,
and foreclosure transfers. We currently expect that, over time, the replacement (other than through relief refinance
activity) of the 2005 to 2008 vintages, which have a higher composition of loans with higher-risk characteristics, should
positively impact the serious delinquency rates and credit-related expenses of our single-family credit guarantee portfolio.
However, the rate at which this replacement is occurring slowed beginning in 2010, due primarily to a decline in the
volume of home purchase mortgage originations and delays in the foreclosure process. See Table 19 Segment
Earnings Composition Single-Family Guarantee Segment for an analysis of the contribution to Segment Earnings
(loss) by loan origination year.
Payment status
One month past due . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.02% 1.94% 1.92% 1.75% 2.07%
Two months past due . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 0.70% 0.70% 0.67% 0.65% 0.78%
Seriously delinquent(1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.58% 3.51% 3.50% 3.63% 3.84%
Non-performing loans (in millions)(2) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $120,514 $119,081 $114,819 $115,083 $115,478
Single-family loan loss reserve (in millions)(3) . . . . . . . . . . . . . . . . . . . . . . . . $ 38,916 $ 39,088 $ 38,390 $ 38,558 $ 39,098
REO inventory (in properties) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 60,535 59,596 60,599 65,159 72,079
REO assets, net carrying value (in millions) . . . . . . . . . . . . . . . . . . . . . . . . . . $ 5,548 $ 5,539 $ 5,834 $ 6,261 $ 6,961
For the Three Months Ended
12/31/2011 9/30/2011 6/30/2011 3/31/2011 12/31/2010
(in units, unless noted)
Seriously delinquent loan additions(1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 95,661 93,850 87,813 97,646 113,235
Loan modifications(4) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19,048 23,919 31,049 35,158 37,203
Foreclosure starts ratio(5) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 0.54% 0.56% 0.55% 0.58% 0.73%
REO acquisitions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24,758 24,378 24,788 24,707 23,771
REO disposition severity ratio:(6)
California . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 44.6% 45.5% 44.9% 44.5% 43.9%
Arizona . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 46.7% 48.7% 51.3% 50.8% 49.5%
Florida . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 50.1% 53.3% 52.7% 54.8% 53.0%
Nevada . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 54.2% 53.2% 55.4% 53.1% 53.1%
Illinois . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 51.2% 50.5% 49.4% 49.5% 49.4%
Total U.S. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41.2% 41.9% 41.7% 43.0% 41.3%
Single-family credit losses (in millions) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 3,209 $ 3,440 $ 3,106 $ 3,226 $ 3,086
(1) See MD&A RISK MANAGEMENT Credit Risk Mortgage Credit Risk Single-Family Mortgage Credit Risk Delinquencies for
further information about our reported serious delinquency rates.
(2) Consists of the UPB of loans in our single-family credit guarantee portfolio that have undergone a TDR or that are seriously delinquent. As of
December 31, 2011 and December 31, 2010, approximately $44.4 billion and $26.6 billion in UPB of TDR loans, respectively, were no longer
seriously delinquent.
(3) Consists of the combination of: (a) our allowance for loan losses on mortgage loans held for investment; and (b) our reserve for guarantee losses
associated with non-consolidated single-family mortgage securitization trusts and other guarantee commitments.
(4) Represents the number of completed modifications under agreement with the borrower during the quarter. Excludes forbearance agreements,
repayment plans, and loans in modification trial periods.
(5) 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
single-family credit guarantee portfolio at the end of the quarter. Excludes Other Guarantee Transactions and mortgages covered under other
guarantee commitments.
(6) States presented represent the five states where our credit losses have been greatest during 2011. Calculated as the amount of our losses recorded on
disposition of REO properties during the respective quarterly period, excluding those subject to repurchase requests made to our seller/servicers,
divided by the aggregate UPB of the related loans. The amount of losses recognized on disposition of the properties is equal to the amount by which
the UPB of the loans exceeds the amount of sales proceeds from disposition of the properties. Excludes sales commissions and other expenses, such
as property maintenance and costs, as well as applicable recoveries from credit enhancements, such as mortgage insurance.
In discussing our credit performance, we often use the terms credit losses and credit-related expenses. These
terms are significantly different. Our credit losses consist of charge-offs and REO operations income (expense), while
our credit-related expenses consist of our provision for credit losses and REO operations income (expense).
Since the beginning of 2008, on an aggregate basis, we have recorded provision for credit losses associated with
single-family loans of approximately $73.2 billion, and have recorded an additional $4.3 billion in losses on loans
purchased from PC trusts, net of recoveries. The majority of these losses are associated with loans originated in 2005
through 2008. While loans originated in 2005 through 2008 will give rise to additional credit losses that have not yet been
incurred and, thus, have not yet been provisioned for, we believe that, as of December 31, 2011, we have reserved for or
charged-off the majority of the total expected credit losses for these loans. Nevertheless, various factors, such as continued
high unemployment rates or further declines in home prices, could require us to provide for losses on these loans beyond
our current expectations.
The quarterly number of seriously delinquent loan additions declined during the first half of 2011; however, we
experienced a small increase in the quarterly number of seriously delinquent loan additions during the second half of
2011. As of December 31, 2011 and December 31, 2010, the percentage of seriously delinquent loans that have been
delinquent for more than six months was 70% and 66%, respectively. Several factors, including delays in the foreclosure
process, have resulted in loans remaining in serious delinquency for longer periods than prior to 2008, particularly in
states that require a judicial foreclosure process. The credit losses and loan loss reserves associated with our single-family
credit guarantee portfolio remained elevated in 2011, due in part to:
Losses associated with the continued high volume of foreclosures and foreclosure alternatives. These actions relate
to the continued efforts of our servicers to resolve our large inventory of seriously delinquent loans. Due to the
length of time necessary for servicers either to complete the foreclosure process or pursue foreclosure alternatives
8 Freddie Mac
on seriously delinquent loans in our portfolio, we expect our credit losses will continue to remain high even if the
volume of new serious delinquencies declines.
Continued negative impact of certain loan groups within the single-family credit guarantee portfolio, such as those
underwritten with certain lower documentation standards and interest-only loans, as well as other 2005 through
2008 vintage loans. These groups continue to be large contributors to our credit losses.
Cumulative declines in national home prices during the last five years, based on our own index. As a result of
these price declines, approximately 20% of loans in our single-family credit guarantee portfolio, based on UPB,
had estimated current LTV ratios in excess of 100% (underwater loans) as of December 31, 2011.
Deterioration in the financial condition of many of our mortgage insurers, which reduced our estimates of expected
recoveries from these counterparties.
Some of our loss mitigation activities create fluctuations in our delinquency statistics. For example, loans that we
report as seriously delinquent before they enter a modification trial period continue to be reported as seriously delinquent
until the modifications become effective and the loans are removed from delinquent status by our servicers. See
MD&A RISK MANAGEMENT Credit Risk Mortgage Credit Risk Single-family Mortgage Credit Risk
Credit Performance Delinquencies for further information about factors affecting our reported delinquency rates.
Our Business
We conduct business in the U.S. residential mortgage market and the global securities market, subject to the direction
of our Conservator, FHFA, and under regulatory supervision of FHFA, the SEC, HUD, and Treasury. The size of the
U.S. residential mortgage market is affected by many factors, including changes in interest rates, home ownership rates,
home prices, the supply of housing and lender preferences regarding credit risk and borrower preferences regarding
mortgage debt. The amount of residential mortgage debt available for us to purchase and the mix of available loan
products are also affected by several factors, including the volume of mortgages meeting the requirements of our charter
(which is affected by changes in the conforming loan limit determined by FHFA), our own preference for credit risk
reflected in our purchase standards and the mortgage purchase and securitization activity of other financial institutions.
We conduct our operations solely in the U.S. and its territories, and do not generate any revenue from or have assets in
geographic locations outside of the U.S. and its territories.
Our charter forms the framework for our business activities, the initiatives we bring to market and the services we
provide to the nations residential housing and mortgage industries. Our charter also determines the types of mortgage
loans that we are permitted to purchase. Our statutory mission as defined in our charter is to:
provide stability in the secondary market for residential mortgages;
respond appropriately to the private capital market;
provide ongoing assistance to the secondary market for residential mortgages (including activities relating to
mortgages for low- and moderate-income families, involving a reasonable economic return that may be less than
the return earned on other activities); and
promote access to mortgage credit throughout the U.S. (including central cities, rural areas, and other underserved
areas).
10 Freddie Mac
Our charter does not permit us to originate mortgage loans or lend money directly to consumers in the primary
mortgage market. We provide liquidity, stability and affordability to the U.S. housing market primarily by providing our
credit guarantee for residential mortgages originated by mortgage lenders and investing in mortgage loans and mortgage-
related securities. We use mortgage securitization as an integral part of our activities. Mortgage securitization is a process
by which we purchase mortgage loans that lenders originate, and pool these loans into guaranteed mortgage securities that
are sold in global capital markets, generating proceeds that support future loan origination activity by lenders. The
primary Freddie Mac guaranteed mortgage-related security is the single-class PC. We also aggregate and resecuritize
mortgage-related securities that are issued by us, other GSEs, HFAs, or private (non-agency) entities, and issue other
single-class and multiclass mortgage-related securities to third-party investors. We also enter into certain other guarantee
commitments for mortgage loans, HFA bonds under the HFA initiative, and multifamily housing revenue bonds held by
third parties.
Our charter limits our purchases of single-family loans to the conforming loan market. The conforming loan market
is defined by loans originated with UPBs at or below limits determined annually based on changes in FHFAs housing
price index, a method established and maintained by FHFA for determining the national average single-family home price.
Since 2006, the base conforming loan limit for a one-family residence has been set at $417,000, and higher limits have
been established in certain high-cost areas (currently, up to $625,500 for a one-family residence). Higher limits also
apply to two- to four-family residences and for mortgages secured by properties in Alaska, Guam, Hawaii, and the
U.S. Virgin Islands.
Beginning in 2008, pursuant to a series of laws, our loan limits in certain high-cost areas were increased temporarily
above the limits that otherwise would have been applicable (up to $729,750 for a one-family residence). The latest of
these increases expired on September 30, 2011. We refer to loans that we have purchased with UPB exceeding the base
conforming loan limit (i.e., $417,000) as conforming jumbo loans.
Our charter generally prohibits us from purchasing first-lien single-family mortgages if the outstanding UPB of the
mortgage at the time of our purchase exceeds 80% of the value of the property securing the mortgage unless we have one
of the following credit protections:
mortgage insurance from a mortgage insurer that we determine is qualified on the portion of the UPB of the
mortgage that exceeds 80%;
a sellers agreement to repurchase or replace any mortgage that has defaulted; or
retention by the seller of at least a 10% participation interest in the mortgage.
Under our charter, our mortgage purchase operations are confined, so far as practicable, to mortgages that we deem
to be of such quality, type and class as to meet generally the purchase standards of other private institutional mortgage
investors. This is a general marketability standard.
Our charter requirement for credit protection on mortgages with LTV ratios greater than 80% does not apply to
multifamily mortgages or to mortgages that have the benefit of any guarantee, insurance or other obligation by the U.S. or
any of its agencies or instrumentalities (e.g., the FHA, the VA or the USDA Rural Development).
As part of HARP under the MHA Program, we may purchase single-family mortgages that refinance borrowers
whose mortgages we currently own or guarantee without obtaining additional credit enhancement in excess of that already
in place for any such loan, even if the LTV ratio of the new loan is above 80%.
Our Customers
Our customers are predominantly lenders in the primary mortgage market that originate mortgages for homeowners.
These lenders include mortgage banking companies, commercial banks, savings banks, community banks, credit unions,
HFAs, and savings and loan associations.
We acquire a significant portion of our mortgages from several large lenders. These lenders are among the largest
mortgage loan originators in the U.S. Since 2007, the mortgage industry has consolidated significantly and a smaller
number of large lenders originate most single-family mortgages. As a result, mortgage origination volume during 2011
was concentrated in a smaller number of institutions. During 2011, two mortgage lenders (Wells Fargo Bank, N.A. and
JPMorgan Chase Bank, N.A.) each accounted for more than 10% of our single-family mortgage purchase volume and
collectively accounted for approximately 40% of our single-family mortgage purchase volume. Our top ten lenders
accounted for approximately 82% of our single-family mortgage purchase volume during 2011.
Our customers also service loans in our single-family credit guarantee portfolio. A significant portion of our single-
family mortgage loans are serviced by several of our large customers. Because we do not have our own servicing
operation, if our servicers lack appropriate process controls, experience a failure in their controls, or experience an
operating disruption in their ability to service mortgage loans, our business and financial results could be adversely
affected. For information about our relationships with our customers, see MD&A RISK MANAGEMENT Credit
Risk Institutional Credit Risk Single-Family Mortgage Seller/Servicers.
Our Competition
Historically, our principal competitors have been Fannie Mae, Ginnie Mae and FHA/VA, and other financial
institutions that retain or securitize mortgages, such as commercial and investment banks, dealers, and thrift institutions.
Since 2008, most of our competitors, other than Fannie Mae, Ginnie Mae, and FHA/VA, have ceased their activities in the
residential mortgage securitization business or severely curtailed these activities relative to their previous levels. We
compete on the basis of price, products, the structure of our securities, and service. Competition to acquire single-family
mortgages can also be significantly affected by changes in our credit standards.
Ginnie Mae, which became a more significant competitor beginning in 2009, guarantees the timely payment of
principal and interest on mortgage-related securities backed by federally insured or guaranteed loans, primarily those
insured by FHA or guaranteed by VA. Ginnie Mae maintained a significant market share in 2011 and 2010, in large part
due to favorable pricing of loans insured by FHA, the increase in the FHA loan limit and the availability, through FHA,
of a mortgage product for borrowers seeking greater than 80% financing who could not otherwise qualify for a
conventional mortgage.
The conservatorship, including direction provided to us by our Conservator, and the restrictions on our activities
under the Purchase Agreement may affect our ability to compete in the business of securitizing mortgages. On multiple
occasions, FHFA has directed us and Fannie Mae to confer and suggest to FHFA possible uniform approaches to
particular business and accounting issues and problems. In most such cases, FHFA subsequently directed us and Fannie
Mae to adopt a specific uniform approach. It is possible that in some areas FHFA could require us and Fannie Mae to
take a uniform approach that, because of differences in our respective businesses, could place Freddie Mac at a
competitive disadvantage to Fannie Mae. For more information, see RISK FACTORS Conservatorship and Related
Matters FHFA directives that we and Fannie Mae adopt uniform approaches in some areas could have an adverse
impact on our business or on our competitive position with respect to Fannie Mae.
Mortgage Securitizations
Investors
Cas
PC
PC
h
sh
Ca
Cash PC or Cash PC
The U.S. residential mortgage market consists of a primary mortgage market that links homebuyers and lenders and a
secondary mortgage market that links lenders and investors. We participate in the secondary mortgage market by
purchasing mortgage loans and mortgage-related securities for investment and by issuing guaranteed mortgage-related
securities. In the Single-family Guarantee segment, we purchase and securitize single-family mortgages, which are
mortgages that are secured by one- to four-family properties.
In general, the securitization and Freddie Mac guarantee process works as follows: (a) a lender originates a mortgage
loan to a borrower purchasing a home or refinancing an existing mortgage loan; (b) we purchase the loan from the lender
and place it with other mortgages into a security that is sold to investors (this process is referred to as pooling); (c) the
lender may then use the proceeds from the sale of the loan or security to originate another mortgage loan; (d) we provide
a credit guarantee, for a fee (generally a portion of the interest collected on the mortgage loan), to those who invest in the
security; (e) the borrowers monthly payment of mortgage principal and interest (net of a servicing fee and our
management and guarantee fee) is passed through to the investors in the security; and (f) if the borrower stops making
monthly payments because a family member loses a job, for example we step in and, pursuant to our guarantee,
make the applicable payments to investors in the security. In the event a borrower defaults on the mortgage, our servicer
works with the borrower to find a solution to help them stay in the home, or sell the property and avoid foreclosure,
through our many different workout options. If this is not possible, we ultimately foreclose and sell the home.
The terms of single-family mortgages that we purchase or guarantee allow borrowers to prepay these loans, thereby
allowing borrowers to refinance their loans when mortgage rates decline. Because of the nature of long-term, fixed-rate
mortgages, borrowers with these mortgages are protected against rising interest rates, but are able to take advantage of
declining rates through refinancing. When a borrower prepays a mortgage that we have securitized, the outstanding
balance of the security owned by investors is reduced by the amount of the prepayment. Unscheduled reductions in loan
principal, regardless of whether they are voluntary or involuntary (e.g. foreclosure), result in prepayments of security
balances. Consequently, the owners of our guaranteed securities are subject to prepayment risk on the related mortgage
13 Freddie Mac
loans, which is principally that the investor will receive an unscheduled return of the principal, and therefore may not earn
the rate of return originally expected on the investment.
We guarantee these mortgage-related securities in exchange for compensation, which consists primarily of a
combination of management and guarantee fees paid on a monthly basis as a percentage of the UPB of the underlying
loans and initial upfront payments referred to as delivery fees. We may also make upfront payments to buy-up the
monthly management and guarantee fee rate, or receive upfront payments to buy-down the monthly management and
guarantee fee rate. These fees are paid in conjunction with the formation of a PC to provide for a uniform coupon rate for
the mortgage pool underlying the issued PC.
We enter into mortgage purchase volume commitments with many of our single-family customers in order to have a
supply of loans for our guarantee business. These commitments provide for the lenders to deliver to us a certain volume
of mortgages during a specified period of time. Some commitments may also provide for the lender to deliver to us a
minimum percentage of their total sales of conforming loans. The purchase and securitization of mortgage loans from
customers under these contracts have pricing schedules for our management and guarantee fees that are negotiated at the
outset of the contract with initial terms that may range from one month to one year. We call these transactions flow
activity and they represent the majority of our purchase volumes. The remainder of our purchases and securitizations of
mortgage loans occurs in bulk transactions for which purchase prices and management and guarantee fees are
negotiated on an individual transaction basis. Mortgage purchase volumes from individual customers can fluctuate
significantly. If a mortgage lender fails to meet its contractual commitment, we have a variety of contractual remedies,
which may include the right to assess certain fees. Our mortgage purchase contracts contain no penalty or liquidated
damages clauses based on our inability to take delivery of presented mortgage loans. However, if we were to fail to meet
our contractual commitment, we could be deemed to be in breach of our contract and could be liable for damages in a
lawsuit.
We seek to issue guarantees on our PCs with fee terms that we believe will, over the long-term, provide management
and guarantee fee income that exceeds our anticipated credit-related and administrative expenses on the underlying loans.
Historically, we have varied our guarantee and delivery fee pricing for different customers, mortgage products, and
mortgage or borrower underwriting characteristics based on our assessment of credit risk and loss mitigation related to
single-family loans. However, on December 23, 2011, President Obama signed into law the Temporary Payroll Tax Cut
Continuation Act of 2011. Among its provisions, this new law directs FHFA to require Freddie Mac and Fannie Mae to
increase guarantee fees by no less than 10 basis points above the average guarantee fees charged in 2011 on single-family
mortgage-backed securities. Under the law, the proceeds from this increase will be remitted to Treasury to fund the
payroll tax cut, rather than retained by the companies. See Regulation and Supervision Legislative and Regulatory
Developments for further information on the impact of this new law. For more information on fees, see MD&A RISK
MANAGEMENT Credit Risk Mortgage Credit Risk Single-Family Mortgage Credit Risk Other Credit Risk
Management Activities.
For information on how we account for our securitization activities, see NOTE 1: SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES.
Securitization Activities
The types of mortgage-related securities we issue and guarantee include the following:
PCs;
REMICs and Other Structured Securities; and
Other Guarantee Transactions.
PCs
Our PCs are single-class pass-through securities that represent undivided beneficial interests in trusts that hold pools
of mortgages we have purchased. Holding single-family loans in the form of PCs rather than as unsecuritized loans gives
us greater flexibility in managing the composition of our mortgage portfolio, as it is generally easier to purchase and sell
PCs than unsecuritized mortgage loans, and allows more cost effective interest-rate risk management. For our fixed-rate
PCs, we guarantee the timely payment of principal and interest. For our single-family ARM PCs, we guarantee the timely
payment of the weighted average coupon interest rate for the underlying mortgage loans. We also guarantee the full and
final payment of principal for ARM PCs; however, we do not guarantee the timely payment of principal on ARM PCs.
We issue most of our single-family PCs in transactions in which our customers provide us with mortgage loans in
14 Freddie Mac
exchange for PCs. We refer to these transactions as guarantor swaps. The following diagram illustrates a guarantor swap
transaction:
Guarantor Swap
Guarantee
Freddie Mac
TRUST (guarantor)
Fee
Mortgage PC
loans
Mortgage loans
Mortgage Lender Freddie Mac
PC (administrator)
Cash (Buy-ups)
We also issue PCs in exchange for cash. The following diagram illustrates an exchange for cash in a cash auction
of PCs:
Mortgage PC
CASH PURCHASE loans CASH AUCTION OF PC
Mortgage loan PC
Securities Dealers
Mortgage Lender Freddie Mac
and Investors
Cash (administrator) Cash
Institutional and other fixed-income investors, including pension funds, insurance companies, securities dealers,
money managers, commercial banks and foreign central banks, purchase our PCs. Treasury and the Federal Reserve have
also purchased mortgage-related securities issued by us, Fannie Mae and Ginnie Mae under their purchase programs. The
most recent of these programs ended in March 2010. During 2011, the Federal Reserve took several actions designed to
support an economic recovery and maintain historically low interest rates, including resumption of purchases of agency
securities, which impacted and will continue to impact the demand for and value of our PCs in the market.
PCs differ from U.S. Treasury securities and other fixed-income investments in two ways. First, single-family PCs
can be prepaid at any time. Homeowners have the right to prepay their mortgage at any time (known as the prepayment
option), and homeowner mortgage prepayments are passed through to the PC holder. Consequently, our securities
implicitly have a call option that significantly reduces the average life of the security from the contractual loan maturity.
As a result, our PCs generally provide a higher nominal yield than certain other fixed-income products. Second, unlike
U.S. Treasury securities, PCs are not backed by the full faith and credit of the United States.
In addition, in our Single-family Guarantee segment we historically sought to support the liquidity of the market for
our PCs and the relative price performance of our PCs to comparable Fannie Mae securities through a variety of activities,
including the resecuritization of PCs into REMICs and Other Structured Securities. Other strategies may include:
(a) encouraging sellers to pool mortgages that they deliver to us into PC pools with a larger and more diverse population
15 Freddie Mac
of mortgages; (b) influencing the volume and characteristics of mortgages delivered to us by tailoring our loan eligibility
guidelines and other means; and (c) engaging in portfolio purchase and retention activities. Beginning in 2012, under
guidance from FHFA we expect to curtail mortgage-related investments portfolio purchase and retention activities that are
undertaken for the primary purpose of supporting the price performance of our PCs, which may result in a significant
decline in the market share of our single-family guarantee business, lower comprehensive income, and a more rapid
decline in the size of our total mortgage portfolio. See Investments Segment PC Support Activities and RISK
FACTORS Competitive and Market Risks Any decline in the price performance of or demand for our PCs could
have an adverse effect on the volume and profitability of our new single-family guarantee business for additional
information about our support of market liquidity for PCs.
TRUST
PCs Security
Classes
PCs
Freddie Mac
Security Dealer Transaction Fee
(administrator)
Security
Classes
We issue many of our REMICs and Other Structured Securities in transactions in which securities dealers or
investors sell us mortgage-related assets or we use our own mortgage-related assets (e.g., PCs and REMICs and Other
Structured Securities) in exchange for the REMICs and Other Structured Securities. The creation of REMICs and Other
Structured Securities allows for setting differing terms for specific classes of investors, and our issuance of these securities
can expand the range of investors in our mortgage-related securities to include those seeking specific security attributes.
For REMICs and Other Structured Securities that we issue to third parties, we typically receive a transaction, or
16 Freddie Mac
resecuritization, fee. This transaction fee is compensation for facilitating the transaction, as well as future administrative
responsibilities.
Guarantee
Freddie Mac Freddie Mac
Trust (guarantor)
Fee
Investors
(which may
include Freddie
Mac)
Other Guarantee Transactions can generally be segregated into two different types. In one type, we purchase only
senior tranches from a non-Freddie Mac senior-subordinated securitization, place the senior tranches into securitization
trusts, and issue Other Guarantee Transaction certificates guaranteeing the principal and interest payments on those
certificates. In this type of transaction, our credit risk is reduced by the structural credit protections from the related
subordinated tranches, which we do not guarantee. In the second type, we purchase single-class pass-through securities,
place them in securitization trusts, and issue Other Guarantee Transaction certificates guaranteeing the principal and
interest payments on those certificates. Our Other Guarantee Transactions backed by single-class pass-through securities
do not benefit from structural or other credit enhancement protections.
Although Other Guarantee Transactions generally have underlying mortgage loans with varying risk characteristics,
we do not issue tranches that have concentrations of credit risk beyond those embedded in the underlying assets, as all
cash flows of the underlying collateral are passed through to the holders of the securities and there are no economic
residual interests in the securitization trusts. Additionally, there may be other credit enhancements and structural features
retained by the seller, such as excess interest or overcollateralization, that provide credit protection to our interests, and
reduce the likelihood that we will have to perform under our guarantee of the senior tranches. In exchange for providing
our guarantee, we may receive a management and guarantee fee or other delivery fees, if the underlying collateral is not
already guaranteed by us.
In 2010 and 2009, we entered into transactions under Treasurys NIBP with HFAs, for the partial guarantee of certain
single-family and multifamily HFA bonds, which were Other Guarantee Transactions with significant credit enhancement
provided by Treasury. While we did not engage in any of these transactions in 2011, we continue to participate in and
17 Freddie Mac
support this program and these guarantees remain outstanding. The securities issued by us pursuant to the NIBP were
purchased by Treasury. See NOTE 2: CONSERVATORSHIP AND RELATED MATTERS Housing Finance Agency
Initiative for further information.
For information about the amount of mortgage-related securities we have issued, see Table 35 Freddie Mac
Mortgage-Related Securities. For information about the relative performance of mortgages underlying these securities,
refer to our MD&A RISK MANAGEMENT Credit Risk section.
Credit Enhancements
Our charter requires that single-family mortgages with LTV ratios above 80% at the time of purchase be covered by
specified credit enhancements or participation interests. Primary mortgage insurance is the most prevalent type of credit
enhancement protecting our single-family credit guarantee portfolio, and is typically provided on a loan-level basis. In
addition, we employ other types of credit enhancements to further manage certain credit risk, including indemnification
agreements, collateral pledged by lenders and subordinated security structures. We also have pool insurance covering
certain single-family loans, though we did not purchase any pool insurance on single-family loans during 2011 or 2010.
Investments Segment
The Investments segment reflects results from our investment, funding and hedging activities. In our Investments
segment, we invest principally in mortgage-related securities and single-family performing mortgage loans, which are
funded by other debt issuances and hedged using derivatives. In our Investments segment, we also provide funding and
hedging management services to the Single-family Guarantee and Multifamily segments. In the Investments segment, we
are not currently a substantial buyer or seller of mortgage assets.
Our Customers
Our customers for our debt securities predominantly include insurance companies, money managers, central banks,
depository institutions, and pension funds. Within the Investments segment, we buy securities through various market
sources. We also invest in performing single-family mortgage loans, which we intend to aggregate and securitize. We
20 Freddie Mac
purchase a significant portion of these loans from several lenders, as discussed in Single-Family Guarantee Segment
Our Customers.
Our Competition
Historically, our principal competitors have been Fannie Mae and other financial institutions that invest in mortgage-
related securities and mortgage loans, such as commercial and investment banks, dealers, thrift institutions, and insurance
companies. The conservatorship, including direction provided to us by our Conservator and the restrictions on our
activities under the Purchase Agreement has affected and will continue to affect our ability to compete in the business of
investing in mortgage-related securities and mortgage loans.
We compete for low-cost debt funding with Fannie Mae, the FHLBs and other institutions. Competition for debt
funding from these entities can vary with changes in economic, financial market and regulatory environments.
Assets
Historically, we have primarily been a buy-and-hold investor in mortgage-related securities and single-family
performing mortgage loans. We may sell assets to reduce risk, provide liquidity, and improve our returns. However, due to
limitations under the Purchase Agreement and those imposed by FHFA, our ability to acquire and sell mortgage assets is
significantly constrained. For more information, see Conservatorship and Related Matters and MD&A
CONSOLIDATED RESULTS OF OPERATIONS Segment Earnings Segment Earnings-Results Investments.
We may enter into a variety of transactions to improve investment returns, including: (a) dollar roll transactions,
which are transactions in which we enter into an agreement to purchase and subsequently resell (or sell and subsequently
repurchase) agency securities; (b) purchases of agency securities (including agency REMICs); and (c) purchases of
performing single-family mortgage loans. In addition, we may create REMICs from existing agency securities and sell
tranches that are in demand by investors to reduce our asset balance, while conserving value for the taxpayer. We estimate
our expected investment returns using an OAS approach, which is an estimate of the yield spread between a given
financial instrument and a benchmark (LIBOR, agency or Treasury) yield curve. In this approach, we consider potential
variability in the instruments cash flows resulting from any options embedded in the instrument, such as the prepayment
option. Additionally, in this segment we hold reperforming and modified single-family mortgage loans related to our
single-family business. For our liquidity needs, we maintain a portfolio comprised primarily of cash and cash equivalents,
non-mortgage-related securities, and securities purchased under agreements to resell.
Debt Financing
We fund our investment activities by issuing short-term and long-term debt. The conservatorship, and the resulting
support we receive from Treasury, has enabled us to access debt funding on terms sufficient for our needs. While we
believe that the support provided by Treasury pursuant to the Purchase Agreement currently enables us to maintain our
access to the debt markets and to have adequate liquidity to conduct our normal business activities, the costs of our debt
funding could vary due to the uncertainty about the future of the GSEs and potential investor concerns about the adequacy
of funding available under the Purchase Agreement after 2012. Additionally, the Purchase Agreement limits the amount of
indebtedness we can incur.
For more information, see Conservatorship and Related Matters and MD&A LIQUIDITY AND CAPITAL
RESOURCES Liquidity.
Risk Management
Our Investments segment has responsibility for managing our interest rate risk and certain liquidity risks. Derivatives
are an important part of our risk management strategy. We use derivatives primarily to: (a) regularly adjust or rebalance
our funding mix in response to changes in the interest-rate characteristics of our mortgage-related assets; (b) hedge
forecasted issuances of debt; (c) synthetically create callable and non-callable funding; and (d) hedge foreign-currency
exposure. For more information regarding our use of derivatives, see QUANTITATIVE AND QUALITATIVE
DISCLOSURES ABOUT MARKET RISK and NOTE 11: DERIVATIVES. For information regarding our liquidity
management, see MD&A LIQUIDITY AND CAPITAL RESOURCES.
PC Support Activities
Our PCs are an integral part of our mortgage purchase program. Our Single-family Guarantee segment purchases
many of our mortgages by issuing PCs in exchange for those mortgage loans in guarantor swap transactions. We also
issue PCs backed by mortgage loans that we purchased for cash. Our competitiveness in purchasing single-family
21 Freddie Mac
mortgages from our seller/servicers, and thus the volume and profitability of new single-family business, can be directly
affected by the relative price performance of our PCs and comparable Fannie Mae securities.
Historically, we sought to support the liquidity of the market for our PCs and the relative price performance of our
PCs to comparable Fannie Mae securities through a variety of activities conducted by our Investments segment, including
the purchase and sale of Freddie Mac and other agency mortgage-related securities (e.g., dollar roll transactions), as well
as through the issuance of REMICs and Other Structured Securities. Our purchases and sales of mortgage-related
securities and our issuances of REMICs and Other Structured Securities influence the relative supply and demand for
these securities, helping to support the price performance of our PCs. Depending upon market conditions, including the
relative prices, supply of and demand for our mortgage-related securities and comparable Fannie Mae securities, as well
as other factors, there may be substantial variability in any period in the total amount of securities we purchase or sell,
and in the success of our efforts to support the liquidity and price performance of our mortgage-related securities.
Historically, we incurred costs to support the liquidity and price performance of our securities, including engaging in
transactions below our target rate of return. We may increase, reduce or discontinue these or other related activities at any
time, which could affect the liquidity and price performance of our mortgage-related securities. Beginning in 2012, under
guidance from FHFA we expect to curtail mortgage-related investments portfolio purchase and retention activities that are
undertaken for the primary purpose of supporting the price performance of our PCs, which may result in a significant
decline in the market share of our single-family guarantee business, lower comprehensive income, and a more rapid
decline in the size of our total mortgage portfolio. For more information, see RISK FACTORS Competitive and
Market Risks Any decline in the price performance of or demand for our PCs could have an adverse effect on the
volume and profitability of our new single-family guarantee business.
Multifamily Segment
The Multifamily segment reflects results from our investment (both purchases and sales), securitization, and
guarantee activities in multifamily mortgage loans and securities. Although we hold multifamily mortgage loans and non-
agency CMBS that we purchased for investment, our purchases of such multifamily mortgage loans for investment have
declined significantly since 2010, and our purchases of CMBS have declined significantly since 2008. The only CMBS
that we have purchased since 2008 have been senior, mezzanine, and interest-only tranches related to certain of our
securitization transactions, and these purchases have not been significant. Currently, our primary business strategy is to
purchase multifamily mortgage loans for aggregation and then securitization. We guarantee the senior tranches of these
securitizations in Other Guarantee Transactions. Our Multifamily segment also issues Other Structured Securities, but does
not issue REMIC securities. Our Multifamily segment also enters into other guarantee commitments for multifamily HFA
bonds and housing revenue bonds held by third parties. Historically, we issued multifamily PCs, but this activity has been
insignificant in recent years.
The multifamily property market is affected by local and regional economic factors, such as employment rates,
construction cycles, and relative affordability of single-family home prices, all of which influence the supply and demand
for multifamily properties and pricing for apartment rentals. Our multifamily loan volume is largely sourced through
established institutional channels where we are generally providing post-construction financing to larger apartment project
operators with established performance records.
Our lending decisions are largely based on the assessment of the propertys ability to provide rents that will generate
sufficient operating cash flows to support payment of debt service obligations as measured by the expected DSCR and the
loan amount relative to the value of the property as measured by the LTV ratio. Multifamily mortgages generally are
without recourse to the borrower (i.e., the borrower is not personally liable for any deficiency remaining after foreclosure
and sale of the property), except in the event of fraud or certain other specified types of default. Therefore, repayment of
the mortgage depends on the ability of the underlying property to generate cash flows sufficient to cover the related debt
obligations. That in turn depends on conditions in the local rental market, local and regional economic conditions, the
physical condition of the property, the quality of property management, and the level of operating expenses.
Prior to 2010, our Multifamily segment also reflected results from our investments in LIHTC partnerships formed for
the purpose of providing equity funding for affordable multifamily rental properties. In these investments, we provided
equity contributions to partnerships designed to sponsor the development and ongoing operations for low- and moderate-
income multifamily apartments. We planned to realize a return on our investment through reductions in income tax
expense that result from federal income tax credits and the deductibility of operating losses generated by the partnerships.
However, we no longer make investments in such partnerships because we do not expect to be able to use the underlying
federal income tax credits or the operating losses generated from the partnerships as a reduction to our taxable income
22 Freddie Mac
because of our inability to generate sufficient taxable income or to sell these interests to third parties. See NOTE 3:
VARIABLE INTEREST ENTITIES for additional information.
Our Customers
We acquire a significant portion of our multifamily mortgage loans from several large seller/servicers. For 2011, our
top two multifamily sellers, CBRE Capital Markets, Inc. and NorthMarq Capital, LLC, each accounted for more than 10%
of our multifamily purchase volume, and together accounted for approximately 32% of our multifamily purchase volume.
Our top 10 multifamily lenders represented an aggregate of approximately 81% of our multifamily purchase volume for
2011.
A significant portion of our multifamily mortgage loans are serviced by several of our large customers. See
MD&A RISK MANAGEMENT Credit Risk Institutional Credit Risk Seller/Servicers for additional
information.
Our Competition
Historically, our principal competitors have been Fannie Mae, FHA, and other financial institutions that retain or
securitize multifamily mortgages, such as commercial and investment banks, dealers, thrift institutions, and insurance
companies. During 2009, many of our competitors, other than Fannie Mae and FHA, significantly curtailed their activities
in the multifamily mortgage business relative to their previous levels. Beginning in 2010, some market participants began
to re-emerge in the multifamily market, and we have faced increased competition from some other institutional investors.
We compete on the basis of price, products, structure and service.
(1) Based on UPB and excludes mortgage loans and mortgage-related securities traded, but not yet settled.
(2) Represents unsecuritized seriously delinquent single-family loans managed by the Single-family Guarantee segment.
FHFA has stated that we will not be a substantial buyer or seller of mortgages for our mortgage-related investments
portfolio. FHFA also stated that, given the size of our current mortgage-related investments portfolio and the potential
volume of delinquent mortgages to be removed from PC pools, it expects that any net additions to our mortgage-related
investments portfolio would be related to that activity. We expect that our holdings of unsecuritized single-family loans
will continue to increase during 2012 due to the revisions to HARP, which will result in our purchase of mortgage loans
with LTV ratios greater than 125%, as we have not yet implemented a securitization process for such loans.
Our mortgage-related investments portfolio includes assets that are less liquid than agency securities, including
unsecuritized performing single-family mortgage loans, multifamily mortgage loans, CMBS, and housing revenue bonds.
Our less liquid assets collectively represented approximately 32% of the UPB of the portfolio at December 31, 2011, as
compared to 30% as of December 31, 2010. Our mortgage-related investments portfolio also includes illiquid assets,
including unsecuritized seriously delinquent and modified single-family mortgage loans which we removed from PC
trusts, and our investments in non-agency mortgage-related securities backed by subprime, option ARM, and Alt-A and
other loans. Our illiquid assets collectively represented approximately 29% of the UPB of the portfolio at December 31,
2011, as compared to 27% as of December 31, 2010. The changing composition of our mortgage-related investments
portfolio to a greater proportion of illiquid assets may influence our decisions regarding funding and hedging. The
description above of the liquidity of our assets is based on our own internal expectations given current market conditions.
Changes in market conditions could continue to affect the liquidity of our assets at any given time.
Subpoena Power
The GSE 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.
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. Pursuant to this authority, Treasury entered into several
agreements with us, as described below.
Purchase 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, and further
amended on May 6, 2009 and December 24, 2009. Pursuant to the Purchase Agreement, on September 8, 2008 we issued
to Treasury: (a) 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 (b) 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. 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. However, deficits in our net worth have made it necessary for
us to make substantial draws on Treasurys funding commitment under the Purchase Agreement. As a result, the aggregate
liquidation preference of the senior preferred stock has increased from $1.0 billion as of September 8, 2008 to
$72.2 billion at December 31, 2011 (this figure reflects the receipt of funds requested in the draw to address our net worth
deficit as of September 30, 2011). Our dividend obligation on the senior preferred stock, based on that liquidation
preference, is $7.22 billion, which exceeds our annual earnings in all but one period.
The senior preferred stock and warrant were issued to Treasury as an initial commitment fee in consideration of the
initial commitment from Treasury to provide up to $100 billion (subsequently increased to $200 billion) in funds to us
28 Freddie Mac
under the terms and conditions set forth in the Purchase Agreement. Under the Purchase Agreement, the $200 billion
maximum amount of the commitment from Treasury will increase as necessary to accommodate any cumulative reduction
in our net worth during 2010, 2011 and 2012. If we do not have a capital surplus (i.e., positive net worth) at the end of
2012, then the amount of funding available after 2012 will be $149.3 billion ($200 billion funding commitment reduced
by cumulative draws for net worth deficits through December 31, 2009). In the event we have a capital surplus at the end
of 2012, then the amount of funding available after 2012 will depend on the size of that surplus relative to cumulative
draws needed for deficits during 2010 to 2012, as follows:
If the year-end 2012 surplus is lower than the cumulative draws needed for 2010 to 2012, then the amount of
available funding is $149.3 billion less the surplus.
If the year-end 2012 surplus exceeds the cumulative draws for 2010 to 2012, then the amount of available funding
is $149.3 billion less the amount of those draws.
In addition to the issuance of the senior preferred stock and warrant, we are required under the Purchase Agreement
to pay a quarterly commitment fee to Treasury. Under the Purchase Agreement, the fee is to be determined in an amount
mutually agreed to by us and Treasury with reference to the market value of Treasurys funding commitment as then in
effect, and reset every five years. 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. 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. The fee was originally
scheduled to begin accruing on January 1, 2010 (with the first fee payable on March 31, 2010), but was delayed until
January 1, 2011 (with the first fee payable on March 31, 2011) pursuant to an amendment to the Purchase Agreement.
Treasury waived the fee for all quarters of 2011 and the first quarter of 2012, but has indicated that it remains committed
to protecting taxpayers and ensuring that our future positive earnings are returned to taxpayers as compensation for their
investment. Treasury stated that it would reevaluate whether the quarterly commitment fee should be set in the second
quarter of 2012. Absent Treasury waiving the commitment fee in the second quarter of 2012, this quarterly commitment
fee will begin accruing on April 1, 2012 and must be paid each quarter for as long as the Purchase Agreement is in effect.
The amount of the fee has not yet been determined and could be substantial.
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 Treasurys commitment. 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 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 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. As a result, the expiration on
December 31, 2009 of Treasurys temporary authority to purchase obligations and other securities issued by Freddie Mac
did not affect Treasurys funding commitment under the Purchase Agreement.
Under the Purchase Agreement, our ability to repay the liquidation preference of the senior preferred stock is limited
and we will not be able to do so for the foreseeable future, if at all. The amounts payable for dividends on the senior
preferred stock are substantial and will have an adverse impact on our financial position and net worth. The payment of
dividends on our senior preferred stock in cash reduces our net worth. For periods in which our earnings and other
changes in equity do not result in positive net worth, draws under the Purchase Agreement effectively fund the cash
payment of senior preferred dividends to Treasury. It is unlikely that, over the long-term, we will generate net income or
comprehensive income in excess of our annual dividends payable to Treasury, although we may experience period-to-
period variability in earnings and comprehensive income. As a result, we expect to make additional draws in future
periods.
The Purchase Agreement provides that the Treasurys funding commitment will terminate under any of the following
circumstances: (a) the completion of our liquidation and fulfillment of Treasurys obligations under its funding
commitment at that time; (b) the payment in full of, or reasonable provision for, all of our liabilities (whether or not
29 Freddie Mac
contingent, including mortgage guarantee obligations); and (c) the funding by Treasury of the maximum amount of the
commitment 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 Purchase 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: (a) the amount necessary to cure the payment defaults on our debt and Freddie Mac mortgage
guarantee obligations; and (b) the lesser of: (i) the deficiency amount; and (ii) the maximum amount of the commitment
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 has an indefinite term and can terminate only in limited circumstances, which do not
include the end of the conservatorship. The Purchase Agreement therefore could continue after the conservatorship ends.
Warrant Covenants
The warrant we issued to Treasury includes, among others, the following covenants: (a) 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; (b) 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 (c) 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.
As of March 9, 2012, we believe we were in compliance with the covenants under the warrant.
Receivership
Under the GSE Act, FHFA must place us into receivership if FHFA determines in writing that our assets are less than
our obligations for a period of 60 days. FHFA has notified us that the measurement period for any mandatory receivership
determination with respect to our assets and obligations would commence no earlier than the SEC public filing deadline
for our quarterly or annual financial statements and would continue for 60 calendar days after that date. FHFA has also
advised us that, if, during that 60-day period, we receive funds from Treasury in an amount at least equal to the
deficiency amount under the Purchase Agreement, the Director of FHFA will not make a mandatory receivership
determination.
In addition, we could be put into 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 then Director of FHFA placed us into
conservatorship. These include: (a) a substantial dissipation of assets or earnings due to unsafe or unsound practices;
(b) the existence of an unsafe or unsound condition to transact business; (c) an inability to meet our obligations in the
ordinary course of business; (d) a weakening of our condition due to unsafe or unsound practices or conditions; (e) critical
undercapitalization; (f) the likelihood of losses that will deplete substantially all of our capital; or (g) by consent.
On June 20, 2011, FHFA published a final rule that addresses conservatorship and receivership operations of Freddie
Mac, Fannie Mae and the FHLBs. The final rule establishes a framework to be used by FHFA when acting as conservator
or receiver, supplementing and clarifying statutory authorities. Among other provisions, the final rule indicates that FHFA
will not permit payment of securities litigation claims during conservatorship and that claims by current or former
shareholders arising as a result of their status as shareholders would receive the lowest priority of claim in receivership. In
addition, the final rule indicates that administrative expenses of the conservatorship will also be deemed to be
administrative expenses of a subsequent receivership and that capital distributions may not be made during
conservatorship, except as specified in the final rule.
Capital Standards
FHFA has suspended capital classification of us during conservatorship in light of the Purchase Agreement. The
existing statutory and FHFA-directed regulatory capital requirements are not binding during the conservatorship. We
continue to provide our submission to FHFA on minimum capital. FHFA continues to publish relevant capital figures
(minimum capital requirement, core capital, and GAAP net worth) but does not publish our critical capital, risk-based
capital or subordinated debt levels during conservatorship.
On October 9, 2008, FHFA also announced that it will engage in rulemaking to revise our minimum capital and risk-
based capital requirements. The GSE Act provides that FHFA may increase minimum capital levels from the existing
statutory percentages either by regulation or on a temporary basis by order. On March 3, 2011, FHFA issued a final rule
setting forth procedures and standards for such a temporary increase in minimum capital levels. FHFA may also, by
regulation or order, establish capital or reserve requirements with respect to any product or activity of an enterprise, as
FHFA considers appropriate. In addition, under the GSE Act, FHFA must, by regulation, establish risk-based capital
requirements to ensure the enterprises operate in a safe and sound manner, maintaining sufficient capital and reserves to
support the risks that arise in their operations and management. In developing the new risk-based capital requirements,
FHFA is not bound by the risk-based capital standards in effect prior to the amendment of the GSE Act by the Reform
Act.
Our regulatory minimum capital is a leverage-based measure that is generally calculated based on GAAP and reflects
a 2.50% capital requirement for on-balance sheet assets and 0.45% capital requirement for off-balance sheet obligations.
Pursuant to regulatory guidance from FHFA, our minimum capital requirement was not automatically affected by our
January 1, 2010 adoption of amendments to the accounting guidance for transfers of financial assets and consolidation of
VIEs. Specifically, upon adoption of this accounting guidance, FHFA directed us, for purposes of minimum capital, to
continue reporting our PCs held by third parties and other aggregate off-balance sheet obligations using a 0.45% capital
requirement. Notwithstanding this guidance, FHFA reserves the authority under the GSE Act to raise the minimum capital
requirement for any of our assets or activities.
For additional information, see MD&A LIQUIDITY AND CAPITAL RESOURCES Capital Resources and
NOTE 15: REGULATORY CAPITAL. Also, see RISK FACTORS Legal and Regulatory Risks for more
information.
33 Freddie Mac
New Products
The GSE Act requires the enterprises to obtain the approval of FHFA before initially offering any product, subject to
certain exceptions. The GSE Act provides for a public comment process on requests for approval of new products. FHFA
may temporarily approve a product without soliciting public comment if delay would be contrary to the public interest.
FHFA may condition approval of a product on specific terms, conditions and limitations. The GSE Act also requires the
enterprises to provide FHFA with written notice of any new activity that we or Fannie Mae consider not to be a product.
On July 2, 2009, FHFA published an interim final rule on prior approval of new products, implementing the new
product provisions for us and Fannie Mae in the GSE Act. The rule establishes a process for Freddie Mac and Fannie
Mae to provide prior notice to the Director of FHFA of a new activity and, if applicable, to obtain prior approval from the
Director if the new activity is determined to be a new product. On August 31, 2009, Freddie Mac and Fannie Mae filed
joint public comments on the interim final rule with FHFA. FHFA has stated that permitting us to engage in new products
is inconsistent with the goals of conservatorship and has instructed us not to submit such requests under the interim final
rule. This could have an adverse effect on our business and profitability in future periods. We cannot currently predict
when or if FHFA will permit us to engage in new products under the interim final rule, nor when the rule will be
finalized.
Affordable Housing Goals for 2010 and 2011 and Results for 2010
On September 14, 2010, FHFA published in the Federal Register a final rule establishing new affordable housing
goals for Freddie Mac and Fannie Mae for 2010 and 2011. The final rule was effective on October 14, 2010. The rule
establishes four goals and one subgoal for single-family owner-occupied housing, one multifamily special affordable
housing goal, and one multifamily special affordable housing subgoal. Three of the single-family housing goals and the
subgoal target purchase money mortgages for: (a) low-income families; (b) very low-income families; and/or (c) families
that reside in low-income areas. The single-family housing goals also include one that targets refinancing mortgages for
low-income families. The multifamily special affordable housing goal targets multifamily rental housing affordable to
low-income families. The multifamily special affordable housing subgoal targets multifamily rental housing affordable to
very low-income families.
The single-family goals are expressed as a percentage of the total number of eligible mortgages underlying our total
single-family mortgage purchases. The multifamily goals are expressed in terms of minimum numbers of units financed.
With respect to the single-family goals, the rule includes: (a) an assessment of performance as compared to the actual
share of the market that meets the criteria for each goal; and (b) a benchmark level to measure performance. Where our
performance on a single-family goal falls short of the benchmark for a goal, we still could achieve the goal if our
performance meets or exceeds the actual share of the market that meets the criteria for the goal for that year. For
example, if the actual market share of mortgages to low-income families relative to all mortgages originated to finance
34 Freddie Mac
owner-occupied single-family properties is lower than the 27% benchmark rate, we would still satisfy this goal if we
achieve that actual market percentage.
The rule makes a number of changes to the previous counting methods for goals credit, including prohibiting housing
goals credit for purchases of private-label securities. However, the rule allows credit under the low-income refinance goal
for permanent MHA Program loan modifications. The rule also states that FHFA does not intend for the enterprises to
undertake economically adverse or high-risk activities in support of the goals, nor does it intend for the enterprises state
of conservatorship to be a justification for withdrawing support from these important market segments.
Our housing goals for 2010 and 2011 and results for 2010 are set forth in the table below.
Table 5 Affordable Housing Goals for 2010 and 2011 and Results for 2010
Goals for 2010 and 2011 Market Level for 2010(1) Results for 2010(2)
We previously reported that we did not achieve the benchmark levels for the single-family low-income areas goal and
the related low-income areas subgoal for 2010 and that we did achieve the benchmark levels for the single-family low-
income purchase and very low-income purchase goals. In February 2012, at the direction of FHFA, we revised our single-
family results for 2010 to exclude mortgages underlying certain HFA bonds. FHFA determined that the resulting small
shortfalls were not sufficient to require reopening its previous determination that the single-family low-income purchase
and very low-income purchase goals had been met. FHFA has informed us that, given that 2010 is the first year under
which FHFA utilized the benchmark or market level for the housing goals and that we continue to operate under
conservatorship, FHFA will not be requiring housing plans for goals that we did not achieve.
We expect to report our performance with respect to the 2011 affordable housing goals in March 2012. At this time,
based on preliminary information, we believe we met the single-family refinance low-income goal and both multifamily
goals, and believe we failed to meet the FHFA benchmark level for the single-family purchase-money goals and the
subgoal for 2011. In such cases, FHFA regulations allow us to achieve a goal if our qualifying share matches that of the
market, as measured by the Home Mortgage Disclosure Act. Because the Home Mortgage Disclosure Act data for 2011
will not be released until September 2012, FHFA will not be able to make a final determination on our performance until
that time. If we fail to meet both the FHFA benchmark level and the market level, we may enter into discussions with
FHFA concerning whether these goals were infeasible under the terms of the GSE Act, due to market and economic
conditions and our financial condition. For more information, see EXECUTIVE COMPENSATION Compensation
Discussion and Analysis Executive Management Compensation Program Determination of the Performance-Based
Portion of 2011 Deferred Base Salary.
We anticipate that the difficult market conditions and our financial condition will continue to affect our affordable
housing activities in 2012. However, we view the purchase of mortgage loans that are eligible to count toward our
affordable housing goals to be a principal part of our mission and business and we are committed to facilitating the
financing of affordable housing for low- and moderate-income families. See also RISK FACTORS Legal and
Regulatory Risks We may make certain changes to our business in an attempt to meet the housing goals and subgoals
set for us by FHFA that may increase our losses.
Portfolio Activities
The GSE Act requires FHFA to establish, by regulation, criteria governing portfolio holdings to ensure the holdings
are backed by sufficient capital and consistent with the enterprises mission and safe and sound operations. In establishing
these criteria, FHFA must consider the ability of the enterprises to provide a liquid secondary market through
securitization activities, the portfolio holdings in relation to the mortgage market and the enterprises compliance with the
prudential management and operations standards prescribed by FHFA.
On December 28, 2010, FHFA issued a final rule adopting the portfolio holdings criteria established in the Purchase
Agreement, as it may be amended from time to time, for so long as we remain subject to the Purchase Agreement.
See Conservatorship and Related Matters Impact of Conservatorship and Related Activities on Our Business for
additional information on restrictions to our portfolio activities.
Anti-Predatory Lending
Predatory lending practices are in direct opposition to our mission, our goals and our practices. We have instituted
anti-predatory lending policies intended to prevent the purchase or assignment of mortgage loans with unacceptable terms
or conditions or resulting from unacceptable practices. These policies include processes related to the delivery and
validation of loans sold to us. In addition to the purchase policies we have instituted, we promote consumer education and
financial literacy efforts to help borrowers avoid abusive lending practices and we provide competitive mortgage products
to reputable mortgage originators so that borrowers have a greater choice of financing options.
Subordinated Debt
FHFA 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. See NOTE 15: REGULATORY CAPITAL
Subordinated Debt Commitment for more information regarding subordinated debt.
FHFAs Strategic Plan for Freddie Mac and Fannie Mae Conservatorships
On February 21, 2012, FHFA sent to Congress a strategic plan for the next phase of the conservatorships of Freddie
Mac and Fannie Mae. The plan sets forth objectives and steps FHFA is taking or will take to meet FHFAs obligations as
Conservator. FHFA states that the steps envisioned in the plan are consistent with each of the housing finance reform
frameworks set forth in the report delivered by the Administration to Congress in February 2011, as well as with the
leading congressional proposals introduced to date. FHFA indicates that the plan leaves open all options for Congress and
38 Freddie Mac
the Administration regarding the resolution of the conservatorships and the degree of government involvement in
supporting the secondary mortgage market in the future.
FHFAs plan provides lawmakers and the public with an outline of how FHFA as Conservator intends to guide
Freddie Mac and Fannie Mae over the next few years, and identifies three strategic goals:
Build. Build a new infrastructure for the secondary mortgage market;
Contract. Gradually contract Freddie Mac and Fannie Maes dominant presence in the marketplace while
simplifying and shrinking their operations; and
Maintain. Maintain foreclosure prevention activities and credit availability for new and refinanced mortgages.
The first of these goals establishes the steps FHFA, Freddie Mac, and Fannie Mae will take to create the necessary
infrastructure, including a securitization platform and national standards for mortgage securitization, that Congress and
market participants may use to develop the secondary mortgage market of the future. As part of this process, FHFA would
determine how Freddie Mac and Fannie Mae can work together to build a single securitization platform that would
replace their current separate proprietary systems.
The second goal describes steps that FHFA plans to take to gradually shift mortgage credit risk from Freddie Mac
and Fannie Mae to private investors and eliminate the direct funding of mortgages by the enterprises. The plan states that
the goal of gradually shifting mortgage credit risk from Freddie Mac and Fannie Mae to private investors could be
accomplished, in the case of single-family credit guarantees, in several ways, including increasing guarantee fees,
establishing loss-sharing arrangements and expanding reliance on mortgage insurance. To evaluate how to accomplish the
goal of contracting enterprise operations in the multifamily business, the plan states that Freddie Mac and Fannie Mae will
each undertake a market analysis of the viability of its respective multifamily operations without government guarantees.
For the third goal, the plan states that programs and strategies to ensure ongoing mortgage credit availability, assist
troubled homeowners, and minimize taxpayer losses while restoring stability to housing markets continue to require
energy, focus, and resources. The plan states that activities that must be continued and enhanced include: (a) successful
implementation of HARP, including the significant program changes announced in October 2011; (b) continued
implementation of the Servicing Alignment Initiative; (c) renewed focus on short sales, deeds-in-lieu, and deeds-for-lease
options that enable households and Freddie Mac and Fannie Mae to avoid foreclosure; and (d) further development and
implementation of the REO disposition initiative announced by FHFA in 2011.
In 2011, the Financial Services Committee of the House of Representatives approved a bill that would generally put
our employees on the federal government pay scale, and in 2012 both the House and the Senate approved legislation that
would prohibit senior executives from receiving bonuses during conservatorship. In February 2012, legislative proposals
were introduced in the Senate that would, among other items, cap the compensation and benefits of executive officers and
employees of Freddie Mac and Fannie Mae so they cannot exceed the amounts paid to the highest compensated executive
or employee at the federal financial institution regulatory agencies; and require executive officers, under certain
circumstances, to return to Treasury any compensation earned that exceeds the regulatory agencies rate of compensation.
If this or similar legislation were to become law, many of our employees would experience a sudden and sharp decrease
in compensation. The Acting Director of FHFA stated on November 15, 2011 that this would certainly risk a substantial
exodus of talent, the best leaving first in many instances. [Freddie Mac and Fannie Mae] likely would suffer a rapidly
growing vacancy list and replacements with lesser skills and no experience in their specific jobs. A significant increase in
safety and soundness risks and in costly operational failures would, in my opinion, be highly likely. The Acting Director
noted that [s]hould the risks I fear materialize, FHFA might well be forced to limit [Freddie Mac and Fannie Maes]
business activities. Some of the business [Freddie Mac and Fannie Mae] would be unable to undertake might simply not
occur, with potential disruption in housing markets and the economy.
Some of the bills discussed above, if enacted, would materially affect the role of the company, our business model
and our structure, and could have an adverse effect on our financial results and operations as well as our ability to retain
and recruit management and other valuable employees. A number of the bills would adversely affect our ability to
conduct business under our current business model, including by subjecting us to new requirements that could increase
costs, reduce revenues and limit or prohibit current business activities.
We cannot predict whether or when any of the bills discussed above might be enacted. We also expect additional
bills relating to Freddie Mac and Fannie Mae to be introduced and considered by Congress in 2012.
For more information on the potential impacts of legislative developments on compensation and employee retention,
see RISK FACTORS Conservatorship and Related Matters The conservatorship and uncertainty concerning our
future has had, and will likely continue to have, an adverse effect on the retention, recruitment and engagement of
management and other employees, which could have a material adverse effect on our ability to operate our business and
MD&A RISK MANAGEMENT Operational Risks.
40 Freddie Mac
Dodd-Frank Act
The Dodd-Frank Act, which was signed into law on July 21, 2010, significantly changed the regulation of the
financial services industry, including by creating new standards related to regulatory oversight of systemically important
financial companies, derivatives, capital requirements, asset-backed securitization, mortgage underwriting, and consumer
financial protection. The Dodd-Frank Act has directly affected and will continue to directly affect the business and
operations of Freddie Mac by subjecting us to new and additional regulatory oversight and standards, including with
respect to our activities and products. We may also be affected by provisions of the Dodd-Frank Act and implementing
regulations that affect the activities of banks, savings institutions, insurance companies, securities dealers, and other
regulated entities that are our customers and counterparties.
Implementation of the Dodd-Frank Act is being accomplished through numerous rulemakings, many of which are
still in process. Accordingly, it is difficult to assess fully the impact of the Dodd-Frank Act on Freddie Mac and the
financial services industry at this time. The final effects of the legislation will not be known with certainty until these
rulemakings are complete. The Dodd-Frank Act also mandates the preparation of studies on a wide range of issues, which
could lead to additional legislation or regulatory changes.
Recent developments with respect to Dodd-Frank rulemakings that may have a significant impact on Freddie Mac
include the following:
Designation as a systemically important nonbank financial company The Financial Stability Oversight Council,
or FSOC, is expected to announce during 2012 which nonbank financial companies are systemically important. The
Federal Reserve has recently proposed rules to implement the enhanced supervisory and prudential requirements
that would apply to designated nonbank financial companies. The proposal includes rules to implement Dodd-
Frank requirements related to risk-based capital and leverage, liquidity, single-counterparty credit limits, overall
risk management and risk committees, stress tests, and debt-to-equity limits for certain covered companies. The
proposed rules also would implement Dodd-Frank requirements related to early remediation of financial distress of
a designated nonbank financial company. In addition, a recently adopted final rule requires designated nonbank
financial companies to submit annual resolution plans that describe the companys strategy for rapid and orderly
resolution in bankruptcy during times of financial distress. If Freddie Mac is designated as a systemically important
nonbank financial company, we could be subject to these and other additional oversight and prudential standards.
Derivatives Rulemakings The U.S. Commodity Futures Trading Commission, or CFTC, has promulgated a
number of final rules implementing the Dodd-Frank Acts provisions relating to derivatives. However, the CFTC
has yet to finalize many of the more significant derivative-related rules, including rules addressing the definition of
major swap participant and margin requirements for uncleared swaps. The Dodd-Frank Act imposes certain new
requirements on all swaps counterparties, including requirements addressing recordkeeping and reporting. If
Freddie Mac qualifies as a major swap participant, it will be subject to increased and additional requirements, such
as those relating to registration and business conduct. The eventual final rules on margin might increase the costs
of our swaps transactions. According to the CFTCs tentative schedule, the CFTC expects to finalize the major
swap participant definition rule in the first quarter of 2012, but it does not expect to consider final rules on margin
(and numerous other topics) until later in 2012.
We continue to review and assess the impact of rulemakings and other activities under the Dodd-Frank Act. For more
information, see RISK FACTORS Legal and Regulatory Risks The Dodd-Frank Act and related regulation may
adversely affect our business activities and financial results.
Administration Plan to Help Responsible Homeowners and Heal the Housing Market
In his January 24, 2012 State of the Union Address, President Obama called for action to help responsible borrowers
and support a housing market recovery. The Administration subsequently put forth a Plan to Help Responsible
Homeowners and Heal the Housing Market. We have implemented, or are in the process of implementing, several aspects
of the Administrations plan, such as the changes to HAMP discussed in MD&A RISK MANAGEMENT Credit
42 Freddie Mac
Risk Mortgage Credit Risk Single-Family Loan Workouts and the MHA Program Home Affordable Modification
Program. A number of other aspects of the plan could affect Freddie Mac, including those discussed below.
The plan calls for Congress to pass legislation to establish a broad based mortgage refinancing plan. The broad based
refinancing plan includes provisions to further streamline the refinancing process for borrowers with loans guaranteed by
Freddie Mac and Fannie Mae. It would also provide underwater borrowers who participate in HARP with the choice of
taking the benefit of the reduced interest rate in the form of lower monthly payments, or applying that savings to
rebuilding equity in their homes. The plan would require us to change certain existing processes and could increase our
costs. To date, no legislation has been introduced in Congress with respect to this plan.
The plan states that the mortgage servicing system would benefit from a single set of strong federal standards, and
indicates that the Administration will work closely with regulators, Congress and stakeholders to create a more robust and
comprehensive set of rules related to mortgage servicing. These rules would include standards for assisting at-risk
homeowners.
Employees
At February 27, 2012, we had 4,859 full-time and 62 part-time employees. Our principal offices are located in
McLean, Virginia.
Available Information
SEC Reports
We file reports and other information with the SEC. In view of the Conservators succession to all of the voting
power of our stockholders, we have not prepared or provided proxy statements for the solicitation of proxies from
stockholders since we entered into conservatorship, and do not expect to do so while we remain in conservatorship. We
make available free of charge through our website at www.freddiemac.com our annual reports on Form 10-K, quarterly
reports on Form 10-Q, current reports on Form 8-K, and all other SEC reports and amendments to those reports as soon
as reasonably practicable after we electronically file the material with, or furnish it to, the SEC. In addition, materials that
we filed with the SEC are available for review and copying at the SECs Public Reference Room at 100 F Street, N.E.,
Washington, D.C. 20549. The public may obtain information on the operation of the Public Reference Room by calling
the SEC at 1-800-SEC-0330. The SEC also maintains an internet site (www.sec.gov) that contains reports, proxy and
information statements, and other information regarding companies that file electronically with the SEC.
We are providing our website addresses and the website address of the SEC here or elsewhere in this annual report
on Form 10-K solely for your information. Information appearing on our website or on the SECs website is not
incorporated into this annual report on Form 10-K.
The conservatorship is indefinite in duration and the timing, conditions, and likelihood of our emerging from
conservatorship are uncertain. Even if the conservatorship is terminated, we would remain subject to the Purchase
Agreement, senior preferred stock, and warrant.
FHFA has stated that there is no exact time frame as to when the conservatorship may end. Termination of the
conservatorship (other than in connection with receivership) 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.
There is also significant uncertainty as to what changes may occur to our business structure during or following our
conservatorship, including whether we will continue to exist. It is possible that the conservatorship will end with us being
placed into receivership. The Acting Director of FHFA stated on September 19, 2011 that it ought to be clear to
everyone as this point, given [Freddie Mac and Fannie Maes] losses since being placed into conservatorship and the
terms of the Treasurys financial support agreements, that [Freddie Mac and Fannie Mae] will not be able to earn their
way back to a condition that allows them to emerge from conservatorship.
In addition, Treasury has the ability to acquire almost 80% of our common stock for nominal consideration 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, the restrictions on our business contained in the Purchase Agreement,
and the senior status of the senior preferred stock issued to Treasury under the Purchase Agreement, if the senior
46 Freddie Mac
preferred stock has not been redeemed, also could adversely affect our ability to attract new private sector capital in the
future should the company be in a position to seek such capital. Moreover, our draws under Treasurys funding
commitment, the senior preferred stock dividend obligation, and commitment fees paid to Treasury (commitment fees
have been waived through the first quarter of 2012) could permanently impair our ability to build independent sources of
capital.
We expect to make additional draws under the Purchase Agreement in future periods, which will adversely affect our
future results of operations and financial condition.
We expect to request additional draws under the Purchase Agreement in future periods. Over time, our dividend
obligation to Treasury on the senior preferred stock will increasingly drive future draws. Although we may experience
period-to-period variability in earnings and comprehensive income, it is unlikely that we will generate net income or
comprehensive income in excess of our annual dividends payable to Treasury over the long term. Dividends to Treasury
on the senior preferred stock are cumulative and accrue at an annual rate of 10% (or 12% in any quarter in which
dividends are not paid in cash) until all accrued dividends are paid in cash.
The size and timing of our future draws will be determined by our dividend obligation on the senior preferred stock
and a variety of other factors that could adversely affect our net worth. These other factors include the following:
how long and to what extent the U.S. economy and housing market, including home prices, remain weak, which
could increase credit expenses and cause additional other-than-temporary impairments of the non-agency mortgage-
related securities we hold;
foreclosure prevention efforts and foreclosure processing delays, which could increase our expenses;
competitiveness with other mortgage market participants, including Fannie Mae;
adverse changes in interest rates, the yield curve, implied volatility or mortgage-to-debt OAS, which could increase
realized and unrealized mark-to-fair value losses recorded in earnings or AOCI;
required reductions in the size of our mortgage-related investments portfolio and other limitations on our
investment activities that reduce the earnings capacity of our investment activities;
quarterly commitment fees payable to Treasury, the amount of which has not yet been established and could be
substantial (Treasury has waived the fee for all quarters of 2011 and the first quarter of 2012). Treasury has
indicated that it remains committed to protecting taxpayers and ensuring that our future positive earnings are
returned to taxpayers as compensation for their investment;
adverse changes in our funding costs or limitations in our access to public debt markets;
establishment of additional valuation allowances for our remaining net deferred tax asset;
changes in accounting practices or guidance;
effects of the MHA Program and other government initiatives, including any future requirements to reduce the
principal amount of loans;
losses resulting from control failures, including any control failures because of our inability to retain staff;
limitations on our ability to develop new products, enter into new lines of business, or increase guarantee and
related fees;
introduction of additional public mission-related initiatives that may adversely impact our financial results; or
changes in business practices resulting from legislative and regulatory developments or direction from our
Conservator.
Under the Purchase Agreement, the $200 billion cap on Treasurys funding commitment will increase as necessary to
accommodate any cumulative reduction in our net worth during 2010, 2011, and 2012. Although additional draws under
the Purchase Agreement will allow us to remain solvent and avoid mandatory receivership, they will also increase the
liquidation preference of, and the dividends we owe on, the senior preferred stock. Based on the aggregate liquidation
preference of the senior preferred stock of $72.3 billion (which amount includes the funds requested to address our net
worth deficit as of December 31, 2011), Treasury is entitled to annual cash dividends of $7.23 billion, which exceeds our
annual historical earnings in all but one period. Increases in the already substantial liquidation preference and senior
preferred stock dividend obligation, along with limited flexibility to redeem the senior preferred stock, will adversely
affect our results of operations and financial condition and add to the significant uncertainty regarding our long-term
financial sustainability. This may also cause further negative publicity about our company.
47 Freddie Mac
Our business objectives and strategies have in some cases been significantly altered since we were placed into
conservatorship, and may continue to change, in ways that negatively affect our future financial condition and results
of operations.
FHFA, as Conservator, has directed the company to focus on managing to a positive stockholders equity. At the
direction of the Conservator, we have made changes to certain business practices that are designed to provide support for
the mortgage market in a manner that serves our public mission and other non-financial objectives but may not contribute
to our goal of managing to a positive stockholders equity. Some of these changes have increased our expenses or caused
us to forego revenue opportunities. For example, FHFA has directed that we implement various initiatives under the MHA
Program. We expect to incur significant costs associated with the implementation of these initiatives and we cannot
currently estimate whether, or the extent to which, costs incurred in the near term from these initiatives may be offset, if
at all, by the prevention or reduction of potential future costs of serious delinquencies and foreclosures due to these
initiatives. On October 24, 2011, FHFA, Freddie Mac, and Fannie Mae announced a series of FHFA-directed changes to
HARP in an effort to attract more eligible borrowers whose monthly payments are current and who can benefit from
refinancing their home mortgages. There can be no assurance that the revisions to HARP will be successful in achieving
these objectives or that any benefits from the revised program will exceed our costs. The Conservator and Treasury have
also not authorized us to engage in certain business activities and transactions, including the purchase or sale of certain
assets, which we believe might have had a beneficial impact on our results of operations or financial condition, if
executed. Our inability to execute such initiatives and transactions may adversely affect our profitability. Other agencies of
the U.S. government, as well as Congress, also have an interest in the conduct of our business. We do not know what
actions they may request us to take.
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 continue to change, possibly significantly, including in pursuit of our public mission
and other non-financial objectives. Among other things, we could experience significant changes in the size, growth, and
characteristics of our guarantee activities, and we could further change our operational objectives, including our pricing
strategy in our core mortgage guarantee business. The conservatorship has significantly impacted our investment activity,
and we may face further restrictions on this activity. Accordingly, our strategic and operational focus may not always be
consistent with the generation of net income. It is possible that we will make material changes to our capital strategy and
to our accounting policies, methods, and estimates. In addition, we may be directed to engage in initiatives that are
operationally difficult or costly to implement, or that adversely affect our financial results. For example, FHFA has
directed us to take various actions in support of the objectives of a gradual transition to greater private capital
participation in housing finance and greater distribution of risk to participants other than the government, such as
developing security structures that allow for private sector risk sharing.
On December 23, 2011, President Obama signed into law the Temporary Payroll Tax Cut Continuation Act of 2011.
Among its provisions, this new law directs FHFA to require Freddie Mac and Fannie Mae to increase guarantee fees by
no less than 10 basis points above the average guarantee fees charged in 2011 on single-family mortgage-backed
securities. Under the law, the proceeds from this increase will be remitted to Treasury to fund the payroll tax cut, rather
than retained by the companies. It is currently unclear what effect this increase or any further guarantee fee increases or
other fee adjustments associated with this law will have on the future profitability and operations of our single-family
guarantee business, or on our ability to raise guarantee fees that may be retained by us. While we continue to assess the
impact of this law on us, we currently believe that implementation of this law will present operational and accounting
challenges for us.
FHFA has stated that it has focused Freddie Mac and Fannie Mae on their existing core business, including
minimizing credit losses, and taking actions necessary to advance the goals of the conservatorship, and is not permitting
Freddie Mac and Fannie Mae to offer new products or enter into new lines of business. FHFA stated that the focus of the
conservatorship is on conserving assets, minimizing corporate losses, ensuring Freddie Mac and Fannie Mae continue to
serve their mission, overseeing remediation of identified weaknesses in corporate operations and risk management, and
ensuring that sound corporate governance principles are followed. These and other restrictions imposed by FHFA could
adversely affect our financial results in future periods.
As our Conservator, FHFA possesses all of the powers of our stockholders, officers, and directors. During the
conservatorship, the Conservator has delegated certain authority to the Board of Directors to oversee, and to management
to conduct, day-to-day operations so that the company can continue to operate in the ordinary course of business. FHFA
has the ability to withdraw or revise its delegations of authority and override actions of our Board of Directors at any
time. The directors serve on behalf of, and exercise authority as directed by, the Conservator. In addition, FHFA has the
48 Freddie Mac
power to take actions without our knowledge that could be material to investors and could significantly affect our
financial performance.
These changes and other factors could have material adverse effects on, among other things, our portfolio growth, net
worth, credit losses, net interest income, guarantee fee income, net 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 when, or if, we will return to profitability.
We have a variety of different, and potentially competing, objectives that may adversely affect our financial results and
our ability to maintain positive net worth.
Based on our charter, other legislation, public statements from Treasury and FHFA officials and guidance and
directives from our Conservator, we have a variety of different, and potentially competing, objectives. These objectives
include: (a) minimizing our credit losses; (b) conserving assets; (c) providing liquidity, stability, and affordability in the
mortgage market; (d) continuing to provide additional assistance to the struggling housing and mortgage markets;
(e) managing to a positive stockholders equity and reducing the need to draw funds from Treasury pursuant to the
Purchase Agreement; and (f) protecting the interests of the taxpayers. These objectives create conflicts in strategic and
day-to-day decision making that will likely lead to suboptimal outcomes for one or more, or possibly all, of these
objectives. This could lead to negative publicity and damage our reputation. We may face increased operational risk from
these competing objectives. Current portfolio investment and mortgage guarantee activities, liquidity support, loan
modification and refinancing initiatives, and foreclosure forbearance initiatives, including our efforts under the MHA
Program, are intended to provide support for the mortgage market in a manner that serves our public mission and other
non-financial objectives under conservatorship, but may negatively impact our financial results and net worth.
FHFA directives that we and Fannie Mae adopt uniform approaches in some areas could have an adverse impact on
our business or on our competitive position with respect to Fannie Mae.
FHFA is also Conservator of Fannie Mae, our primary competitor. On multiple occasions, FHFA has directed us and
Fannie Mae to confer and suggest to FHFA possible uniform approaches to particular business and accounting issues and
problems. It is likely that we will receive additional directives in the future. In most such cases, FHFA subsequently
directed us and Fannie Mae to adopt a specific uniform approach. For example:
In March 2009, FHFA directed Freddie Mac and Fannie Mae to adopt the HAMP program for modification of
mortgages that they hold or guarantee, leading to a largely uniform approach to modifications for HAMP-eligible
borrowers;
In February 2010, FHFA directed Freddie Mac and Fannie Mae to work together to standardize definitions for
mortgage delivery data;
In January 2011, FHFA announced that it had directed Freddie Mac and Fannie Mae to work on a joint initiative,
in coordination with HUD, to consider alternatives for future mortgage servicing structures and servicing
compensation;
In April 2011, FHFA announced a new set of aligned standards for servicing of non-performing loans owned or
guaranteed by Freddie Mac and Fannie Mae, including a standard modification initiative for borrowers not eligible
for HAMP modifications;
In October 2011, through the revisions to the HARP initiative, FHFA directed us and Fannie Mae to align certain
aspects of our and Fannie Maes respective refinance initiatives; and
In December 2011, FHFA announced that the guarantee fee on all single-family residential mortgages sold to
Freddie Mac and Fannie Mae will increase by 10 basis points to fund the payroll tax cut, effective April 1, 2012.
This increase is in connection with the implementation of the Temporary Payroll Tax Cut Continuation Act of
2011.
We cannot predict the impact on our business of these actions or any similar actions FHFA may require us and
Fannie Mae to take in the future. It is possible that in some areas FHFA could require us and Fannie Mae to take a
uniform approach that, because of differences in our respective businesses, could place Freddie Mac at a competitive
disadvantage to Fannie Mae. We may be required to adopt approaches that are operationally difficult for us to implement.
It also is possible that in some cases identifying, adopting and maintaining a uniform approach could entail higher costs
than would a unilateral approach, and that when market conditions merit a change in a uniform approach, coordinating the
change might entail additional cost and delay. If and when conservatorship ends, market acceptance of a uniform
approach could make it difficult to depart from that approach even if doing so would be economically desirable.
49 Freddie Mac
We are subject to significant limitations on our business under the Purchase Agreement that could have a material
adverse effect on our results of operations and financial condition.
The Purchase Agreement includes significant restrictions on our ability to manage our business, including limitations
on the amount of indebtedness we may incur, the size of our mortgage-related investments portfolio, and the
circumstances in which we may pay dividends, transfer certain assets, raise capital, and pay down the liquidation
preference on the senior preferred stock. 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 executive officers without the consent of the Director of FHFA, in consultation with the Secretary of the Treasury. In
deciding whether or not to consent to any request for approval it receives from us under the Purchase Agreement,
Treasury has the right to withhold its consent for any reason and is not required by the agreement to consider any
particular factors, including whether or not management believes that the transaction would benefit the company. The
limitations under the Purchase Agreement could have a material adverse effect on our future results of operations and
financial condition.
Our regulator may, and in some cases must, place us into receivership, which would result in the liquidation of our
assets and terminate all rights and claims that our stockholders and creditors may have against our assets or under our
charter; if we are liquidated, there may not be sufficient funds to pay the secured and unsecured claims of the
company, repay the liquidation preference of any series of our preferred stock, or make any distribution to the holders
of our common stock.
We could be put into receivership at the discretion of the Director of FHFA at any time for a number of reasons,
including conditions that FHFA has already asserted existed at the time the then Director of FHFA placed us 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. In addition,
FHFA could be required to place us in receivership if Treasury is unable to provide us with funding requested under the
Purchase Agreement to address a deficit in our net worth. For more information, see If Treasury is unable to provide
us with funding requested under the Purchase Agreement to address a deficit in our net worth, FHFA could be required to
place us into receivership.
A receivership would terminate the conservatorship. The appointment of FHFA (or any other entity) as our receiver
would terminate all rights and claims that our stockholders and creditors may have against our assets or under our charter
arising as a result of their status as stockholders or creditors, other than the potential ability to be paid upon our
liquidation. Unlike conservatorship, the purpose of which is to conserve our assets and return us to a sound and solvent
condition, the purpose of receivership is to liquidate our assets and resolve claims against us.
In the event of a liquidation of our assets, there can be no assurance that there would be sufficient proceeds to pay
the secured and unsecured claims of the company, repay the liquidation preference of any series of our preferred stock or
make any distribution to the holders of our common stock. To the extent that we are placed into receivership and do not
or cannot fulfill our guarantee to the holders of our mortgage-related securities, such holders could become unsecured
creditors of ours with respect to claims made under our guarantee. 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,
which ranks senior to our common stock and all other series of preferred stock upon liquidation, 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. The aggregate liquidation preference on the senior preferred stock owned by
Treasury will increase to $72.3 billion upon funding of the draw request to address our net worth deficit as of
December 31, 2011. The liquidation preference will increase further if, as we expect, we make additional draws under the
Purchase Agreement. It will also increase if we do not pay dividends owed on the senior preferred stock in cash or if we
do not pay the quarterly commitment fee to Treasury under the Purchase Agreement.
If we are placed into receivership or no longer operate as a going concern, we would no longer be able to assert that
we will realize assets and satisfy liabilities in the normal course of business, and, therefore, our basis of accounting would
change to liquidation-based accounting. Under the liquidation basis of accounting, assets are stated at their estimated net
realizable value and liabilities are stated at their estimated settlement amounts, which could adversely affect our net
worth. In addition, the amounts in AOCI would be reclassified to earnings, which could also adversely affect our net
worth.
50 Freddie Mac
If Treasury is unable to provide us with funding requested under the Purchase Agreement to address a deficit in our
net worth, FHFA could be required to place us into receivership.
Under the Purchase Agreement, Treasury made a commitment to provide funding, under certain conditions, to
eliminate deficits in our net worth. Under the GSE Act, FHFA must place us into receivership if FHFA determines in
writing that our assets are less than our obligations for a period of 60 calendar days. FHFA has notified us that the
measurement period for any mandatory receivership determination with respect to our assets and obligations would
commence no earlier than the SEC public filing deadline for our quarterly or annual financial statements and would
continue for 60 calendar days after that date. FHFA has also advised us that, if, during that 60-day period, we receive
funds from Treasury in an amount at least equal to the deficiency amount under the Purchase Agreement, the Director of
FHFA will not make a mandatory receivership determination. If funding has been requested under the Purchase Agreement
to address a deficit in our net worth, and Treasury is unable to provide us with such funding within the 60-day period
specified by FHFA, FHFA would be required to place us into receivership if our assets remain less than our obligations
during that 60-day period.
The conservatorship and uncertainty concerning our future has had, and will likely continue to have, an adverse effect
on the retention, recruitment, and engagement of management and other employees, which could have a material
adverse effect on our ability to operate our business.
Our ability to recruit, retain, and engage management and other employees with the necessary skills to conduct our
business has been, and will likely continue to be, adversely affected by the conservatorship, the uncertainty regarding its
duration, the potential for future legislative or regulatory actions that could significantly affect our existence and our role
in the secondary mortgage market, and the negative publicity concerning the GSEs. Accordingly, we may not be able to
retain or replace executives or other employees with the requisite institutional knowledge and the technical, operational,
risk management, and other key skills needed to conduct our business effectively. We may also face increased operational
risk if key employees leave the company.
The actions taken by Congress, Treasury, and the Conservator to date, or that may be taken by them or other
government agencies in the future, may have an adverse effect on the retention and recruitment of senior executives,
management, and other valuable employees. For example, we are subject to restrictions on the amount and type of
compensation we may pay our executives under conservatorship. Also contributing to our concerns regarding executive
retention risk is the aggregate level of compensation paid to our Section 16 executive officers, which for 2011
performance was significantly below the 25th percentile of market-based compensation. See EXECUTIVE
COMPENSATION for more information. We cannot offer equity-based compensation, which is both common in our
industry and provides a key incentive for employees to stay with the company. The Conservator directed us to maintain
individual salaries and wage rates for all employees at 2010 levels for 2011 and 2012 (except in the case of promotions or
significant changes in responsibilities). Given our current status, we cannot offer the prospects of even medium-term
employment, much less long-term. Continued public condemnation of the company and its employees creates yet another
obstacle to hiring and retaining the talent we need.
We are finding it difficult to retain and engage critical employees and attract people with the skills and experience
we need. Voluntary attrition rates for high performing employees, those with specialized skill sets, and those responsible
for controls over financial reporting have risen markedly since we were placed into conservatorship. This has led to
concerns about staffing inadequacies, management depth, and employee engagement. Attracting qualified senior
executives is particularly difficult. We operate in an environment in which virtually every business decision is closely
scrutinized and subject to public criticism and review by various government authorities. Many executives are unwilling to
work in such an environment for potentially significantly less than what they could earn elsewhere. A recovering economy
is likely to put additional pressures on turnover in 2012, as other attractive opportunities may become available to people
who we want to retain. The high and increasing level of scrutiny from FHFA and its Office of Inspector General and other
regulators has also heightened stress levels throughout the organization and placed additional burdens on staff.
In 2011, the Financial Services Committee of the House of Representatives approved a bill that would generally put
our employees on the federal governments pay scale, and in 2012 the House and Senate each approved legislation
containing a provision that would prohibit senior executives from receiving bonuses during conservatorship. If this or
similar legislation were to become law, many of our employees would experience a sudden and sharp decrease in
compensation. The Acting Director of FHFA stated on November 15, 2011 that this would certainly risk a substantial
exodus of talent, the best leaving first in many instances. [Freddie Mac and Fannie Mae] likely would suffer a rapidly
growing vacancy list and replacements with lesser skills and no experience in their specific jobs. A significant increase in
safety and soundness risks and in costly operational failures would, in my opinion, be highly likely. The Acting Director
51 Freddie Mac
noted that [s]hould the risks I fear materialize, FHFA might well be forced to limit [Freddie Mac and Fannie Maes]
business activities. Some of the business [Freddie Mac and Fannie Mae] would be unable to undertake might simply not
occur, with potential disruption in housing markets and the economy. For more information on legislative developments
affecting compensation, see BUSINESS Regulation and Supervision Legislative and Regulatory Developments
Legislation Related to Reforming Freddie Mac and Fannie Mae.
The conservatorship and investment by Treasury has had, and will continue to have, a material adverse effect on our
common and preferred stockholders.
Prior to our entry into conservatorship, the market price for our common stock declined substantially. After our entry
into conservatorship, the market price of our common stock continued to decline, and has been $1 or less per share since
June 2010. As a result, the investments of our common and preferred stockholders lost substantial value, which they may
never recover. There is significant uncertainty as to what changes may occur to our business structure during or following
our conservatorship, including whether we will continue to exist. Therefore, it is likely that our shares could further
diminish in value, or cease to have any value. The Acting Director of FHFA has stated that [Freddie Mac and Fannie
Maes] equity holders retain an economic claim on the companies but that claim is subordinate to taxpayer claims. As a
practical matter, taxpayers are not likely to be repaid in full, so [Freddie Mac and Fannie Mae] stock lower in priority is
not likely to have any value.
The conservatorship and investment by Treasury has had, and will continue to have, other material adverse effects on
our common and preferred stockholders, including the following:
No voting rights during conservatorship. The rights and powers of our stockholders are suspended during the
conservatorship and our common stockholders do not have the ability to elect directors or to vote on other matters.
No longer managed to maximize stockholder returns. Because we are in conservatorship, we are no longer
managed with a strategy to maximize stockholder returns. FHFA has stated that it has focused Freddie Mac and
Fannie Mae on their existing core business, including minimizing credit losses, and taking actions necessary to
advance the goals of the conservatorship. FHFA stated that it is not permitting Freddie Mac and Fannie Mae to
offer new products or enter into new lines of business. FHFA stated that the focus of the conservatorship is on
conserving assets, minimizing corporate losses, ensuring Freddie Mac and Fannie Mae continue to serve their
mission, overseeing remediation of identified weaknesses in corporate operations and risk management, and
ensuring that sound corporate governance principles are followed.
Priority of Senior Preferred Stock. 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.
Dividends have been eliminated. The Conservator has eliminated dividends on Freddie Mac common and
preferred stock (other than dividends on the senior preferred stock) during the conservatorship. In addition, under
the terms of the Purchase Agreement, dividends may not be paid to common or preferred stockholders (other than
on the senior preferred stock) without the consent of Treasury, regardless of whether or not we are in
conservatorship.
Warrant may substantially dilute investment of current stockholders. 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 stockholders will be
substantially diluted. It is possible that stockholders, other than Treasury, will not own more than 20.1% of our
total common stock for the duration of our existence. Under our charter, bylaws and applicable law, 20.1% is
insufficient to control the outcome of any vote that is presented to the common stockholders. Accordingly, existing
common stockholders 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.
We are subject to mortgage credit risks, including mortgage credit risk relating to off-balance sheet arrangements;
increased credit costs related to these risks could adversely affect our financial condition and/or results of operations.
Mortgage credit risk is the risk that a borrower will fail to make timely payments on a mortgage we own or
guarantee, exposing us to the risk of credit losses and credit-related expenses. We are primarily exposed to mortgage
credit risk with respect to the single-family and multifamily loans that we own or guarantee and hold on our consolidated
balance sheets. We are also exposed to mortgage credit risk with respect to securities and guarantee arrangements that are
not reflected as assets on our consolidated balance sheets. These relate primarily to: (a) Freddie Mac mortgage-related
securities backed by multifamily loans; (b) certain Other Guarantee Transactions; and (c) other guarantee commitments,
including long-term standby commitments and liquidity guarantees.
Significant factors that affect the level of our single-family mortgage credit risk include the credit profile of the
borrower (e.g., credit score, credit history, and monthly income relative to debt payments), documentation level, the
number of borrowers, the features of the mortgage loan, occupancy type, the type of property securing the mortgage, the
LTV ratio of the loan, and local and regional economic conditions, including home prices and unemployment rates. Our
credit losses will remain high for the foreseeable future due to the substantial number of mortgage loans in our single-
family credit guarantee portfolio on which borrowers owe more than their home is currently worth, as well as the
substantial inventory of seriously delinquent loans.
While mortgage interest rates remained low in 2011, many borrowers may not have been able to refinance into lower
interest mortgages or reduce their monthly payments through mortgage modifications due to substantial declines in home
values, market uncertainty, and continued high unemployment rates. Therefore, there can be no assurance that continued
53 Freddie Mac
low mortgage interest rates or efforts to modify and refinance mortgages pursuant to the MHA Program (including
pursuant to the revisions to HARP announced in October 2011) and to modify mortgages under our other loss mitigation
initiatives will reduce our overall mortgage credit risk.
We also continue to have significant amounts of mortgage loans in our single-family credit guarantee portfolio with
certain characteristics, such as Alt-A, interest-only, option ARMs, loans with original LTV ratios greater than 90%, and
loans where borrowers had FICO scores less than 620 at the time of origination, that expose us to greater credit risk than
do other types of mortgage loans. As of December 31, 2011, loans with one or more of the above characteristics
comprised approximately 20% of our single-family credit guarantee portfolio. See Table 50 Certain Higher-Risk
Categories in the Single-Family Credit Guarantee Portfolio for more information.
Beginning in 2008, the conforming loan limits were significantly increased for mortgages originated in certain high
cost areas (the initial increases applied to loans originated after July 1, 2007). Due to our relative lack of experience with
these conforming jumbo loans, purchases pursuant to the high cost conforming loan limits may also expose us to greater
credit risks.
The level of our multifamily mortgage credit risk is affected by the mortgaged propertys ability to generate rental
income from which debt service can be paid. That ability in turn is affected by rental market conditions (e.g., rental and
vacancy rates), the physical condition of the property, the quality of the propertys management, and the level of operating
costs. For certain multifamily mortgage products, we utilize other forms of credit enhancement, such as subordination
through Other Guarantee Transactions, which are intended to reduce our risk exposure.
A risk we continue to monitor is that multifamily borrowers will default if they are unable to refinance their loans at
an affordable rate. This risk is particularly important with respect to multifamily loans because such loans generally have
a balloon payment and typically have a shorter contractual term than single-family mortgages. Borrowers may be less able
to refinance their obligations during periods of rising interest rates or weak economic conditions, which could lead to
default if the borrower is unable to find affordable refinancing. However, of the $116.1 billion in UPB of loans in our
multifamily mortgage portfolio as of December 31, 2011, only approximately 3% and 5% will reach their maturity during
2012 and 2013, respectively.
We are exposed to significant credit risk related to the subprime, Alt-A, and option ARM loans that back the non-
agency mortgage-related securities we hold.
Our investments in non-agency mortgage-related securities include securities that are backed by subprime, Alt-A, and
option ARM loans. As of December 31, 2011, such securities represented approximately 54% of our total investments in
non-agency mortgage-related securities. Since 2007, mortgage loan delinquencies and credit losses in the U.S. mortgage
market have substantially increased, particularly in the subprime, Alt-A, and option ARM sectors of the residential
mortgage market. In addition, home prices have declined significantly, after extended periods during which home prices
appreciated. As a result, the fair value of these investments has declined significantly since 2007, and we have recorded
substantial other-than-temporary impairments, which has adversely impacted stockholders equity (deficit). In addition,
most of these investments do not trade in a liquid secondary market and the size of our holdings relative to normal market
activity is such that, if we were to attempt to sell a significant quantity of these securities, the pricing in such markets
could be significantly disrupted and the price we ultimately realize may be materially lower than the value at which we
carry these investments on our consolidated balance sheets.
We could experience additional GAAP losses due to other-than-temporary impairments on our investments in these
non-agency mortgage-related securities if, among other things: (a) interest rates change; (b) delinquency and loss rates on
subprime, Alt-A, and option ARM loans increase; (c) there is a further decline in actual or forecasted home prices; or
(d) there is a deterioration in servicing performance. In addition, the fair value of these investments may decline further
due to additional ratings downgrades or market events. Any credit enhancements covering these securities, including
subordination and other structural enhancements, may not prevent us from incurring losses. During 2011, we continued to
experience the erosion of structural credit enhancements on many securities backed by subprime first lien, option ARM,
and Alt-A loans due to poor performance of the underlying mortgages. The financial condition of bond insurers also
continued to deteriorate in 2011. See MD&A CONSOLIDATED BALANCE SHEETS ANALYSIS Investments in
Securities for information about the credit ratings for these securities and the extent to which these securities have been
downgraded.
54 Freddie Mac
Certain strategies to mitigate our losses as an investor in non-agency mortgage-related securities may adversely affect
our relationships with some of our largest seller/servicers.
On September 2, 2011, FHFA announced that, as Conservator for Freddie Mac and Fannie Mae, it had filed lawsuits
against 17 financial institutions and related defendants alleging: (a) violations of federal securities laws; and (b) in certain
lawsuits, common law fraud in the sale of residential non-agency mortgage-related securities to Freddie Mac and Fannie
Mae. These institutions include some of our largest seller/servicers and counterparties. FHFA, as Conservator, filed a
similar lawsuit against UBS Americas, Inc. and related defendants on July 27, 2011. FHFA seeks to recover losses and
damages sustained by Freddie Mac and Fannie Mae as a result of their investments in certain residential non-agency
mortgage-related securities issued by these financial institutions.
At the direction of our Conservator, we are working to enforce our rights as an investor with respect to the non-
agency mortgage-related securities we hold, and are engaged in other efforts to mitigate losses on our investments in these
securities, in some cases in conjunction with other investors. For example, FHFA, as Conservator of Freddie Mac and
Fannie Mae, has issued subpoenas to various entities seeking loan files and other transaction documents related to non-
agency mortgage-related securities in which the two enterprises invested. FHFA stated that the documents will enable it to
determine whether issuers of these securities and others are liable to Freddie Mac and Fannie Mae for certain losses they
have suffered on the securities. We are assisting FHFA in this effort.
These and other loss mitigation efforts may lead to further disputes with some of our largest seller/servicers and
counterparties that may result in further litigation. This could adversely affect our relationship with any such company and
could, for example, result in the loss of some or all of our business with a large seller/servicer. The effectiveness of these
loss mitigation efforts is highly uncertain and any potential recoveries may take significant time to realize. For more
information, see MD&A RISK MANAGEMENT Credit Risk Institutional Credit Risk Non-Agency Mortgage-
Related Security Issuers.
The credit losses we experience in future periods as a result of the housing and economic downturn are likely to be
larger, perhaps substantially larger, than our current loan loss reserves.
Our loan loss reserves, as reflected on our consolidated balance sheets, do not reflect the total of all future credit
losses we will ultimately incur with respect to our single-family and multifamily mortgage loans, including those
underlying our financial guarantees. Rather, pursuant to GAAP, our reserves only reflect probable losses we believe we
have already incurred as of the balance sheet date. Accordingly, although we believe that our credit losses may exceed the
amounts we have already reserved for loans currently identified as impaired, and that additional credit losses will be
incurred in the future due to the housing and economic downturn, we are not permitted under GAAP to reflect the
potential impact of these future trends in our loan loss reserves. As a result of the depth and extent of the housing and
economic downturn, there is significant uncertainty regarding the full extent of future credit losses. Therefore, such credit
losses are likely to be larger, perhaps substantially larger, than our current loan loss reserves. Additional credit losses we
incur in future periods will adversely affect our business, results of operations, financial condition, liquidity, and net
worth.
Further declines in U.S. home prices or other adverse changes in the U.S. housing market could negatively impact our
business and increase our losses.
Throughout 2011, the U.S. housing market continued to experience adverse trends, including continued price
depreciation, continued high serious delinquency and default rates, and extended foreclosure timelines. Low volumes of
home sales and the continued large supply of unsold homes placed further downward pressure on home prices. These
conditions, coupled with continued high unemployment, led to continued high loan delinquencies and provisioning for
loan losses. Our credit losses remained high in 2011, in part because home prices have experienced significant cumulative
declines in many geographic areas in recent years. We expect that national average home prices will continue to remain
weak and will likely decline over the near term, which could result in a continued high rate of serious delinquencies or
defaults and a level of credit-related losses higher than our expectations when our guarantees were issued.
We prepare internal forecasts of future home prices, which we use for certain business activities, including:
(a) hedging prepayment risk; (b) setting fees for new guarantee business; and (c) portfolio activities. It is possible that
home price declines could be significantly greater than we anticipate, or that a sustained recovery in home prices would
not begin until much later than we anticipate, which could adversely affect our performance of these business activities.
For example, this could cause the return we earn on new single-family guarantee business to be less than expected. This
could also result in higher losses due to other-than-temporary impairments on our investments in non-agency mortgage-
related securities than would otherwise be recognized in earnings. Government programs designed to strengthen the
55 Freddie Mac
U.S. housing market, such as the MHA Program, may fail to achieve expected results, and new programs could be
instituted that cause our credit losses to increase. For more information, see MD&A RISK MANAGEMENT Credit
Risk.
Our business volumes are closely tied to the rate of growth in total outstanding U.S. residential mortgage debt and
the size of the U.S. residential mortgage market. Total residential mortgage debt declined approximately 1.8% in the first
nine months of 2011 (the most recent data available) compared to a decline of approximately 3.2% in 2010. If total
outstanding U.S. residential mortgage debt were to continue to decline, there could be fewer mortgage loans available for
us to purchase, and we could face more competition to purchase a smaller number of loans.
While multifamily market fundamentals (i.e., vacancy rates and effective rents) improved during 2011, there can be
no assurance that this trend will continue. Certain local multifamily markets exhibit relatively weak fundamentals,
especially some of those hit hardest by residential home price declines. Any further softening of the broader economy
could have negative impacts on multifamily markets, which could cause delinquencies and credit losses relating to our
multifamily activities to increase beyond our current expectations.
Our refinance volumes could decline if interest rates rise, which could cause our overall new mortgage-related security
issuance volumes to decline.
We continued to experience a high percentage of refinance mortgages in our purchase volume during 2011 due to
continued low interest rates and the impact of our relief refinance mortgages. Interest rates have been at historically low
levels for an extended period of time. Overall originations of refinance mortgages, and our purchases of them, will likely
decrease if interest rates rise and home prices remain at depressed levels. Originations of refinance mortgages will also
likely decline after the Home Affordable Refinance Program expires in December 2013. In addition, many eligible
borrowers have already refinanced at least once during this period of low interest rates, and therefore may be unlikely to
do so again in the near future. It is possible that our overall mortgage-related security issuance volumes could decline if
our volumes of purchase money mortgages do not increase to offset any such decrease in refinance mortgages. This could
adversely affect the amount of revenue we receive from our guarantee activities.
We could incur significant credit losses and credit-related expenses in the event of a major natural disaster or other
catastrophic event in geographic areas in which portions of our total mortgage portfolio and REO holdings are
concentrated.
We own or guarantee mortgage loans and own REO properties throughout the United States. The occurrence of a
major natural or environmental disaster (such as an earthquake, hurricane, tsunami, or widespread damage caused to the
environment by commercial entities), terrorist attack, pandemic, or similar catastrophic event in a regional geographic area
of the United States could negatively impact our credit losses and credit-related expenses in the affected area.
The occurrence of a catastrophic event could negatively impact a geographic area in a number of different ways,
depending on the nature of the event. A catastrophic event that either damaged or destroyed residential real estate
underlying mortgage loans we own or guarantee or negatively impacted the ability of homeowners to continue to make
principal and interest payments on mortgage loans we own or guarantee could increase our serious delinquency rates and
average loan loss severity in the affected region or regions, which could have a material adverse effect on our business,
results of operations, financial condition, liquidity and net worth. Such an event could also damage or destroy REO
properties we own. While we attempt to maintain a geographically diverse portfolio, there can be no assurance that a
catastrophic event, depending on its magnitude, scope and nature, will not generate significant credit losses and credit-
related expenses. We may not have insurance coverage for some of these catastrophic events. In some cases, we may be
prohibited by state law from requiring such insurance as a condition to our purchasing or guaranteeing loans.
We depend on our institutional counterparties to provide services that are critical to our business, and our results of
operations or financial condition may be adversely affected if one or more of our institutional counterparties do not
meet their obligations to us.
We face the risk that one or more of the institutional counterparties that has entered into a business contract or
arrangement with us may fail to meet its obligations. We face similar risks with respect to contracts or arrangements we
benefit from indirectly or that we enter into on behalf of our securitization trusts. Our primary exposures to institutional
counterparty risk are with:
mortgage seller/servicers;
mortgage insurers;
56 Freddie Mac
issuers, guarantors or third-party providers of other credit enhancements (including bond insurers);
counterparties to short-term lending and other investment-related agreements and cash equivalent transactions,
including such agreements and transactions we manage for our PC trusts;
derivative counterparties;
hazard and title insurers;
mortgage investors and originators; and
document custodians and funds custodians.
Many of our counterparties provide several types of services to us. In some cases, our business with institutional
counterparties is concentrated. The concentration of our exposure to our counterparties increased in recent periods due to
industry consolidation and counterparty failures, and we continue to face challenges in reducing our risk concentrations
with counterparties. Efforts we take to reduce exposure to financially weakened counterparties could further increase our
exposure to other individual counterparties. In the future, our mortgage insurance exposure will be concentrated among a
smaller number of counterparties. A significant failure by a major institutional counterparty could harm our business and
financial results in a variety of ways, including by adversely affecting our ability to conduct operations efficiently and at
cost-effective rates, and have a material adverse effect on our investments in mortgage loans, investments in securities, our
derivative portfolio or our credit guarantee activities. See NOTE 16: CONCENTRATION OF CREDIT AND OTHER
RISKS for additional information.
Some of our counterparties may become subject to serious liquidity problems affecting their businesses, either
temporarily or permanently, which may adversely affect their ability to meet their obligations to us. In recent periods,
challenging market conditions have adversely affected the liquidity and financial condition of our counterparties. These
trends may continue. In particular, we believe all of our derivative portfolio and cash and other investments portfolio
counterparties are exposed to fiscally troubled European countries. It is possible that continued adverse developments in
the Eurozone could significantly impact such counterparties. In turn, this could adversely affect their ability to meet their
obligations to us.
In the past few years, some of our largest seller/servicers have experienced ratings downgrades and liquidity
constraints, and certain large lenders have failed. These challenging market conditions could also increase the likelihood
that we will have disputes with our counterparties concerning their obligations to us, especially with respect to
counterparties that have experienced financial strain and/or have large exposures to us. See MD&A RISK
MANAGEMENT Credit Risk Institutional Credit Risk for additional information regarding our credit risks to
certain categories of counterparties and how we seek to manage them.
The servicing of mortgage loans backing our single-family non-agency mortgage-related securities investments is
concentrated in a small number of institutions. We could experience losses on these investments from servicing
performance deterioration should one of these institutions come under financial distress. Furthermore, Freddie Macs
rights as a non-agency mortgage-related securities investor to transfer servicing are limited.
Our financial condition or results of operations may be adversely affected if mortgage seller/servicers fail to repurchase
loans sold to us in breach of representations and warranties or fail to honor any related indemnification or recourse
obligations.
We 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. In lieu of repurchase, we may agree to allow a seller/servicer to indemnify us against
losses on such mortgages or otherwise compensate us for the risk of continuing to hold the mortgages. Sometimes a
seller/servicer sells us mortgages with recourse, meaning that the seller/servicer agrees to repurchase any mortgage that is
delinquent for more than a specified period (usually 120 days), regardless of whether there has been a breach of
representations and warranties.
Some of our seller/servicers have failed to fully perform their repurchase obligations due to lack of financial
capacity, while others, including many of our larger seller/servicers, have not fully performed their repurchase obligations
in a timely manner. As of December 31, 2011 and 2010, the UPB of loans subject to repurchase requests based on
breaches of representations and warranties issued to our single-family seller/servicers was approximately $2.7 billion and
$3.8 billion, respectively. As of December 31, 2011, approximately $1.2 billion of such loans were subject to repurchase
requests issued due to mortgage insurance rescission or mortgage insurance claim denial.
57 Freddie Mac
Our contracts require that a seller/servicer repurchase a mortgage within 30 days after we issue a repurchase request,
unless the seller/servicer avails itself of an appeal process provided for in our contracts, in which case the deadline for
repurchase is extended until we decide the appeal. As of December 31, 2011 and 2010, approximately 39% and 34%,
respectively, of these repurchase requests were outstanding more than four months since issuance of our repurchase
request (these figures included repurchase requests for which appeals were pending).
The amount we collect on these requests and others we may make in the future could be significantly less than the
UPB of the loans subject to the repurchase requests primarily because we expect many of these requests will likely be
satisfied by reimbursement of our realized credit losses by seller/servicers, instead of repurchase of loans at their UPB, or
may be rescinded in the course of the contractual appeals process. Based on our historical loss experience and the fact
that many of these loans are covered by credit enhancement, we expect the actual credit losses experienced by us should
we fail to collect on these repurchase requests will also be less than the UPB of the loans. We may also enter into
agreements with seller/servicers to resolve claims for repurchases. The amounts we receive under any such agreements
may be less than the losses we ultimately incur.
Our credit losses may increase to the extent our seller/servicers do not fully perform their repurchase obligations.
Enforcing repurchase obligations of seller/servicers who have the financial capacity to perform those obligations could
also negatively impact our relationships with such customers and could result in the loss of some or all of our business
with such customers, which could negatively impact our ability to retain market share. It may be difficult, expensive, and
time-consuming to legally enforce a seller/servicers repurchase obligations, in the event a seller/servicer continues to fail
to perform such obligations.
On October 24, 2011, FHFA, Freddie Mac, and Fannie Mae announced a series of FHFA-directed changes to HARP.
We may face greater exposure to credit and other losses on these HARP loans because we are not requiring lenders to
provide us with certain representations and warranties on these HARP loans. For more information, see MD&A RISK
MANAGEMENT Credit Risk Mortgage Credit Risk Single-Family Loan Workouts and the MHA Program
Home Affordable Refinance Program and Relief Refinance Mortgage Initiative.
We also have exposure to seller/servicers with respect to mortgage insurance. When a mortgage insurer rescinds
coverage or denies or curtails a claim, we may require the seller/servicer to repurchase the mortgage or to indemnify us
for additional loss. The volume of rescissions, claim denials, and curtailments by mortgage insurers remains high.
We face the risk that seller/servicers may fail to perform their obligations to service loans in our single-family and
multifamily mortgage portfolios or that their servicing performance could decline.
Our seller/servicers have a significant role in servicing loans in our single-family credit guarantee portfolio, which
includes an active role in our loss mitigation efforts. Therefore, a decline in their performance could impact our credit
performance (including through missed opportunities for mortgage modifications), which could adversely affect our
financial condition or results of operations and have a significant impact on our ability to mitigate credit losses. The risk
of such a decline in performance remains high. The high levels of seriously delinquent loan volume, the ongoing weak
conditions of the mortgage market, and the number and variety of additions and changes to HAMP and our other loan
modification and loss mitigation initiatives have placed a strain on the loss mitigation resources of many of our seller/
servicers. This has also increased the operational complexity of the servicing function, as well as the risk that errors will
occur. A number of seller/servicers have had to address issues relating to the improper preparation and execution of
certain documents used in foreclosure proceedings, which has further strained their resources. There have also been a
number of regulatory developments that have increased, or could increase, the complexity of the servicing function. It is
also possible that we could be directed to introduce additional changes to the servicing function that increase its
complexity, such as new or revised loan modification or loss mitigation initiatives or new compensation arrangements.
Our expected ability to partially mitigate losses through loan modifications and other alternatives to foreclosure is a factor
we consider in determining our allowance for loan losses. Therefore, the inability to realize the anticipated benefits of our
loss mitigation plans could cause our losses to be significantly higher than those currently estimated. Weak economic
conditions continue to affect the liquidity and financial condition of many of our seller/servicers, including some of our
largest seller/servicers. Any efforts we take to attempt to improve our servicers performance could adversely affect our
relationships with such servicers, many of which also sell loans to us.
If a servicer does not fulfill its servicing obligations (including its repurchase or other responsibilities), we may seek
partial or full recovery of the amounts that such servicer owes us, such as by attempting to sell the applicable mortgage
servicing rights to a different servicer and applying the proceeds to such owed amounts, or by contracting the servicing
responsibilities to a different servicer and retaining the net servicing fee. The ongoing weakness in the housing market has
negatively affected the market for mortgage servicing rights, which increases the risk that we might not receive a
58 Freddie Mac
sufficient price for such rights or that we may be unable to find buyers who: (a) have sufficient capacity to service the
affected mortgages in compliance with our servicing standards; (b) are willing to assume the representations and
warranties of the former servicer regarding the affected mortgages (which we typically require); and (c) have sufficient
capacity to service all of the affected mortgages. Increased industry consolidation, bankruptcies of mortgage bankers or
bank failures may also make it more difficult for us to sell such rights, because there may not be sufficient capacity in the
market, particularly in the event of multiple failures. This option may be difficult to accomplish with respect to our larger
seller/servicers due to operational and capacity challenges of transferring a large servicing portfolio. The financial stress
on servicers and increased costs of servicing may lead to strategic defaults (i.e., defaults done deliberately as a financial
strategy, and not involuntarily) by servicers, which would also require us to seek a successor servicer.
Our seller/servicers also have a significant role in servicing loans in our multifamily mortgage portfolio. We are
exposed to the risk that multifamily seller/servicers could come under financial pressure, which could potentially cause
degradation in the quality of the servicing they provide us including their monitoring of each propertys financial
performance and physical condition. This could also, in certain cases, reduce the likelihood that we could recover losses
through lender repurchases, recourse agreements, or other credit enhancements, where applicable.
See MD&A RISK MANAGEMENT Credit Risk Institutional Credit Risk Single-family Mortgage Seller/
Servicers and Multifamily Mortgage Seller/Servicers for additional information on our institutional credit risk
related to our mortgage seller/servicers.
Our financial condition or results of operations may be adversely affected by the financial distress of our
counterparties to derivatives, funding, and other transactions.
We use derivatives for several purposes, including to regularly adjust or rebalance our funding mix in response to
changes in the interest-rate characteristics of our mortgage-related assets and to hedge forecasted issuances of debt. The
relative concentration of our derivative exposure among our primary derivative counterparties remains high. This
concentration increased in the last several years due to industry consolidation and the failure of certain counterparties, and
could further increase. Three of our derivative counterparties each accounted for greater than 10% of our net
uncollateralized exposure, excluding commitments, at December 31, 2011. For a further discussion of our exposure to
derivative counterparties, see MD&A RISK MANAGEMENT Credit Risk Institutional Credit Risk Derivative
Counterparties and NOTE 16: CONCENTRATION OF CREDIT AND OTHER RISKS.
Some of our derivative and other capital markets counterparties have experienced various degrees of financial distress
in the past few years, 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 capital markets
counterparties to the extent that they fail to meet their obligations to us. For example, our OTC derivative counterparties
are required to post collateral in certain circumstances to cover our net exposure to them on derivative contracts. We may
incur losses if the collateral held by us cannot be liquidated at prices that are sufficient to cover the amount of such
exposure.
Our ability to engage in routine derivatives, funding, and other transactions could be adversely affected by the actions
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 acceptable counterparties for such transactions.
We also use derivatives to synthetically create the substantive economic equivalent of various debt funding structures.
Thus, if our access to the derivative markets were disrupted, it may become more difficult or expensive to fund our
business activities and achieve the funding mix we desire, which could adversely affect our business and results of
operations.
Our credit losses and other-than-temporary impairments recognized in earnings could increase if our mortgage or bond
insurers become insolvent or fail to perform their obligations to us.
We are exposed to risk relating to the potential insolvency of or non-performance by mortgage insurers that insure
single-family mortgages we purchase or guarantee and bond insurers that insure certain of the non-agency mortgage-
related securities we hold. The weakened financial condition and liquidity position of these counterparties increases the
risk that these entities will fail to fully reimburse us for claims under insurance policies. This risk could increase if home
prices deteriorate further or if the economy worsens.
59 Freddie Mac
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. Thus, if any of our mortgage insurers that provide credit enhancement fails to
fulfill its obligation, we could experience increased credit losses. In addition, if a regulator determined that a mortgage
insurer lacked sufficient capital to pay all claims when due, the regulator could take action that might impact the timing
and amount of claim payments made to us. We independently assess the financial condition, including the claims-paying
resources, of each of our mortgage insurers. Based on our analysis of the financial condition of a mortgage insurer and
pursuant to our eligibility requirements for mortgage insurers, we could take action against a mortgage insurer intended to
protect our interests that may impact the timing and amount of claims payments received from that insurer. We expect to
receive substantially less than full payment of our claims from Triad Guaranty Insurance Corp., Republic Mortgage
Insurance Company and PMI Mortgage Insurance Co. We also believe that certain other of our mortgage insurance
counterparties may lack sufficient ability to meet all their expected lifetime claims paying obligations to us as such claims
emerge.
In the event one or more of our bond insurers were to become insolvent, it is likely that we would not collect all of
our claims from the affected insurer. This would impact our ability to recover certain unrealized losses on our investments
in non-agency mortgage-related securities, and could contribute to net impairment of available-for-sale securities
recognized in earnings. We evaluate the expected recovery from primary bond insurance policies as part of our
impairment analysis for our investments in securities. If a bond insurers performance with respect to its obligations on
our investments in securities is worse than expected, this could contribute to additional net impairment of those securities.
In addition, the fair values of our securities may further decline, which could also have a material adverse effect on our
results and financial condition. We expect to receive substantially less than full payment from several of our bond
insurers, including Ambac Assurance Corporation and Financial Guaranty Insurance Company, due to adverse
developments concerning these companies. Ambac Assurance Corporation and Financial Guaranty Insurance Company are
currently not paying any of their claims. We believe that some of our other bond insurers may also lack sufficient ability
to fully meet all of their expected lifetime claims-paying obligations to us as such claims emerge.
For more information on developments concerning our mortgage insurers and bond insurers, see MD&A RISK
MANAGEMENT Credit Risk Institutional Credit Risk Mortgage Insurers and Bond Insurers.
If mortgage insurers were to further tighten their standards or fall out of compliance with regulatory capital
requirements, the volume of high LTV ratio mortgages available for us to purchase could be reduced, which could
reduce our overall volume of new business. Mortgage insurance standards could constrain our future ability to
purchase loans with LTV ratios over 80%.
Our charter requires that single-family mortgages with LTV ratios above 80% at the time of purchase be covered by
specified credit enhancements or participation interests. Our purchases of mortgages with LTV ratios above 80% (other
than relief refinance mortgages) have declined in recent years, in part because mortgage insurers tightened their eligibility
requirements with respect to the issuance of insurance on new mortgages with such higher LTV ratios. If mortgage
insurers further restrict their eligibility requirements for such loans, or if we are no longer willing or able to obtain
mortgage insurance from these counterparties under terms we find reasonable, and we are not able to avail ourselves of
suitable alternative methods of obtaining credit enhancement for these loans, we may be further restricted in our ability to
purchase or securitize loans with LTV ratios over 80% at the time of purchase. This could further reduce our overall
volume of new business. This could also negatively impact our ability to participate in a significant segment of the
mortgage market (i.e., loans with LTV ratios over 80%) should we seek, or be directed, to do so.
If a mortgage insurance company were to fall out of compliance with regulatory capital requirements and not obtain
appropriate waivers, it could become subject to regulatory actions that restrict its ability to write new business in certain,
or in some cases all, states. During the third quarter of 2011, Republic Mortgage Insurance Company and PMI Mortgage
Insurance Co. were prohibited from writing new business by their primary state regulators and neither writes new business
in any state any longer. Given the difficulties in the mortgage insurance industry, we believe it is likely that other
companies may be unable to meet regulatory capital requirements.
A mortgage insurer may attempt a corporate restructuring designed to enable it to continue to write new business
through a new entity in the event the insurer falls out of compliance with regulatory capital requirements. However, there
can be no assurance that an insurer would be able to accomplish such a restructuring, as the restructured entity would be
required to satisfy regulatory requirements as well as our own conditions. These restructuring plans generally involve
contributing capital to a subsidiary or affiliate. This could result in less liquidity available to the existing mortgage insurer
to pay claims on its existing book of business, and an increased risk that the mortgage insurer would not pay its claims in
full in the future. We monitor the claim paying ability of our mortgage insurers. As these restructuring plans are presented
60 Freddie Mac
to us for review, we attempt to determine whether the insurers plans make available sufficient resources to meet their
obligations to policyholders of the insurance entities involved in the restructuring. However, there can be no assurance that
any such restructuring will enable payment in full of all claims in the future. See NOTE 1: SUMMARY OF
SIGNIFICANT ACCOUNTING POLICIES Allowance for Loan Losses and Reserve for Guarantee Losses Single-
Family Loans for more information.
We could incur increased credit losses if our seller/servicers enter into arrangements with mortgage insurers for
settlement of future rescission activity and such agreements could potentially reduce the ability of mortgage insurers to
pay claims to us.
Under our contracts with our seller/servicers, the rescission or denial of mortgage insurance on a loan is grounds for
us to make a repurchase request to the seller/servicer. At least one of our largest servicers has entered into arrangements
with two of our mortgage insurance counterparties under which the servicer pays and/or indemnifies the insurer in
exchange for the mortgage insurer agreeing not to issue mortgage insurance rescissions or denials of coverage on Freddie
Mac mortgages. When such an agreement is in place, we are unable to make repurchase requests based solely on a
rescission of insurance or denial of coverage. Thus, there is a risk that we will experience higher credit losses if we do not
independently identify other areas of noncompliance with our contractual requirements and require lenders to repurchase
the loans we own. Additionally, there could be a negative financial impact on our mortgage insurers ability to pay their
other obligations to us if the payments they receive from the seller/servicers are insufficient to compensate them for the
insurance claims paid that would have otherwise been denied. As guarantor of the insured loans, we remain responsible
for the payment of principal and interest if a mortgage insurer fails to meet its obligation to reimburse us for claims, and
this could increase our credit losses. In April 2011, we issued an industry letter to our servicers reminding them that they
may not enter into these types of agreements without our consent. Several of our servicers have asked us to consent to
these types of agreements. We are evaluating these requests on a case by case basis.
The loss of business volume from key lenders could result in a decline in our market share and revenues.
Our business depends on our ability to acquire a steady flow of mortgage loans. We purchase a significant percentage
of our single-family mortgages from several large mortgage originators. During 2011 and 2010, approximately 82% and
78%, respectively, of our single-family mortgage purchase volume was associated with our ten largest customers. During
2011, two mortgage lenders (Wells Fargo Bank, N.A. and JPMorgan Chase Bank, N.A.) each accounted for more than
10% of our single-family mortgage purchase volume and collectively accounted for approximately 40% of our single-
family mortgage purchase volume. Similarly, we acquire a significant portion of our multifamily mortgage loans from
several large lenders.
We enter into mortgage purchase volume commitments with many of our single-family customers that provide for the
customers to deliver to us a certain volume of mortgages during a specified period of time. Some commitments may also
provide for the lender to deliver to us a minimum percentage of their total sales of conforming loans. There is a risk that
we will not be able to enter into new commitments with our key single-family customers that will maintain mortgage
purchase volume following the expiration of our existing commitments with them. Since 2007, the mortgage industry has
consolidated significantly and a smaller number of large lenders originate most single-family mortgages. The loss of
business from any one of our major lenders could adversely affect our market share and our revenues. Many of our seller/
servicers also have tightened their lending criteria in recent years, which has reduced their loan volume, thus reducing the
volume of loans available for us to purchase.
Ongoing weak business and economic conditions in the U.S. and abroad may adversely affect our business and results
of operations.
Our business and results of operations are significantly affected by general business and economic conditions,
including conditions in the international markets for our investments or our mortgage-related and debt securities. These
conditions include employment rates, fluctuations in both debt and equity capital markets, the value of the U.S. dollar as
compared to foreign currencies, the strength of the U.S. financial markets and national economy and the local economies
in which we conduct business, and the economies of other countries that purchase our mortgage-related and debt
securities. Concerns about fiscal challenges in several Eurozone economies intensified during 2011, creating significant
uncertainty in the financial markets and potential increased risk exposure for our counterparties and for us. There is also
significant uncertainty regarding the strength of the U.S. economic recovery. If the U.S. economy remains weak, we could
experience continued high serious delinquencies and credit losses, which will adversely affect our results of operations
and financial condition.
61 Freddie Mac
The mortgage credit markets continue to be impacted by a decrease in availability of corporate credit and liquidity
within the mortgage industry, causing disruptions to normal operations of major mortgage servicers and, at times,
originators, including some of our largest customers. This has also contributed to significant volatility, wide credit spreads
and a lack of price transparency, and the potential for further consolidation within the financial services industry.
Competition from banking and non-banking companies may harm our business.
Competition in the secondary mortgage market combined with a decline in the amount of residential mortgage debt
outstanding may make it more difficult for us to purchase mortgages. Furthermore, competitive pricing pressures may
make our products less attractive in the market and negatively impact our financial results. Increased competition from
Fannie Mae, Ginnie Mae, and FHA/VA may alter our product mix, lower volumes, and reduce revenues on new business.
FHFA is also Conservator of Fannie Mae, our primary competitor, and FHFAs actions as Conservator of both companies
could affect competition between us and Fannie Mae. It is possible that FHFA could require us and Fannie Mae to take a
common approach that, because of differences in our respective businesses, could place Freddie Mac at a competitive
disadvantage to Fannie Mae. Efforts we may make or may be directed to make to increase the profitability of new single-
family guarantee business, such as by tightening credit standards or raising guarantee fees, could cause our market share
to decrease and the volume of our single-family guarantee business to decline. Historically, we also competed with other
financial institutions that retain or securitize mortgages, such as commercial and investment banks, dealers, thrift
institutions, and insurance companies. While many of these institutions have ceased or substantially reduced their
activities in the secondary market for single-family mortgages since 2008, it is possible that these institutions will reenter
the market.
Beginning in 2010, some market participants began to re-emerge in the multifamily market, and we have faced
increased competition from other institutional investors.
We could be prevented from competing efficiently and effectively by competitors who use their patent portfolios to
prevent us from using necessary business processes and products, or to require us to pay significant royalties to use those
processes and products.
Our investment activities may be adversely affected by limited availability of financing and increased funding costs.
The amount, type and cost of our funding, including financing from other financial institutions and the capital
markets, directly impacts our interest expense and results of operations. A number of factors could make such financing
more difficult to obtain, more expensive or unavailable on any terms, both domestically and internationally, including:
termination of, or future restrictions or other adverse changes with respect to, government support programs that
may benefit us;
reduced demand for our debt securities;
competition for debt funding from other debt issuers; and
downgrades in our credit ratings or the credit ratings of the U.S. government.
Our ability to obtain funding in the public debt markets or by pledging mortgage-related securities as collateral to
other financial institutions could cease or change rapidly, and the cost of available funding could increase significantly
due to changes in market confidence and other factors. For example, in the fall of 2008, we experienced significant
deterioration in our access to the unsecured medium- and long-term debt markets, and were forced to rely on short-term
debt to fund our purchases of mortgage assets and refinance maturing debt and to rely on derivatives to synthetically
create the substantive economic equivalent of various debt funding structures.
We follow certain liquidity management practices and procedures. However, in the event we were unable to obtain
funding from the public debt markets, there can be no assurance that such practices and procedures would provide us with
sufficient liquidity to meet ongoing cash obligations for an extended period.
Since 2008, the ratings on the non-agency mortgage-related securities we hold backed by Alt-A, subprime, and
option ARM loans have decreased, limiting their availability as a significant source of liquidity for us through sales or use
as collateral in secured lending transactions. In addition, adverse market conditions have negatively impacted our ability to
enter into secured lending transactions using agency securities as collateral. These trends are likely to continue in the
future.
The composition of our mortgage-related investments portfolio has changed significantly since we entered into
conservatorship, as our holdings of single-family whole loans have significantly increased and our holdings of agency
62 Freddie Mac
mortgage-related securities have significantly declined. This changing composition presents heightened liquidity risk,
which influences managements decisions regarding funding and hedging.
Government Support
Changes or perceived changes in the governments support of us could have a severe negative effect on our access to
the debt markets and our debt funding costs. Under the Purchase Agreement, the $200 billion cap on Treasurys funding
commitment will increase as necessary to accommodate any cumulative reduction in our net worth during 2010, 2011, and
2012. While we believe that the support provided by Treasury pursuant to the Purchase Agreement currently enables us to
maintain our access to the debt markets and to have adequate liquidity to conduct our normal business activities, the costs
of our debt funding could vary due to the uncertainty about the future of the GSEs and potential investor concerns about
the adequacy of funding available to us under the Purchase Agreement after 2012. The cost of our debt funding could
increase if debt investors believe that the risk that we could be placed into receivership is increasing. In addition, under
the Purchase Agreement, without the prior consent of Treasury, we may not increase our total indebtedness above a
specified limit or become liable for any subordinated indebtedness. For more information, see MD&A LIQUIDITY
AND CAPITAL RESOURCES Liquidity Actions of Treasury and FHFA.
We do not currently have a liquidity backstop available to us (other than draws from Treasury under the Purchase
Agreement and Treasurys ability to purchase up to $2.25 billion of our obligations under its permanent statutory
authority) if we are unable to obtain funding from issuances of debt or other conventional sources. At present, we are not
able to predict the likelihood that a liquidity backstop will be needed, or to identify the alternative sources of liquidity
that might be available to us if needed, other than from Treasury as referenced above.
Line of Credit
We maintain a secured intraday line of credit to provide additional intraday liquidity to fund our activities through
the Fedwire system. This line of credit requires us to post collateral to a third party. In certain circumstances, this secured
counterparty may be able to repledge the collateral underlying our financing without our consent. In addition, because the
secured intraday line of credit is uncommitted, we may not be able to continue to draw on it if and when needed.
Any downgrade in the credit ratings of the U.S. government would likely be followed by a downgrade in our credit
ratings. A downgrade in the credit ratings of our debt could adversely affect our liquidity and other aspects of our
business.
Nationally recognized statistical rating organizations play an important role in determining, by means of the ratings
they assign to issuers and their debt, the availability and cost of funding. Our credit ratings are important to our liquidity.
We currently receive ratings from three nationally recognized statistical rating organizations (S&P, Moodys, and Fitch)
for our unsecured borrowings. These ratings are primarily based on the support we receive from Treasury, and therefore
are affected by changes in the credit ratings of the U.S. government.
63 Freddie Mac
On August 2, 2011, President Obama signed the Budget and Control Act of 2011 which raised the
U.S. governments statutory debt limit. The raising of the statutory debt limit and details outlined in the legislation to
reduce the deficit resulted in actions on the ratings of the U.S. government and our debt, including: (a) on August 5, 2011,
S&P lowered the long-term credit rating of the United States to AA+ from AAA and assigned a negative outlook to
the rating; and (b) on August 8, 2011, S&P lowered our senior long-term debt credit rating to AA+ from AAA and
assigned a negative outlook to the rating. As a result of this downgrade, we posted additional collateral to certain
derivative counterparties in accordance with the terms of the collateral agreements with such counterparties. For more
information, see MD&A LIQUIDITY AND CAPITAL RESOURCES Liquidity Credit Ratings.
S&P, Moodys, and Fitch have indicated that additional actions on the U.S. governments ratings could occur if steps
toward a credible deficit reduction plan are not taken or if the U.S. experiences a weaker than expected economic
recovery. Any downgrade in the credit ratings of the U.S. government would be expected to be followed or accompanied
by a downgrade in our credit ratings.
In addition to a downgrade in the credit ratings of or outlook on the U.S. government, a number of events could
adversely affect our debt credit ratings, including actions by governmental entities or others, changes in government
support for us, additional GAAP losses, and additional draws under the Purchase Agreement. Such actions could lead to
major disruptions in the mortgage market and to our business due to lower liquidity, higher borrowing costs, lower asset
values, and higher credit losses, and could cause us to experience much greater net losses and net worth deficits. The full
range and extent of the adverse effects to our business that would result from any such ratings downgrades and market
disruptions cannot be predicted with certainty. However, we expect that they could: (a) adversely affect our liquidity and
cause us to limit or suspend new business activities that entail outlays of cash; (b) make new issuances of debt
significantly more costly, or potentially prohibitively expensive, and adversely affect the supply of debt financing available
to us; (c) reduce the value of our guarantee to investors and adversely affect our ability to issue our guaranteed mortgage-
related securities; (d) reduce the value of Treasury and agency mortgage securities we hold; (e) increase the cost of
mortgage financing for borrowers, thereby reducing the supply of mortgages available to us to purchase; (f) adversely
affect home prices, reducing the value of our REO and likely leading to additional borrower defaults on mortgage loans
we guarantee; and (g) trigger additional collateral requirements under our derivatives contracts.
Any decline in the price performance of or demand for our PCs could have an adverse effect on the volume and
profitability of our new single-family guarantee business.
Our PCs are an integral part of our mortgage purchase program. We purchase many mortgages by issuing PCs in
exchange for them in guarantor swap transactions. We also issue PCs backed by mortgage loans that we purchased for
cash. Our competitiveness in purchasing single-family mortgages from our seller/servicers, and thus the volume and
profitability of new single-family business, can be directly affected by the relative price performance of our PCs and
comparable Fannie Mae securities. Increasing demand for our PCs helps support the price performance of our PCs, which
in turn helps us compete with Fannie Mae and others in purchasing mortgages.
Our PCs have typically traded at a discount to comparable Fannie Mae securities, which creates an incentive for
customers to conduct a disproportionate share of their guarantor business with Fannie Mae and negatively impacts the
economics of our business. Various factors, including market conditions and the relative rates at which the underlying
mortgages prepay, affect the price performance of our PCs. The changes to HARP (announced by FHFA on October 24,
2011) could adversely affect the price performance of our PCs, to the extent they cause the loans underlying our PCs to
refinance at a faster rate than loans underlying comparable Fannie Mae securities (or cause the perception that loans
underlying our PCs will refinance at a faster rate). While we employ a variety of strategies to support the price
performance of our PCs and may consider further strategies, any such strategies may fail or adversely affect our business
or we may cease such activities if deemed appropriate. We may incur costs to support the liquidity and price performance
of our securities. In certain circumstances, we compensate customers for the difference in price between our PCs and
comparable Fannie Mae securities. However, this could adversely affect the profitability and market share of our single-
family guarantee business.
Beginning in 2012, under guidance from FHFA we expect to curtail mortgage-related investments portfolio purchase
and retention activities that are undertaken for the primary purpose of supporting the price performance of our PCs, which
may result in a significant decline in the market share of our single-family guarantee business, lower comprehensive
income, and a more rapid decline in the size of our total mortgage portfolio. If these developments occur, it may be
difficult and expensive for us to reverse or mitigate them through PC price support activities, should we desire or be
directed to do so. For more information, see BUSINESS Our Business Segments Single-Family Guarantee
Segment Securitization Activities and Investments Segment PC Support Activities.
64 Freddie Mac
We may be unable to maintain a liquid and deep market for our PCs, which could also adversely affect the price
performance of PCs. A significant reduction in the volume of mortgage loans that we securitize could reduce the liquidity
of our PCs.
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 of the information that is provided to us
before we purchase the loan. This exposes us to the risk that one or more of the parties involved in a transaction (such as
the borrower, seller, broker, appraiser, title agent, loan officer, lender or servicer) will engage in fraud by misrepresenting
facts about a mortgage loan or a borrower. While we subsequently review a sample of these loans to determine if such
loans are in compliance with our contractual standards, there can be no assurance that this would detect or deter mortgage
fraud, or otherwise reduce our exposure to the risk of fraud. We are also exposed to fraud by third parties in the mortgage
servicing function, particularly with respect to sales of REO properties, single-family short sales, and other dispositions of
non-performing assets. We may experience significant financial losses and reputational damage as a result of such fraud.
The value of mortgage-related securities guaranteed by us and held as investments may decline if we were unable to
perform under our guarantee or if investor confidence in our ability to perform under our guarantee were to diminish.
A portion of our investments in mortgage-related securities are securities guaranteed by us. Our valuation of these
securities is consistent with GAAP and the legal structure of the guarantee transaction. These securities include the
Freddie Mac assets transferred to the securitization trusts that serve as collateral for the mortgage-related securities issued
by the trusts (i.e., (a) multifamily PCs; (b) REMICs and Other Structured Securities; and (c) certain Other Guarantee
Transactions). The valuation of our guaranteed mortgage-related securities necessarily reflects investor confidence in our
ability to perform under our guarantee and the liquidity that our guarantee provides. If we were unable to perform under
our guarantee or if investor confidence in our ability to perform under our guarantee were to diminish, the value of our
guaranteed securities may decline, thereby reducing the value of the securities reported on our consolidated balance
sheets, which could have an adverse affect on our financial condition and results of operations. This could also adversely
affect our ability to sell or otherwise use these securities for liquidity purposes.
Changes in interest rates could negatively impact our results of operations, stockholders equity (deficit) and fair value
of net assets.
Our investment activities and credit guarantee activities expose us to interest rate and other market risks. Changes in
interest rates, up or down, could adversely affect our net interest yield. Although the yield we earn on our assets and our
funding costs tend to move in the same direction in response to changes in interest rates, either can rise or fall faster than
the other, causing our net interest yield to expand or compress. For example, due to the timing of maturities or rate reset
dates on variable-rate instruments, when interest rates rise, our funding costs may rise faster than the yield we earn on our
assets. This rate change could cause our net interest yield to compress until the effect of the increase is fully reflected in
asset yields. Changes in the slope of the yield curve could also reduce our net interest yield.
Our GAAP results can be significantly affected by changes in interest rates, and adverse changes in interest rates
could increase our GAAP net loss or deficit in total equity (deficit) materially. For example, changes in interest rates
affect the fair value of our derivative portfolio. Since we generally record changes in fair values of our derivatives in
current income, such changes could significantly impact our GAAP results. While derivatives are an important aspect of
our management of interest-rate risk, they generally increase the volatility of reported net income (loss), because, while
fair value changes in derivatives affect net income, fair value changes in several of the types of assets and liabilities being
hedged do not affect net income. We could record substantial gains or losses from derivatives in any period, which could
significantly contribute to our overall results for the period and affect our net equity (deficit) as of the end of such period.
It is difficult for us to predict the amount or direction of derivative results. Additionally, increases in interest rates could
increase other-than-temporary impairments on our investments in non-agency mortgage-related securities.
Changes in interest rates may also affect prepayment assumptions, thus potentially impacting the fair value of our
assets, including our investments in mortgage-related assets. When interest rates fall, borrowers are more likely to prepay
their mortgage loans by refinancing them at a lower rate. An increased likelihood of prepayment on the mortgages
underlying our mortgage-related securities may adversely impact the value of these securities.
When interest rates increase, our credit losses from ARM and interest-only ARM loans may increase as borrower
payments increase at their reset dates, which increases the borrowers risk of default. Rising interest rates may also reduce
the opportunity for these borrowers to refinance into a fixed-rate loan.
65 Freddie Mac
Interest rates can fluctuate for a number of reasons, including changes in the fiscal and monetary policies of the
federal government and its agencies, such as the Federal Reserve. Federal Reserve policies directly and indirectly
influence the yield on our interest-earning assets and the cost of our interest-bearing liabilities. The availability of
derivative financial instruments (such as options and interest rate and foreign currency swaps) from acceptable
counterparties of the types and in the quantities needed could also affect our ability to effectively manage the risks related
to our investment funding. Our strategies and efforts to manage our exposures to these risks may not be effective. In
particular, in recent periods, a number of factors have made it more difficult for us to estimate future prepayments,
including uncertainty regarding default rates, unemployment, loan modifications, the impact of FHFA-directed changes to
HARP (announced in October 2011), and the volatility and impact of home price movements on mortgage durations. This
could make it more difficult for us to manage prepayment risk, and could cause our hedging-related losses to increase.
See QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK for a description of the types
of market risks to which we are exposed and how we seek to manage those risks.
Changes in OAS could materially impact our fair value of net assets and affect future results of operations and
stockholders equity (deficit).
OAS is an estimate of the incremental yield spread between a given security and an agency debt yield curve. This
includes consideration of potential variability in the securitys cash flows resulting from any options embedded in the
security, such as prepayment options. The OAS between the mortgage and agency debt sectors can significantly affect the
fair value of our net assets. The fair value impact of changes in OAS for a given period represents an estimate of the net
unrealized increase or decrease in the fair value of net assets arising from net fluctuations in OAS during that period. We
do not attempt to hedge or actively manage the impact of changes in mortgage-to-debt OAS.
Changes in market conditions, including changes in interest rates or liquidity, may cause fluctuations in OAS. A
widening of the OAS on a given asset, which typically causes a decline in the current fair value of that asset, may cause
significant mark-to-fair value losses, and may adversely affect our financial results and stockholders equity (deficit), but
may increase the number of attractive investment opportunities in mortgage loans and mortgage-related securities.
Conversely, a narrowing or tightening of the OAS typically causes an increase in the current fair value of that asset, but
may reduce the number of attractive investment opportunities in mortgage loans and mortgage-related securities.
Consequently, a tightening of the OAS may adversely affect our future financial results and stockholders equity (deficit).
See MD&A FAIR VALUE MEASUREMENTS AND ANALYSIS Consolidated Fair Value Balance Sheets
Analysis Discussion of Fair Value Results for a more detailed description of the impacts of changes in mortgage-to-
debt OAS.
While wider spreads might create favorable investment opportunities, we are limited in our ability to take advantage
of any such opportunities due to various restrictions on our mortgage-related investments portfolio activities. See
BUSINESS Conservatorship and Related Matters Impact of Conservatorship and Related Actions on Our Business
Limits on Investment Activity and Our Mortgage-Related Investments Portfolio.
We could experience significant reputational harm, which could affect the future of our company, if our efforts under
the MHA Program and other initiatives to support the U.S. residential mortgage market do not succeed.
We are focused on the servicing alignment initiative, the MHA Program and other initiatives to support the
U.S. residential mortgage market. If these initiatives do not achieve their desired results, or are otherwise perceived to
have failed to achieve their objectives, we may experience damage to our reputation, which may impact the extent of
future government support for our business and government decisions with respect to the future status and role of Freddie
Mac.
Negative publicity causing damage to our reputation could adversely affect our business prospects, financial results, or
net worth.
Reputation risk, or the risk to our financial results and net worth from negative public opinion, is inherent in our
business. Negative public opinion could adversely affect our ability to keep and attract customers or otherwise impair our
customer relationships, adversely affect our ability to obtain financing, impede our ability to hire and retain qualified
personnel, hinder our business prospects, or adversely impact the trading price of our securities. Perceptions regarding the
practices of our competitors, our seller/servicers or the financial services and mortgage industries as a whole, particularly
as they relate to the current housing and economic downturn, may also adversely impact our reputation. Adverse
reputation impacts on third parties with whom we have important relationships may impair market confidence or investor
confidence in our business operations as well. In addition, negative publicity could expose us to adverse legal and
regulatory consequences, including greater regulatory scrutiny or adverse regulatory or legislative changes, and could
66 Freddie Mac
affect what changes may occur to our business structure during or following conservatorship, including whether we will
continue to exist. These adverse consequences could result from perceptions concerning our activities and role in
addressing the housing and economic downturn, concern about our compensation practices, concerns about deficiencies in
foreclosure documentation practices or our actual or alleged action or failure to act in any number of areas, including
corporate governance, regulatory compliance, financial reporting and disclosure, purchases of products perceived to be
predatory, safeguarding or using nonpublic personal information, or from actions taken by government regulators in
response to our actual or alleged conduct.
The servicing alignment initiative, MHA Program, and other efforts to reduce foreclosures, modify loan terms and
refinance mortgages, including HARP, may fail to mitigate our credit losses and may adversely affect our results of
operations or financial condition.
The servicing alignment initiative, MHA Program, and other loss mitigation activities are a key component of our
strategy for managing and resolving troubled assets and lowering credit losses. However, there can be no assurance that
any of our loss mitigation strategies will be successful and that credit losses will not continue to escalate. The costs we
incur related to loan modifications and other activities have been, and will likely continue to be, significant because we
bear the full cost of the monthly payment reductions related to modifications of loans we own or guarantee, and all
applicable servicer and borrower incentives. We are not reimbursed for these costs by Treasury. For information on our
loss mitigation activities, see MD&A RISK MANAGEMENT Credit Risk Mortgage Credit Risk Single-
Family Loan Workouts and the MHA Program.
We could be required or elect to make changes to our implementation of our other loss mitigation activities that
could make these activities more costly to us, both in terms of credit expenses and the cost of implementing and operating
the activities. For example, we could be required to, or elect to, use principal reduction to achieve reduced payments for
borrowers. This could further increase our losses, as we could bear the full costs of such reductions.
A significant number of loans are in the trial period of HAMP or the trial period of our new non-HAMP standard
loan modification. For information on completion rates for HAMP and non-HAMP modifications, see MD&A RISK
MANAGEMENT Credit Risk Mortgage Credit Risk Single-Family Loan Workouts and the MHA Program. A
number of loans will fail to complete the applicable trial period or qualify for our other loss mitigation programs. For
these loans, the trial period will have effectively delayed the foreclosure process and could increase our losses, to the
extent the prices we ultimately receive for the foreclosed properties are less than the prices we could have received had
we foreclosed upon the properties earlier, due to continued home price declines. These delays in foreclosure could also
cause our REO operations expense to increase, perhaps substantially.
Mortgage modification initiatives, particularly any future focus on principal reductions (which at present we do not
offer to borrowers), have the potential to change borrower behavior and mortgage underwriting. Principal reductions may
create an incentive for borrowers that are current to become delinquent in order to receive a principal reduction. This,
coupled with the phenomenon of widespread underwater mortgages, could significantly affect borrower attitudes towards
homeownership, the commitment of borrowers to making their mortgage payments, the way the market values residential
mortgage assets, the way in which we conduct business and, ultimately, our financial results.
Depending on the type of loss mitigation activities we pursue, those activities could result in accelerating or slowing
prepayments on our PCs and REMICs and Other Structured Securities, either of which could affect the pricing of such
securities.
On October 24, 2011, FHFA, Freddie Mac, and Fannie Mae announced a series of FHFA-directed changes to HARP
in an effort to attract more eligible borrowers whose monthly payments are current and who can benefit from refinancing
their home mortgages. The Acting Director of FHFA stated that the goal of pursuing these changes is to create refinancing
opportunities for more borrowers whose mortgages are owned or guaranteed by Freddie Mac and Fannie Mae, while
reducing risk for Freddie Mac and Fannie Mae and bringing a measure of stability to housing markets. However, there can
be no assurance that the revisions to HARP will be successful in achieving these objectives or that any benefits from the
revised program will exceed our costs. We may face greater exposure to credit and other losses on these HARP loans
because we are not requiring lenders to provide us with certain representations and warranties on these HARP loans. In
addition, changes in expectations of mortgage prepayments could result in declines in the fair value of our investments in
certain agency securities and lower net interest yields over time on other mortgage-related investments. The ultimate
impact of the HARP revisions on our financial results will be driven by the level of borrower participation and the volume
of loans with high LTV ratios that we acquire under the program. Over time, relief refinance mortgages with LTV ratios
above 80% may not perform as well as relief refinance mortgages with LTV ratios of 80% and below because of the
continued high LTV ratios of these loans. There is an increase in borrower default risk as LTV ratios increase, particularly
67 Freddie Mac
for loans with LTV ratios above 80%. In addition, relief refinance mortgages may not be covered by mortgage insurance
for the full excess of their UPB over 80%.
We are devoting significant internal resources to the implementation of the servicing alignment initiative and the
MHA Program, which has, and will continue to, increase our expenses. The size and scope of these efforts may also limit
our ability to pursue other business opportunities or corporate initiatives.
We may experience further write-downs and losses relating to our assets, including our investment securities, net
deferred tax assets, REO properties or mortgage loans, that could materially adversely affect our business, results of
operations, financial condition, liquidity and net worth.
We experienced significant losses and write-downs relating to certain of our assets during the past several years,
including significant declines in market value, impairments of our investment securities, market-based write-downs of
REO properties, losses on non-performing loans removed from PC pools, and impairments on other assets. The fair value
of our assets may be further adversely affected by continued weakness in the economy, further deterioration in the
housing and financial markets, additional ratings downgrades, or other events.
We increased our valuation allowance for our net deferred tax assets by $2.3 billion during 2011. The future status
and role of Freddie Mac could be affected by actions of the Conservator, and legislative and regulatory action that alters
the ownership, structure, and mission of the company. The uncertainty of these developments could materially affect our
operations, which could in turn affect our ability or intent to hold investments until the recovery of any temporary
unrealized losses. If future events significantly alter our current outlook, a valuation allowance may need to be established
for the remaining deferred tax asset.
Due to the ongoing weaknesses in the economy and in the housing and financial markets, we may experience
additional write-downs and losses relating to our assets, including those that are currently AAA-rated, and the fair values
of our assets may continue to decline. This could adversely affect our results of operations, financial condition, liquidity,
and net worth.
There may not be an active, liquid trading market for our equity securities. Our equity securities are not likely to have
any value beyond the short-term.
Our common stock and classes of preferred stock that previously were listed and traded on the NYSE were delisted
from the NYSE effective July 8, 2010, and now trade on the OTC market. The market price of our common stock
declined significantly between June 16, 2010, the date we announced our intention to delist these securities, and July 8,
2010, the first day the common stock traded exclusively on the OTC market, and may decline further. Trading volumes on
the OTC market have been, and will likely continue to be, less than those on the NYSE, which would make it more
difficult for investors to execute transactions in our securities and could make the prices of our securities decline or be
more volatile. The Acting Director of FHFA has stated that [Freddie Mac and Fannie Maes] equity holders retain an
economic claim on the companies but that claim is subordinate to taxpayer claims. As a practical matter, taxpayers are not
likely to be repaid in full, so [Freddie Mac and Fannie Mae] stock lower in priority is not likely to have any value.
Operational Risks
We have incurred, and will continue to incur, expenses and we may otherwise be adversely affected by delays and
deficiencies in the foreclosure process.
We have been, and will likely continue to be, adversely affected by delays in the foreclosure process, which could
increase our expenses.
The average length of time for foreclosure of a Freddie Mac loan significantly increased in recent years, and may
continue to increase. A number of factors have contributed to this increase, including: (a) the increasingly lengthy
foreclosure process in many states; and (b) concerns about deficiencies in seller/servicers conduct of the foreclosure
process. More recently, regulatory developments impacting mortgage servicing and foreclosure practices have also
contributed to these delays. For more information on these developments, see BUSINESS Regulation and
Supervision Legislative and Regulatory Developments Developments Concerning Single-Family Servicing Practices.
Delays in the foreclosure process could cause our credit losses to increase for a number of reasons. For example,
properties awaiting foreclosure could deteriorate until we acquire ownership of them through foreclosure. This would
increase our expenses to repair and maintain the properties when we do acquire them. Such delays may also adversely
affect the values of, and our losses on, the non-agency mortgage-related securities we hold. Delays in the foreclosure
68 Freddie Mac
process may also adversely affect trends in home prices regionally or nationally, which could also adversely affect our
financial results.
It also is possible that mortgage insurance claims could be reduced if delays caused by servicers deficient
foreclosure practices prevent servicers from completing foreclosures within required timelines defined by mortgage
insurers. Mortgage insurance companies establish foreclosure timelines that vary by state and range between 30 and
960 days.
Delays in the foreclosure process could create fluctuations in our single-family credit statistics. For example, our
realization of credit losses, which consists of REO operations income (expense) plus charge-offs, net, could be delayed
because we typically record charge-offs at the time we take ownership of a property through foreclosure. Delays could
also temporarily increase the number of seriously delinquent loans that remain in our single-family mortgage portfolio,
which could result in higher reported serious delinquency rates and a larger number of non-performing loans than would
otherwise have been the case.
In the fall of 2010, several large seller/servicers announced issues relating to the improper preparation and execution
of certain documents used in foreclosure proceedings. These announcements raised various concerns relating to
foreclosure practices. A number of our seller/servicers, including several of our largest ones, temporarily suspended
foreclosure proceedings in certain states while they evaluated and addressed these issues. While the larger servicers
generally resumed foreclosure proceedings in early 2011, single-family mortgages in our portfolio have continued to
experience significant delays in the foreclosure process in 2011, as compared to periods before these issues arose,
particularly in states that require a judicial foreclosure process. These and other factors could also delay sales of our REO
properties. In addition, a group consisting of state attorneys general and state bank and mortgage regulators is reviewing
foreclosure practices. We have terminated the eligibility of several law firms to serve as counsel in foreclosures of Freddie
Mac mortgages, due to issues with respect to the firms foreclosure practices. It is possible that additional deficiencies in
foreclosure practices will be identified.
We have incurred, and will continue to incur, expenses related to deficiencies in foreclosure documentation practices
and the costs of remediating them, which may be significant. These expenses include costs related to terminating the
eligibility of certain law firms and other incremental costs. We may also incur costs if we become involved in litigation or
investigations relating to these issues. It will take time for seller/servicers to complete their evaluations of these issues and
implement remedial actions. The integrity of the foreclosure process is critical to our business, and our financial results
could be adversely affected by deficiencies in the conduct of that process.
Issues related to mortgages recorded through the MERS System could delay or disrupt foreclosure activities and have
an adverse effect on our business.
The Mortgage Electronic Registration System, or the MERS System, is an electronic registry that is widely used by
seller/servicers, Freddie Mac, and other participants in the mortgage finance industry, to maintain records of beneficial
ownership of mortgages. The MERS System is maintained by MERSCORP, Inc., a privately held company, the
shareholders of which include a number of organizations in the mortgage industry, including Freddie Mac, Fannie Mae,
and certain seller/servicers, mortgage insurance companies, and title insurance companies.
Mortgage Electronic Registration Systems, Inc., or MERS, a wholly-owned subsidiary of MERSCORP, Inc., has the
ability to serve as a nominee for the owner of a mortgage loan and in that role become the mortgagee of record for the
loan in local land records. Freddie Mac seller/servicers may choose to use MERS as a nominee. Approximately 42% of
the loans Freddie Mac owns or guarantees were registered in MERS name as of December 31, 2011; the beneficial
ownership and the ownership of the servicing rights related to those loans are tracked in the MERS System.
In the past, Freddie Mac servicers had the option of initiating foreclosure in MERS name. On March 23, 2011, we
informed our servicers that they no longer may initiate foreclosures in MERS name for those mortgages owned or
guaranteed by us and registered with MERS that are referred to foreclosure on or after April 1, 2011. As of April 1, 2011,
foreclosure of mortgages owned or guaranteed by us for which MERS serves as nominee is accomplished by MERS
assigning the record ownership of the mortgage to the servicer, and the servicer initiating foreclosure in its own name.
Many of our servicers were following this procedure before the March 23 announcement.
MERS has also been the subject of numerous lawsuits challenging foreclosures on mortgages for which MERS is
mortgagee of record as nominee for the beneficial owner. For example, on February 3, 2012, the Attorney General of the
State of New York filed a lawsuit against MERSCORP, Inc., MERS and several large banks alleging, among other items,
that the creation and use of the MERS System has resulted in a wide range of deceptive and fraudulent foreclosure filings
in New York state and federal courts. It is possible that adverse judicial decisions, regulatory proceedings or action, or
69 Freddie Mac
legislative action related to MERS, could delay or disrupt foreclosure of mortgages that are registered on the MERS
System. Publicity concerning regulatory or judicial decisions, even if such decisions were not adverse, or MERS-related
concerns about the integrity of the assignment process, could adversely affect the mortgage industry and negatively impact
public confidence in the foreclosure process, which could lead to legislative or regulatory action. Because MERS often
executes legal documents in connection with foreclosure proceedings, it is possible that investigations by governmental
authorities and others into deficiencies in foreclosure practices may negatively impact MERS and the MERS System.
Federal or state legislation or regulatory action could prevent us from using the MERS System for mortgages that we
currently own, guarantee, and securitize and for mortgages acquired in the future, or could create additional requirements
for the transfer of mortgages that could affect the process for and costs of acquiring, transferring, servicing, and
foreclosing mortgages. Such legislation or regulatory action could increase our costs or otherwise adversely affect our
business. For example, we could be required to transfer mortgages out of the MERS System. There is also uncertainty
regarding the extent to which seller/servicers will choose to use the MERS System in the future.
Failures by MERS to apply prudent and effective process controls and to comply with legal and other requirements
in the foreclosure process could pose legal and operational risks for us. We may also face significant reputational risk due
to our ties to MERS, as we are a shareholder of MERSCORP, Inc., and a Freddie Mac officer serves on the board of
directors of both entities.
We cannot predict the impact that such events or actions may have on our business. On April 13, 2011, the Office of
the Comptroller of the Currency, the Federal Reserve, the FDIC, the Office of Thrift Supervision, and FHFA entered into
a consent order with MERS and MERSCORP, Inc., which stated that such federal regulators had identified certain
deficiencies and unsafe or unsound practices by MERS and MERSCORP, Inc. that present financial, operational,
compliance, legal, and reputational risks to MERSCORP, Inc. and MERS, and to its participating members, including
Freddie Mac. The consent order requires MERS and MERSCORP, Inc. to, among other things, create and submit plans to
ensure that MERS and MERSCORP, Inc. (a): are operated in a safe and sound manner and have adequate financial
strength and staff; (b) improve communications with MERSCORP, Inc. shareholders and members; (c) intensify the
monitoring of and response to litigation; and (d) establish processes to ensure data quality and strengthen certain aspects
of corporate governance. The federal banking regulators have also indicated that MERSCORP, Inc. should take action to
simplify its governance structure, which could involve us giving up certain governance rights. It is unclear what changes
will ultimately be made and whether there will be any consequent impact on Freddie Macs relationship with and rights
with respect to the two entities.
Weaknesses in internal control over financial reporting and in disclosure controls could result in errors and inadequate
disclosures, affect operating results, and cause investors to lose confidence in our reported results.
We face continuing challenges because of deficiencies in our controls. Control deficiencies could result in errors, and
lead to inadequate or untimely disclosures, and affect operating results. Control deficiencies could also cause investors to
lose confidence in our reported financial results, which may have an adverse effect on the trading price of our securities.
For information about our ineffective disclosure controls and two material weaknesses in internal control over financial
reporting, see CONTROLS AND PROCEDURES.
There are a number of factors that may impede our efforts to establish and maintain effective disclosure controls and
internal control over financial reporting, including: (a) the nature of the conservatorship and our relationship with FHFA;
(b) the complexity of, and significant changes in, our business activities and related GAAP requirements; (c) significant
employee and management turnover; (d) internal reorganizations; (e) uncertainty regarding the sustainability of newly
established controls; (f) data quality or servicing-related issues; and (g) the uncertain impacts of the ongoing housing and
economic downturn on the results of our models, which are used for financial accounting and reporting purposes.
Disruptive levels of employee turnover could negatively impact our internal control environment, including internal
control over financial reporting, and ability to issue timely financial statements. During 2011, we experienced significant
changes to our internal control environment as a result of resignations, terminations, or changes in responsibility. We
cannot be certain that our efforts to improve and maintain our internal control over financial reporting will ultimately be
successful.
Effectively designed and operated internal control over financial reporting provides only reasonable assurance that
material errors in our financial statements will be prevented or detected on a timely basis. A failure to maintain effective
internal control over financial reporting increases the risk of a material error in our reported financial results and delay in
our financial reporting timeline. Depending on the nature of a control failure and any required remediation, ineffective
controls could have a material adverse effect on our business.
70 Freddie Mac
We face risks and uncertainties associated with the internal models that we use for financial accounting and reporting
purposes, to make business decisions, and to manage risks. Market conditions have raised these risks and uncertainties.
We make significant use of business and financial models for financial accounting and reporting purposes and to
manage risk. We face risk associated with our use of models. First, there is inherent uncertainty associated with model
results. Second, we could fail to properly implement, operate, or use our models. Either of these situations could
adversely affect our financial statements and our ability to manage risks.
We use market-based information as inputs to our models. However, it can take time for data providers to prepare
information, and thus the most recent information may not be available for the preparation of our financial statements.
When market conditions change quickly and in unforeseen ways, there is an increased risk that the inputs reflected in our
models are not representative of current market conditions.
The severe deterioration of the housing and credit markets beginning several years ago and, more recently, the
extended period of economic weakness and uncertainty has increased the risks associated with our use of models. For
example, certain economic events or the implementation of government policies could create increased model uncertainty
as models may not fully capture these events, which makes it more difficult to assess model performance and requires a
higher degree of management judgment. Our models may not perform as well in situations for which there are few or no
recent historical precedents. We have adjusted our models in response to recent events, but there remains considerable
uncertainty about model results.
Models are inherently imperfect predictors of actual results. Our models rely on various assumptions that may be
incorrect, including that historical experience can be used to predict future results. It has been more difficult to predict the
behaviors of the housing and credit capital markets and market participants over the past several years, due to, among
other factors: (a) the uncertainty concerning trends in home prices; (b) the lack of historical evidence about the behavior
of deeply underwater borrowers, the effect of an extended period of extremely low interest rates on prepayments, and the
impact of widespread loan refinancing and modification programs (such as HARP and HAMP), including the potential for
the extensive use of principal reductions; and (c) the impact of the concerns about deficiencies in foreclosure
documentation practices and related delays in the foreclosure process.
We face the risk that we could fail to implement, operate, or adjust or use our models properly. This risk may be
increasing due to our difficulty in attracting and retaining employees with the necessary experience and skills. For
example, the assumptions underlying a model could be invalid, or we could apply a model to events or products outside
the models intended use. We may fail to code a model correctly or we could use incorrect data. The complexity and
interconnectivity of our models create additional risk regarding the accuracy of model output. While we have processes
and controls in place designed to mitigate these risks, there can be no assurances that such processes and controls will be
successful.
Management often needs to exercise judgment to interpret or adjust modeled results to take into account new
information or changes in conditions. The dramatic changes in the housing and credit capital markets in recent years have
required frequent adjustments to our models and the application of greater management judgment in the interpretation and
adjustment of the results produced by our models. This further increases both the uncertainty about model results and the
risk of errors in the implementation, operation, or use of the models.
We face the risk that the valuations, risk metrics, amortization results, loan loss reserve estimations, and security
impairment charges produced by our internal models may be different from actual results, which could adversely affect
our business results, cash flows, fair value of net assets, business prospects, and future financial results. For example, our
models may under-predict the losses we will suffer in various aspects of our business. Changes in, or replacements of, any
of our models or in any of the assumptions, judgments, or estimates used in the models may cause the results generated
by the model to be materially different from those generated by the prior model. The different results could cause a
revision of previously reported financial condition or results of operations, depending on when the change to the model,
assumption, judgment, or estimate is implemented. Any such changes may also cause difficulties in comparisons of the
financial condition or results of operations of prior or future periods.
Due to increased uncertainty about model results, we also face increased risk that we could make poor business
decisions in areas where model results are an important factor, including loan purchases, management and guarantee fee
pricing, asset and liability management, market risk management, and quality-control sampling strategies for loans in our
single-family credit guarantee portfolio. Furthermore, any strategies we employ to attempt to manage the risks associated
with our use of models may not be effective. See MD&A CRITICAL ACCOUNTING POLICIES AND
ESTIMATES and QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Interest-Rate
Risk and Other Market Risks for more information on our use of models.
71 Freddie Mac
Changes in our accounting policies, as well as estimates we make, could materially affect how we report our financial
condition or results of operations.
Our accounting policies are fundamental to understanding our financial condition and results of operations. Certain of
our accounting policies, as well as estimates we make, are critical, as they are both important to the presentation of our
financial condition and results of operations and they require management to make particularly difficult, complex or
subjective judgments and estimates, often regarding matters that are inherently uncertain. Actual results could differ from
our estimates and the use of different judgments and assumptions related to these policies and estimates could have a
material impact on our consolidated financial statements. For a description of our critical accounting policies, see
MD&A CRITICAL ACCOUNTING POLICIES AND ESTIMATES.
From time to time, the FASB and the SEC change the financial accounting and reporting guidance that govern the
preparation of our financial statements. These changes are beyond our control, can be difficult to predict and could
materially impact how we report our financial condition and results of operations. We could be required to apply new or
revised guidance retrospectively, which may result in the revision of prior period financial statements by material
amounts. The implementation of new or revised accounting guidance could result in material adverse effects to our
stockholders equity (deficit) and result in or contribute to the need for additional draws under the Purchase Agreement.
FHFA may require us to change our accounting policies to align more closely with those of Fannie Mae. FHFA may
also require us and Fannie Mae to have the same independent public accounting firm. Either of these events could
significantly increase our expenses and require a substantial time commitment of management.
See NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES for more information.
A failure in our operational systems or infrastructure, or those of third parties, could impair our liquidity, disrupt our
business, damage our reputation, and cause losses.
Shortcomings or failures in our internal processes, people, or systems could lead to impairment of our liquidity,
financial loss, errors in our financial statements, disruption of our business, liability to customers, further legislative or
regulatory intervention, or reputational damage. Servicing and loss mitigation processes are currently under considerable
stress, which increases the risk that we may experience further operational problems in the future. Our core systems and
technical architecture include many legacy systems and applications that lack scalability and flexibility, which increases
the risk of system failure. While we are working to enhance the quality of our infrastructure, we have had difficulty in the
past conducting large-scale infrastructure improvement projects.
Our business is highly dependent on our ability to process a large number of transactions on a daily basis and
manage and analyze significant amounts of information, much of which is provided by third parties. The transactions we
process are complex and are subject to various legal, accounting, and regulatory standards. The types of transactions we
process and the standards relating to those transactions can change rapidly in response to external events, such as the
implementation of government-mandated programs and changes in market conditions. Our financial, accounting, data
processing, or other operating systems and facilities may fail to operate properly or become disabled, adversely affecting
our ability to process these transactions. The information provided by third parties may be incorrect, or we may fail to
properly manage or analyze it. The inability of our systems to accommodate an increasing volume of transactions or new
types of transactions or products could constrain our ability to pursue new business initiatives or change or improve
existing business activities.
Our employees could act improperly for their own gain and cause unexpected losses or reputational damage. While
we have processes and systems in place designed to prevent and detect fraud, there can be no assurance that such
processes and systems will be successful.
We also face the risk of operational failure or termination of any of the clearing agents, exchanges, clearinghouses, or
other financial intermediaries we use to facilitate our securities and derivatives transactions. Any such failure or
termination could adversely affect our ability to effect transactions, service our customers, and manage our exposure to
risk.
Most of our key business activities are conducted in our principal offices located in McLean, Virginia and represent a
concentrated risk of people, technology, and facilities. Despite the contingency plans and local recovery facilities we have
in place, our ability to conduct business would be adversely impacted by a disruption in the infrastructure that supports
our business and the geographical area in which we are located. Potential disruptions may include outages or disruptions
to electrical, communications, transportation, or other services we use or that are provided to us. If a disruption occurs
and our employees are unable to occupy our offices or communicate with or travel to other locations, our ability to
72 Freddie Mac
service and interact with our customers or counterparties may deteriorate and we may not be able to successfully
implement contingency plans that allow us to carry out critical business functions at an acceptable level.
Due to the concentrated risk and inadequate distribution of resources nationally, we are also exposed to the risk that a
catastrophic event, such as a terrorist event or natural disaster, could result in a significant business disruption and an
inability to process transactions through normal business processes. Any measures we take to mitigate this risk may not be
sufficient to respond to the full range of catastrophic events that may occur.
Freddie Mac management has determined that current business recovery capabilities would not be effective in the
event of a catastrophic regional business event and could result in a significant business disruption and inability to process
transactions through normal business processes. While management has developed a remediation plan to address the
current capability gaps, any measures we take to mitigate this risk may not be sufficient to respond to the full range of
catastrophic events that may occur.
We have experienced significant management changes, internal reorganizations, and turnover of key staff, which could
increase our operational and control risks and have a material adverse effect on our ability to do business and our
results of operations.
Internal reorganizations, inability to retain key executives and staff members, and our efforts to reduce administrative
expenses may increase the stress on existing processes, leading to operational or control failures and harm to our financial
performance and results of operations. A number of senior officers left the company in 2011, including our Chief
Operating Officer, our Executive Vice President Single-Family Credit Guarantee, our Executive Vice President
Investments and Capital Markets and Treasurer, our Executive Vice President Multifamily, our Senior Vice President
Operations & Technology, our Executive Vice President General Counsel & Corporate Secretary, our Executive Vice
President Chief Credit Officer, and our Senior Vice President Interim General Counsel & Corporate Secretary. On
October 26, 2011, FHFA announced that our Chief Executive Officer has expressed his desire to step down in 2012. We
also experienced several significant internal reorganizations in 2011 and significant employee turnover.
The magnitude of these changes and the short time interval in which they have occurred, particularly during the
ongoing housing and economic downturn, add to the risks of operational or control failures, including a failure in the
effective operation of our internal control over financial reporting or our disclosure controls and procedures. Control
failures could result in material adverse effects on our financial condition and results of operations. Disruptive levels of
turnover among both executives and other employees could lead to breakdowns in any of our operations, affect our ability
to execute ongoing business activities, cause delays and disruptions in the implementation of FHFA-directed and other
important business initiatives, delay or disrupt critical technology and other projects, and erode our business, modeling,
internal audit, risk management, information security, financial reporting, legal, compliance, and other capabilities. For
more information, see MD&A RISK MANAGEMENT Operational Risks and CONTROLS AND
PROCEDURES.
In addition, management attention may be diverted from regular business concerns by these and future
reorganizations and the continuing need to operate under the framework of conservatorship.
We may not be able to protect the security of our systems or the confidentiality of our information from cyber attack
and other unauthorized access, disclosure, and disruption.
Our operations rely on the secure receipt, processing, storage, and transmission of confidential and other information
in our computer systems and networks and with our business partners. Like many corporations and government entities,
from time to time we have been, and likely will continue to be, the target of cyber attacks. Because the techniques used to
obtain unauthorized access, disable or degrade service, or sabotage systems change frequently and often are not
recognized until launched against a target, and because some techniques involve social engineering attempts addressed to
employees who may have insufficient knowledge to recognize them, we may be unable to anticipate these techniques or
to implement adequate preventative measures. While we have invested significant resources in our information security
program, there is a risk that it could prove to be inadequate to protect our computer systems, software, and networks.
Our computer systems, software, and networks may be vulnerable to internal or external cyber attack, unauthorized
access, computer viruses or other malicious code, computer denial of service attacks, or other attempts to harm our
systems or misuse our confidential information. Our employees may be vulnerable to social engineering efforts that cause
a breach in our security that otherwise would not exist as a technical matter. If one or more of such events occur, this
potentially could jeopardize or result in the unauthorized disclosure, misuse or corruption of confidential and other
information, including nonpublic personal information and other sensitive business data, processed, stored in, or
transmitted through, our computer systems and networks, or otherwise cause interruptions or malfunctions in our
73 Freddie Mac
operations or the operations of our customers or counterparties. This could result in significant losses or reputational
damage, adversely affect our relationships with our customers and counterparties, and adversely affect our ability to
purchase loans, issue securities or enter into and execute other business transactions. We could also face regulatory action.
Internal or external attackers may seek to steal, corrupt or disclose confidential financial assets, intellectual property, and
other sensitive information. We may be required to expend significant additional resources to modify our protective
measures or to investigate and remediate vulnerabilities or other exposures, and we may be subject to litigation and
financial losses that are not fully insured.
We rely on third parties for certain important functions, including some that are critical to financial reporting, our
mortgage-related investment activity, and mortgage loan underwriting. Any failures by those vendors could disrupt our
business operations.
We outsource certain key functions to external parties, including: (a) processing functions for trade capture, market
risk management analytics, and financial instrument valuation; (b) custody and recordkeeping for our mortgage-related
investments; (c) processing functions for mortgage loan underwriting and servicing; (d) certain services we provide to
Treasury in our role as program compliance agent under HAMP; and (e) certain technology infrastructure and operations.
We may enter into other key outsourcing relationships in the future. If one or more of these key external parties were not
able to perform their functions for a period of time, at an acceptable service level, or for increased volumes, our business
operations could be constrained, disrupted, or otherwise negatively impacted. Our use of vendors also exposes us to the
risk of a loss of intellectual property or of confidential information or other harm. We may also be exposed to reputational
harm, to the extent vendors do not conduct their activities under appropriate ethical standards. Financial or operational
difficulties of an outside vendor could also hurt our operations if those difficulties interfere with the vendors ability to
provide services to us.
Our risk management efforts may not effectively mitigate the risks we seek to manage.
We could incur substantial losses and our business operations could be disrupted if we are unable to effectively
identify, manage, monitor and mitigate operational risks, interest rate and other market risks and credit risks related to our
business. Our risk management policies, procedures and techniques may not be sufficient to mitigate the risks we have
identified or to appropriately identify additional risks to which we are subject. See QUANTITATIVE AND
QUALITATIVE DISCLOSURES ABOUT MARKET RISK and MD&A RISK MANAGEMENT for a discussion of
our approach to managing certain of the risks we face.
Legislative or regulatory actions could adversely affect our business activities and financial results.
In addition to the Dodd-Frank Act discussed in the immediately preceding risk factor, and possible GSE reform
discussed in Conservatorship and Related Matters The future status and role of Freddie Mac is uncertain and could be
materially adversely affected by legislative and regulatory action that alters the ownership, structure, and mission of the
company, our business initiatives may be directly adversely affected by other legislative and regulatory actions at the
federal, state, and local levels. We could be negatively affected by legislation or regulatory action that changes the
foreclosure process of any individual state. For example, various states and local jurisdictions have implemented
mediation programs designed to bring servicers and borrowers together to negotiate workout options. These actions could
delay the foreclosure process and increase our expenses, including by potentially delaying the final resolution of seriously
delinquent mortgage loans and the disposition of non-performing assets. We could also be affected by any legislative or
regulatory changes that would expand the responsibilities and liability of servicers and assignees for maintaining vacant
properties prior to foreclosure. These laws and regulatory changes could significantly expand mortgage costs and
liabilities. We could be affected by any legislative or regulatory changes to existing bankruptcy laws or proceedings or
foreclosure processes, including any changes that would allow bankruptcy judges to unilaterally change the terms of
mortgage loans. We could be affected by legislative or regulatory changes that permit or require principal reductions,
including through the bankruptcy process. Our business could also be adversely affected by any modification, reduction,
or repeal of the federal income tax deductibility of mortgage interest payments.
Pursuant to the Temporary Payroll Tax Cut Continuation Act of 2011, FHFA has been directed to require Freddie
Mac and Fannie Mae to increase guarantee fees by no less than 10 basis points above the average guarantee fees charged
in 2011 on single-family mortgage-backed securities to fund the payroll tax cut. If we are found to be out of compliance
75 Freddie Mac
with this requirement of the Act for two consecutive years, we will be precluded from providing any guarantee for a
period to be determined by FHFA, but in no case less than one year.
Legislation or regulatory actions could indirectly adversely affect us to the extent such legislation or 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, or could indirectly affect us to the extent that they
modify industry practices. Legislative or regulatory provisions that create or remove incentives for these entities to sell
mortgage loans to us, purchase our securities or enter into derivatives, or other transactions with us could have a material
adverse effect on our business results and financial condition.
The Basel Committee on Banking Supervision is in the process of substantially revising capital guidelines for
financial institutions and has finalized portions of the so-called Basel III guidelines, which would set new capital and
liquidity requirements for banks. Phase-in of Basel III is expected to take several years and there is significant uncertainty
about how regulators might implement these guidelines or how the resulting regulations might impact us. For example, it
is possible that any new regulations on the capital treatment of mortgage servicing rights, risk-based capital requirements
for credit risk, and liquidity treatment of our debt and guarantee obligations could adversely affect our business results
and financial condition.
We may make certain changes to our business in an attempt to meet the housing goals and subgoals set for us by
FHFA that may increase our losses.
We may make adjustments to our mortgage loan sourcing and purchase strategies in an effort to meet our housing
goals and subgoals, including changes to our underwriting standards and the expanded use of targeted initiatives to reach
underserved populations. For example, we may purchase loans that offer lower expected returns on our investment and
increase our exposure to credit losses. Doing so could cause us to forgo other purchase opportunities that we would expect
to be more profitable. If our current efforts to meet the goals and subgoals prove to be insufficient, we may need to take
additional steps that could further increase our losses. FHFA has not yet published a final rule with respect to our duty to
serve underserved markets. However, it is possible that we could also make changes to our business in the future in
response to this duty. If we do not meet our housing goals or duty to serve requirements, and FHFA finds that the goals or
requirements were feasible, we may become subject to a housing plan that could require us to take additional steps that
could have an adverse effect on our results of operations and financial condition.
We are involved in legal proceedings, governmental investigations, and IRS examinations that could result in the
payment of substantial damages or otherwise harm our business.
We are a party to various legal actions, including litigation in the U.S. Tax Court as result of a dispute of certain tax
matters with the IRS related to our 1998 through 2005 federal income tax returns. In addition, certain of our current and
former directors, officers, and employees are involved in legal proceedings for which they may be entitled to
reimbursement by us for costs and expenses of the proceedings. The defense of these or any future claims or proceedings
could divert managements attention and resources from the needs of the business. We may be required to establish
reserves and to make substantial payments in the event of adverse judgments or settlements of any such claims,
investigations, proceedings, or examinations. Any legal proceeding, governmental investigation, or examination issue, even
if resolved in our favor, could result in negative publicity or cause us to incur significant legal and other expenses.
Furthermore, developments in, outcomes of, impacts of, and costs, expenses, settlements, and judgments related to these
legal proceedings and governmental investigations and examinations may differ from our expectations and exceed any
amounts for which we have reserved or require adjustments to such reserves. We are also cooperating with other
investigations, such as the review being conducted by state attorneys general and state bank and mortgage regulators into
foreclosure practices. These proceedings could divert managements attention or other resources. See LEGAL
PROCEEDINGS and NOTE 18: LEGAL CONTINGENCIES for information about our pending legal proceedings and
NOTE 13: INCOME TAXES for information about our litigation with the IRS relating to potential additional income
taxes and penalties for the 1998 to 2005 tax years and other tax-related matters.
76 Freddie Mac
ITEM 1B. UNRESOLVED STAFF COMMENTS
None.
ITEM 2. PROPERTIES
Our principal offices consist of five office buildings in McLean, Virginia. We own four of the office buildings,
comprising approximately 1.3 million square feet. We occupy the fifth building, comprising approximately 200,000 square
feet, under a lease from a third party.
77 Freddie Mac
PART II
ITEM 5. MARKET FOR REGISTRANTS COMMON EQUITY, RELATED
STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
Market Information
Our common stock, par value $0.00 per share, trades in the OTC market and is quoted on the OTC Bulletin Board
under the ticker symbol FMCC. As of February 27, 2012, there were 649,733,472 shares of our common stock
outstanding.
On July 8, 2010, our common stock and 20 previously-listed classes of preferred securities were delisted from the
NYSE. We delisted such securities pursuant to a directive by the Conservator. The classes of preferred stock that were
previously listed on the NYSE also now trade in the OTC market.
The table below sets forth the high and low prices of our common stock on the NYSE and the high and low bid
information for our common stock on the OTC Bulletin Board for the indicated periods. The OTC Bulletin Board
quotations reflect inter-dealer prices, without retail mark-up, mark-down, or commission, and may not necessarily
represent actual transactions.
Holders
As of February 27, 2012, we had 2,104 common stockholders of record.
80 Freddie Mac
ITEM 6. SELECTED FINANCIAL DATA(1)
The selected financial data presented below should be reviewed in conjunction with MD&A and our consolidated
financial statements and related notes for the year ended December 31, 2011.
At or For The Year Ended December 31,
2011 2010 2009 2008 2007
(dollars in millions, except share-related amounts)
Statements of Income and Comprehensive Income Data
Net interest income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 18,397 $ 16,856 $ 17,073 $ 6,796 $ 3,099
Provision for credit losses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (10,702) (17,218) (29,530) (16,432) (2,854)
Non-interest income (loss) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (10,878) (11,588) (2,732) (29,175) (275)
Non-interest expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (2,483) (2,932) (7,195) (5,753) (5,959)
Net loss attributable to Freddie Mac . . . . . . . . . . . . . . . . . . . . . . . . . (5,266) (14,025) (21,553) (50,119) (3,094)
Total comprehensive income (loss) attributable to Freddie Mac . . . . . . . (1,230) 282 (2,913) (70,483) (5,786)
Net loss attributable to common stockholders . . . . . . . . . . . . . . . . . . . (11,764) (19,774) (25,658) (50,795) (3,503)
Net loss per common share:
Basic . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (3.63) (6.09) (7.89) (34.60) (5.37)
Diluted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (3.63) (6.09) (7.89) (34.60) (5.37)
Cash dividends per common share . . . . . . . . . . . . . . . . . . . . . . . . . . 0.50 1.75
Weighted average common shares outstanding (in thousands):(2)
Basic . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,244,896 3,249,369 3,253,836 1,468,062 651,881
Diluted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,244,896 3,249,369 3,253,836 1,468,062 651,881
Balance Sheets Data
Mortgage loans held-for-investment, at amortized cost by consolidated
trusts (net of allowances for loan losses) . . . . . . . . . . . . . . . . . . . . $1,564,131 $1,646,172 $ $ $
Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,147,216 2,261,780 841,784 850,963 794,368
Debt securities of consolidated trusts held by third parties . . . . . . . . . . 1,471,437 1,528,648
Other debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 660,546 713,940 780,604 843,021 738,557
All other liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15,379 19,593 56,808 38,576 28,906
Total Freddie Mac stockholders equity (deficit) . . . . . . . . . . . . . . . . . (146) (401) 4,278 (30,731) 26,724
Portfolio Balances(3)
Mortgage-related investments portfolio . . . . . . . . . . . . . . . . . . . . . . . $ 653,313 $ 696,874 $ 755,272 $ 804,762 $ 720,813
Total Freddie Mac mortgage-related securities(4) . . . . . . . . . . . . . . . . . 1,624,684 1,712,918 1,854,813 1,807,553 1,701,207
Total mortgage portfolio(5) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,075,394 2,164,859 2,250,539 2,207,476 2,102,676
Non-performing assets(6) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 129,152 125,405 104,984 46,620 16,119
Ratios(7)
Return on average assets(8)(12) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (0.2)% (0.6)% (2.5)% (6.1)% (0.4)%
Non-performing assets ratio(9) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6.8 6.4 5.2 2.4 0.9
Return on common equity(10)(12) . . . . . . . . . . . . . . . . . . . . . . . . . . . N/A N/A N/A N/A (21.0)
Equity to assets ratio(11)(12) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (0.2) (1.6) (0.2) 3.4
(1) See NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES for information regarding our accounting policies and the impact of
new accounting policies on our consolidated financial statements. Effective January 1, 2010, we adopted amendments to the accounting guidance
for transfers of financial assets and the consolidation of VIEs. This had a significant impact on our consolidated financial statements. Consequently,
our results for 2010 and 2011 are not comparable with the results for prior years. For more information, see NOTE 19: SELECTED FINANCIAL
STATEMENT LINE ITEMS.
(2) Includes the weighted average number of shares that are associated with the warrant for our common stock issued to Treasury as part of the
Purchase Agreement for periods after 2007. This warrant is included in basic loss per share, because it is unconditionally exercisable by the holder
at a cost of $0.00001 per share.
(3) Represents the UPB and excludes mortgage loans and mortgage-related securities traded, but not yet settled.
(4) See Table 35 Freddie Mac Mortgage-Related Securities for the composition of this line item.
(5) See Table 16 Composition of Segment Mortgage Portfolios and Credit Risk Portfolios for the composition of our total mortgage portfolio.
(6) See Table 60 Non-Performing Assets for a description of our non-performing assets.
(7) The dividend payout ratio on common stock is not presented because we are reporting a net loss attributable to common stockholders for all
periods presented.
(8) Ratio computed as net income (loss) attributable to Freddie Mac divided by the simple average of the beginning and ending balances of total
assets.
(9) Ratio computed as non-performing assets divided by the ending UPB of our total mortgage portfolio, excluding non-Freddie Mac mortgage-related
securities.
(10) Ratio computed as net income (loss) attributable to common stockholders divided by the simple average of the beginning and ending balances of
total Freddie Mac stockholders equity (deficit), net of preferred stock (at redemption value). Ratio is not presented for periods in which the simple
average of the beginning and ending balances of total Freddie Mac stockholders equity (deficit) is less than zero.
(11) Ratio computed as the simple average of the beginning and ending balances of total Freddie Mac stockholders equity (deficit) divided by the
simple average of the beginning and ending balances of total assets.
(12) To calculate the simple averages for 2010, the beginning balances of total assets and total Freddie Mac stockholders equity are based on the
January 1, 2010 balances, so that both the beginning and ending balances reflect the January 1, 2010 changes in accounting principles related to
VIEs.
81 Freddie Mac
ITEM 7. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
You should read this MD&A in conjunction with BUSINESS Executive Summary and our consolidated financial
statements and related notes for the year ended December 31, 2011.
86 Freddie Mac
2011 vs. 2010 Variance Due to 2010 vs. 2009 Variance Due to
Total Total
(9) (9)
Rate Volume Change Rate(9) Volume(9) Change
(in millions)
Interest-earning assets:
Cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ (33) $ (10) $ (43) $ (83) $ (33) $ (116)
Federal funds sold and securities purchased under agreements to resell . . . . . . . . . . . . . . . . . . . (19) (27) (46) (1) 32 31
Mortgage-related securities:
Mortgage-related securities(3) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (1,082) (3,927) (5,009) (50) (7,147) (7,197)
Extinguishment of PCs held by Freddie Mac . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,042 2,475 3,517 (11,182) (11,182)
Total mortgage-related securities, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (40) (1,452) (1,492) (50) (18,329) (18,379)
Non-mortgage-related securities(3) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (71) (21) (92) (850) 314 (536)
Mortgage loans held by consolidated trusts(4)(5) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (4,921) (4,619) (9,540) 86,698 86,698
Unsecuritized mortgage loans(4)(6) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (1,097) 1,494 397 (1,641) 3,553 1,912
Total interest-earning assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $(6,181) $(4,635) $(10,816) $(2,625) $ 72,235 $ 69,610
Interest-bearing liabilities:
Debt securities of consolidated trusts including PCs held by Freddie Mac . . . . . . . . . . . . . . . . . $ 7,077 $ 4,537 $ 11,614 $ $(86,398) $(86,398)
Extinguishment of PCs held by Freddie Mac . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (1,042) (2,475) (3,517) 11,182 11,182
Total debt securities of consolidated trusts held by third parties . . . . . . . . . . . . . . . . . . . . . . 6,035 2,062 8,097 (75,216) (75,216)
Other debt:
Short-term debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 145 76 221 1,248 434 1,682
Long-term debt(7) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,697 1,128 3,825 3,068 485 3,553
Total other debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,842 1,204 4,046 4,316 919 5,235
Total interest-bearing liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8,877 3,266 12,143 4,316 (74,297) (69,981)
Expense related to derivatives(8) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 214 214 154 154
Total funding of interest-earning assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 9,091 $ 3,266 $ 12,357 $ 4,470 $(74,297) $(69,827)
Net interest income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 2,910 $(1,369) $ 1,541 $ 1,845 $ (2,062) $ (217)
(1) Excludes mortgage loans and mortgage-related securities traded, but not yet settled.
(2) We calculate average balances based on amortized cost.
(3) Interest income (expense) includes accretion of the portion of impairment charges recognized in earnings where we expect a significant improvement
in cash flows.
(4) Non-performing loans, where interest income is generally recognized when collected, are included in average balances.
(5) Loan fees, primarily consisting of delivery fees, included in interest income for mortgage loans held by consolidated trusts were $405 million,
$127 million, and $0 million for 2011, 2010, and 2009, respectively.
(6) Loan fees, primarily consisting of delivery fees and multifamily prepayment fees, included in unsecuritized mortgage loan interest income were
$223 million, $130 million, and $78 million for 2011, 2010, and 2009, respectively.
(7) Includes current portion of long-term debt.
(8) Represents changes in fair value of derivatives in closed cash flow hedge relationships that were previously deferred in AOCI and have been
reclassified to earnings as the associated hedged forecasted issuance of debt affects earnings.
(9) Rate and volume changes are calculated on the individual financial statement line item level. Combined rate/volume changes were allocated to the
individual rate and volume change based on their relative size.
(1) Includes the reversal of interest income accrued, net of interest received on a cash basis, related to mortgage loans that are on non-accrual status.
(2) Represents amortization related to premiums, discounts, deferred fees and other adjustments to the carrying value of our financial instruments, and
the reclassification of previously deferred balances from AOCI for certain derivatives in closed cash flow hedge relationships related to individual
debt issuances and mortgage purchase transactions.
(3) The portion of the impairment charges recognized in earnings where we expect a significant improvement in cash flows is recognized as net interest
income. Upon our adoption of an amendment to the accounting guidance for investments in debt and equity securities on April 1, 2009, previously
recognized non-credit-related other-than-temporary impairments are no longer accreted into net interest income.
(4) Represents changes in fair value of derivatives in closed cash flow hedge relationships that were previously deferred in AOCI and have been
reclassified to earnings as the associated hedged forecasted issuance of debt affects earnings.
87 Freddie Mac
Net interest income and net interest yield increased $1.5 billion and 11 basis points, respectively, during the year
ended December 31, 2011, compared to the year ended December 31, 2010. The primary driver underlying the increases
was lower funding costs from the replacement of debt at lower rates. This factor was partially offset by the reduction in
the average balance of higher-yielding mortgage-related assets due to continued liquidations and limited purchase activity.
Net interest income decreased by $217 million during the year ended December 31, 2010, compared to the year
ended December 31, 2009, primarily due to: (a) the reduction in the average balance of higher-yielding mortgage-related
assets due to liquidations and limited purchase activity; and (b) higher interest expense on seriously delinquent mortgage
loans. These factors were partially offset by: (a) lower funding costs from the replacement of debt at lower rates and
favorable rate resets on floating-rate debt; and (b) the inclusion of amounts previously classified as management and
guarantee income. Net interest yield declined substantially during the year ended December 31, 2010, compared to the
year ended December 31, 2009, because the net interest yield of the assets held in our consolidated single-family trusts
was lower than the net interest yield of PCs previously included in net interest income and our balance of non-performing
mortgage loans increased.
We do not recognize interest income on non-performing loans that have been placed on non-accrual status, except
when cash payments are received. We refer to this interest income that we do not recognize as foregone interest income.
Foregone interest income and reversals of previously recognized interest income, net of cash received, related to non-
performing loans was $4.0 billion, $4.7 billion, and $349 million during the years ended December 31, 2011, 2010, and
2009, respectively. The reduction during the year ended December 31, 2011 compared to the year ended December 31,
2010, was primarily due to the decreased volume of non-performing loans on non-accrual status.
The increase during the year ended December 31, 2010 compared to the year ended December 31, 2009 was
primarily due to our adoption of amendments to the accounting guidance related to the accounting for transfers of
financial assets and consolidation of VIEs. Prior to adoption of these amendments and subsequent consolidation of certain
trusts, we did not reverse interest income on non-performing loans for loans held by the trusts, and the forgone interest
income on non-performing loans of the trusts did not reduce net interest income or net interest yield, since it was
accounted for through a charge to provision for credit losses.
During the year ended December 31, 2011, spreads on our debt and our access to the debt markets remained
favorable relative to historical levels. For more information, see LIQUIDITY AND CAPITAL RESOURCES
Liquidity.
The objectives set for us under our charter and conservatorship, restrictions in the Purchase Agreement and
restrictions imposed by FHFA have negatively impacted, and will continue to negatively impact, our net interest income.
For example, our mortgage-related investments portfolio is subject to a cap that decreases by 10% each year until the
portfolio reaches $250 billion. This decline in asset balances will likely cause a corresponding reduction in our interest
income over time. For more information on the various restrictions and limitations on our investment activity and our
mortgage-related investments portfolio, see BUSINESS Conservatorship and Related Matters Impact of
Conservatorship and Related Actions on Our Business Limits on Investment Activity and Our Mortgage-Related
Investments Portfolio.
(1) Primarily includes purchased call and put swaptions and purchased interest-rate caps and floors.
(2) Includes futures, foreign-currency swaps, commitments, swap guarantee derivatives, and credit derivatives. Foreign-currency swaps are defined as
swaps in which net settlement is based on one leg calculated in a foreign-currency and the other leg calculated in U.S. dollars. Commitments
include: (a) our commitments to purchase and sell investments in securities; (b) our commitments to purchase mortgage loans; and (c) our
commitments to purchase and extinguish or issue debt securities of our consolidated trusts.
(3) Includes imputed interest on zero-coupon swaps.
Gains (losses) on derivatives not accounted for in hedge accounting relationships are principally driven by changes
in: (a) interest rates and implied volatility; and (b) the mix and volume of derivatives in our derivative portfolio.
Our mix and volume of derivatives change from period to period as we respond to changing interest rate
environments. We use receive- and pay-fixed interest-rate 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. A
receive-fixed swap results in our receipt of a fixed interest-rate payment from our counterparty in exchange for a variable-
rate payment. Conversely, a pay-fixed swap requires us to make a fixed interest-rate payment to our counterparty in
exchange for a variable-rate payment. Receive-fixed swaps increase in value and pay-fixed swaps decrease in value when
interest rates decrease (with the opposite being true when interest rates increase).
We use swaptions and other option-based derivatives to adjust the interest-rate characteristics of our debt in response
to changes in the expected lives of our investments in mortgage-related assets. Purchased call and put swaptions, where
we make premium payments, are options for us to enter into receive- and pay-fixed swaps, respectively. Conversely,
written call and put swaptions, where we receive premium payments, are options for our counterparty to enter into receive
and pay-fixed swaps, respectively. The fair values of both purchased and written call and put swaptions are sensitive to
changes in interest rates and are also driven by the markets expectation of potential changes in future interest rates
(referred to as implied volatility). Purchased swaptions generally become more valuable as implied volatility increases
and less valuable as implied volatility decreases. Recognized losses on purchased options in any given period are limited
to the premium paid to purchase the option plus any unrealized gains previously recorded. Potential losses on written
options are unlimited.
We also use derivatives to synthetically create the substantive economic equivalent of various debt funding structures.
For example, the combination of a series of short-term debt issuances over a defined period and a pay-fixed interest-rate
swap with the same maturity as the last debt issuance is the substantive economic equivalent of a long-term fixed-rate
debt instrument of comparable maturity. Similarly, the combination of non-callable debt and a call swaption with the same
maturity as the noncallable debt is the substantive economic equivalent of callable debt. For a discussion regarding our
ability to issue debt, see LIQUIDITY AND CAPITAL RESOURCES Liquidity Other Debt Securities.
During 2011, we recognized losses on derivatives of $9.8 billion, primarily due to declines in long-term swap interest
rates. Specifically, during 2011, we recognized fair value losses on our pay-fixed swap positions of $23.0 billion, partially
offset by fair value gains on our receive-fixed swaps of $12.6 billion. We also recognized fair value gains of $7.2 billion
during 2011 on our option-based derivatives, resulting from gains on our purchased call swaptions as interest rates
decreased. Additionally, we recognized losses of $5.0 billion related to the accrual of periodic settlements during 2011
due to our net pay-fixed swap position and a declining interest rate environment during the year.
During 2010, declining long-term swap interest rates resulted in a loss on derivatives of $8.1 billion. Specifically, the
decrease in long-term swap interest rates resulted in fair value losses on our pay-fixed swaps of $17.5 billion, partially
offset by fair value gains on our receive-fixed swaps of $9.7 billion. We recognized fair value gains of $4.8 billion on our
option-based derivatives, resulting from gains on our purchased call swaptions primarily due to the declines in interest
rates during 2010. Additionally, we recognized losses of $4.5 billion related to the accrual of periodic settlements during
2010 due to our net pay-fixed swap position and a declining interest rate environment during the year.
During 2009, the mix and volume of our derivative portfolio were impacted by fluctuations in swap interest rates,
resulting in a loss on derivatives of $1.9 billion. Long-term swap interest rates and implied volatility both increased during
91 Freddie Mac
2009. As a result of these factors, we recorded gains on our pay-fixed swap positions, partially offset by losses on our
receive-fixed swaps, resulting in a $13.6 billion net gain. We also recorded losses of $10.7 billion on option-based
derivatives, primarily on our purchased call swaptions, as the impact of the increasing swap interest rates more than offset
the impact of higher implied volatility.
Other Income
Other income includes items associated with our guarantee activities on non-consolidated trusts, including
management and guarantee income, gains (losses) on guarantee asset, income on guarantee obligation, gains (losses) on
sale of mortgage loans, and trust management income (expense). Upon consolidation of our single-family PC trusts and
certain Other Guarantee Transactions commencing January 1, 2010, guarantee-related items no longer have a material
impact on our results and are therefore included in other income on our consolidated statements of income and
92 Freddie Mac
comprehensive income. The management and guarantee income recognized during 2011 and 2010 was earned from our
non-consolidated securitization trusts and other mortgage credit guarantees which had an aggregate UPB of $56.9 billion
and $44.0 billion as of December 31, 2011 and 2010, respectively, compared to $1.87 trillion as of December 31, 2009.
For additional information on the impact of consolidation of our single-family PC trusts and certain Other Guarantee
Transactions, see NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES and NOTE 19: SELECTED
FINANCIAL STATEMENT LINE ITEMS.
The table below summarizes the significant components of other income.
(1) Most of our guarantee related income in 2011 and 2010 relates to securitized multifamily mortgage loans where we have not consolidated the
securitization trusts on our consolidated balance sheets.
(2) Upon consolidation of our single-family PC trusts and certain Other Guarantee Transactions on January 1, 2010, we no longer incur trust
management income and expenses and no longer incur lower-of-cost-or-fair-value adjustments on single-family mortgage loans since all of our
single-family mortgage loans are classified as held-for-investment rather than held-for-sale.
(3) We wrote down the carrying value of our LIHTC investments to zero as of December 31, 2009, as we will not be able to realize any value for these
assets either through reductions to our taxable income and related tax liabilities or through a sale to a third party. See NOTE 3: VARIABLE
INTEREST ENTITIES for further information.
Other income increased to $2.2 billion for the year ended December 31, 2011, compared to $1.9 billion for the year
ended December 31, 2010, primarily due to gains on mortgage loans recorded at fair value in 2011, compared to losses on
mortgage loans recorded at fair value in 2010, which was partially offset by lower recoveries on loans impaired upon
purchase and a decline in all other income in 2011. We recognized gains on mortgage loans recorded at fair value during
2011, compared to losses in 2010, as a result of declines in interest rates and higher balances of loans recorded at fair
value during 2011.
All Other
All other income declined to $608 million during the year ended December 31, 2011, compared to $819 million
during the year ended December 31, 2010, primarily due to: (a) gains recognized in 2010 due to the recognition of
income related to mortgage-servicing rights associated with TBW, one of our former seller/servicers; and (b) the
correction in 2011 of certain prior period accounting errors not material to our financial statements.
All other income increased to $819 million in 2010 from $222 million in 2009, primarily due to the recognition of
income related to mortgage-servicing rights associated with TBW, and penalties and other fees on single-family seller
servicers, including penalties arising from failures to complete foreclosures within required time periods, and to a lesser
extent, recognition of expected loss recoveries from certain legal claims.
Non-Interest Expense
The table below summarizes the components of non-interest expense.
(1) Commencing in the first quarter of 2011, we reclassified certain expenses from other expenses to professional services expense. Prior period
amounts have been reclassified to conform to the current presentation.
Administrative Expenses
Administrative expenses decreased in 2011 compared to 2010, largely due to a reduction in the number of employees
as part of our ongoing focus on cost reduction measures. Administrative expenses decreased in 2010 compared to 2009, in
part due to our focus on cost reduction measures in 2010, particularly on professional services costs. We do not expect
that our general and administrative expenses for 2012 will continue to decline, in part due to the continually changing
mortgage market, an environment in which we are subject to increased regulatory oversight and mandates and strategic
94 Freddie Mac
arrangements that we may enter into with outside firms to provide operational capability and staffing for key functions, if
needed.
(1) Consists of costs incurred to acquire, maintain or protect a property after it is acquired in a foreclosure transfer, such as legal fees, insurance, taxes,
and cleaning and other maintenance charges.
(2) Represents the difference between the disposition proceeds, net of selling expenses, and the fair value of the property on the date of the foreclosure
transfer.
(3) Represents the (increase) decrease in the estimated fair value of properties that were in inventory during the period.
(4) Includes recoveries from primary mortgage insurance, pool insurance and seller/servicer repurchases.
REO operations expense was $585 million in 2011, as compared to $673 million in 2010 and $307 million in 2009.
The decline in REO operations expense in 2011, compared to 2010, was primarily due to the impact of a less significant
decline in home prices in certain geographical areas with significant REO activity resulting in lower write-downs of
single-family REO inventory during 2011, partially offset by lower recoveries on REO properties during 2011. Lower
recoveries on REO properties in 2011, compared to 2010, were primarily due to reduced recoveries from mortgage
insurers, in part due to the continued deterioration in the financial condition of the mortgage insurance industry, and a
decline in reimbursements of losses from seller/servicers associated with repurchase requests on loans on which we have
foreclosed. The increase in REO operations expense in 2010, compared to 2009, is a result of higher REO property
expenses and holding period write-downs that were partially offset by lower disposition losses and increased recoveries.
We expect REO property expenses to continue to remain high in 2012 due to expected continued high levels of single-
family REO acquisitions and inventory.
In 2011, we believe the volume of our single-family REO acquisitions was less than it otherwise would have been
due to delays in the foreclosure process, particularly in states that require a judicial foreclosure process. The acquisition
slowdown, coupled with high disposition levels, led to an approximate 16% reduction in REO property inventory during
2011. While we expect the delays to ease in 2012, we also expect the length of the foreclosure process will remain above
historical levels. For more information on how delays in the foreclosure process could adversely affect our REO
operations expense, see RISK FACTORS Operational Risks We have incurred, and will continue to incur, expenses
and we may otherwise be adversely affected by delays and deficiencies in the foreclosure process. See RISK
MANAGEMENT Credit Risk Mortgage Credit Risk Non-Performing Assets for additional information about our
REO activity.
Other Expenses
Other expenses were $0.4 billion, $0.7 billion, and $5.2 billion in 2011, 2010, and 2009, respectively. Other expenses
in 2011 and 2010 consist primarily of HAMP servicer incentive fees, costs related to terminations and transfers of
mortgage servicing, and other miscellaneous expenses. Other expenses were lower in 2011 compared to 2010, primarily
95 Freddie Mac
due to lower expenses associated with transfers and terminations of mortgage servicing, primarily related to TBW,
partially offset by higher servicer incentive fees associated with HAMP during 2011. Other expenses declined significantly
from 2009 to 2010 due to reduction of losses on loans purchased, which was due to the change in accounting guidance
for consolidation of VIEs we implemented on January 1, 2010. See NOTE 1: SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES Recently Adopted Accounting Guidance and NOTE 19: SELECTED FINANCIAL
STATEMENT LINE ITEMS 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. Certain activities that are not part of a reportable
segment are included in the All Other category.
The Investments segment reflects results from our investment, funding and hedging activities. In our Investments
segment, we invest principally in mortgage-related securities and single-family performing mortgage loans, which are
funded by other debt issuances and hedged using derivatives. In our Investments segment, we also provide funding and
hedging management services to the Single-family Guarantee and Multifamily segments. The Investments segment reflects
changes in the fair value of the Multifamily segment assets that are associated with changes in interest rates. Segment
Earnings for this segment consist primarily of the returns on these investments, less the related funding, hedging, and
administrative expenses.
The Single-family Guarantee segment reflects results from our single-family credit guarantee activities. In our Single-
family Guarantee segment, we purchase single-family mortgage loans originated by our seller/servicers in the primary
mortgage market. In most instances, we use the mortgage securitization process to package the purchased mortgage loans
into guaranteed mortgage-related securities. We guarantee the payment of principal and interest on the mortgage-related
securities in exchange for management and guarantee fees. Segment Earnings for this segment consist primarily of
management and guarantee fee revenues, including amortization of upfront fees, less credit-related expenses,
administrative expenses, allocated funding costs, and amounts related to net float benefits or expenses.
The Multifamily segment reflects results from our investment (both purchases and sales), securitization, and
guarantee activities in multifamily mortgage loans and securities. Although we hold multifamily mortgage loans and non-
agency CMBS that we purchased for investment, our purchases of such multifamily mortgage loans for investment have
declined significantly since 2010, and our purchases of CMBS have declined significantly since 2008. The only CMBS
that we have purchased since 2008 have been senior, mezzanine, and interest-only tranches related to certain of our
securitization transactions, and these purchases have not been significant. Currently, our primary business strategy is to
purchase multifamily mortgage loans for aggregation and then securitization. We guarantee the senior tranches of these
securitizations in Other Guarantee Transactions. Our Multifamily segment also issues Other Structured Securities, but does
not issue REMIC securities. Our Multifamily segment also enters into other guarantee commitments for multifamily HFA
bonds and housing revenue bonds held by third parties. Historically, we issued multifamily PCs, but this activity has been
insignificant in recent years. Segment Earnings for this segment consist primarily of the interest earned on assets related
to multifamily investment activities and management and guarantee fee income, less credit-related expenses,
administrative expenses, and allocated funding costs. In addition, the Multifamily segment reflects gains on sale of
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mortgages and the impact of changes in fair value of CMBS and held-for-sale loans associated only with factors other
than changes in interest rates, such as liquidity and credit.
We evaluate segment performance and allocate resources based on a Segment Earnings approach, subject to the
conduct of our business under the direction of the Conservator. The financial performance of our Single-family Guarantee
segment and Multifamily segment are measured based on each segments contribution to GAAP net income (loss). Our
Investments segment is measured on its contribution to GAAP total comprehensive income (loss), which consists of the
sum of its contribution to: (a) GAAP net income (loss); and (b) GAAP total other comprehensive income, net of taxes.
The sum of Segment Earnings for each segment and the All Other category equals GAAP net income (loss) attributable to
Freddie Mac. Likewise, the sum of total comprehensive income (loss) for each segment and the All Other category equals
GAAP total comprehensive income (loss) attributable to Freddie Mac.
The All Other category consists of material corporate level expenses that are: (a) infrequent in nature; and (b) based
on management decisions outside the control of the management of our reportable segments. By recording these types of
activities to the All Other category, we believe the financial results of our three reportable segments reflect the decisions
and strategies that are executed within the reportable segments and provide greater comparability across time periods. The
All Other category also includes the deferred tax asset valuation allowance associated with previously recognized income
tax credits carried forward and, in 2009, the write-down of our LIHTC investments.
In presenting Segment Earnings, we make significant reclassifications to certain financial statement line items in
order to reflect a measure of net interest income on investments and a measure of management and guarantee income on
guarantees that is in line with how we manage our business. We present Segment Earnings by: (a) reclassifying certain
investment-related activities and credit guarantee-related activities between various line items on our GAAP consolidated
statements of income and comprehensive income; and (b) allocating certain revenues and expenses, including certain
returns on assets and funding costs, and all administrative expenses to our three reportable segments.
As a result of these reclassifications and allocations, Segment Earnings for our reportable segments differs
significantly from, and should not be used as a substitute for, net income (loss) as determined in accordance with GAAP.
Our definition of Segment Earnings may differ from similar measures used by other companies. However, we believe that
Segment Earnings provides us with meaningful metrics to assess the financial performance of each segment and our
company as a whole.
Beginning January 1, 2010, we revised our method for presenting Segment Earnings to reflect changes in how
management measures and assesses the performance of each segment and the company as a whole. This change in
method, in conjunction with our implementation of the amendments to the accounting guidance relating to transfers of
financial assets and the consolidation of VIEs, resulted in significant changes to our presentation of Segment Earnings.
Segment Earnings for 2009 do not include changes to the guarantee asset, guarantee obligation, or other items that were
eliminated or changed as a result of our implementation of the aforementioned amendments to the accounting guidance,
as these amendments were applied prospectively consistent with our GAAP results. As a result, our Segment Earnings
results for 2011 and 2010 are not directly comparable with the results for 2009. See NOTE 1: SUMMARY OF
SIGNIFICANT ACCOUNTING POLICIES for further information regarding the consolidation of certain of our
securitization trusts.
See NOTE 14: SEGMENT REPORTING for further information regarding our segments, including the descriptions
and activities of the segments and the reclassifications and allocations used to present Segment Earnings.
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The table below provides information about our various segment mortgage portfolios at December 31, 2011, 2010,
and 2009. For a discussion of each segments portfolios, see Segment Earnings Results.
(1) Based on UPB and excludes mortgage loans and mortgage-related securities traded, but not yet settled.
(2) Excludes unsecuritized seriously delinquent single-family loans managed by the Single-family Guarantee segment. However, the Single-family
Guarantee segment continues to earn management and guarantee fees associated with unsecuritized single-family loans in the Investments segments
mortgage investments portfolio.
(3) The balances of the mortgage-related securities in these portfolios are based on the UPB of the security, whereas the balances of our single-family
credit guarantee and multifamily mortgage portfolios presented in this report are based on the UPB of the mortgage loans underlying the related
security. The differences in the loan and security balances result from the timing of remittances to security holders, which is typically 45 or 75 days
after the mortgage payment cycle of fixed-rate and ARM PCs, respectively.
(4) Represents unsecuritized seriously delinquent single-family loans managed by the Single-family Guarantee segment.
(5) Represents the UPB of mortgage-related assets held by third parties for which we provide our guarantee without our securitization of the related
assets.
(6) Freddie Mac single-family mortgage-related securities held by us are included in both our Investments segments mortgage investments portfolio and
our Single-family Guarantee segments managed loan portfolio, and Freddie Mac multifamily mortgage-related securities held by us are included in
both the multifamily investment securities portfolio and the multifamily guarantee portfolio. Therefore, these amounts are deducted in order to
reconcile to our total mortgage portfolio.
(7) Represents the UPB of loans for which we present characteristics, delinquency data, and certain other statistics in this report. See GLOSSARY for
further description.
(8) We exclude HFA-related guarantees and our resecuritizations of Ginnie Mae certificates from our credit risk portfolios and most related statistics
because these guarantees do not expose us to meaningful amounts of credit risk due to the credit enhancement provided on them by the U.S.
government.
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Segment Earnings Results
Investments
The table below presents the Segment Earnings of our Investments segment.
Segment Earnings for our Investments segment increased by $2.1 billion to $3.4 billion in 2011, compared to
$1.3 billion in 2010. Comprehensive income for our Investments segment decreased by $5.0 billion to $6.5 billion in
2011, compared to $11.5 billion in 2010.
During 2011, the UPB of the Investments segment mortgage investments portfolio decreased by 6.7%. We held
$253.6 billion of agency securities and $86.5 billion of non-agency mortgage-related securities as of December 31, 2011,
compared to $302.9 billion of agency securities and $99.6 billion of non-agency mortgage-related securities as of
December 31, 2010. The decline in UPB of agency securities is due mainly to liquidations, including prepayments and
selected sales. The decline in UPB of non-agency mortgage-related securities is due mainly to the receipt of monthly
remittances of principal repayments from both the recoveries of liquidated loans and, to a lesser extent, voluntary
repayments of the underlying collateral, representing a partial return of our investments in these securities. Since the
beginning of 2007, we have incurred actual principal cash shortfalls of $1.5 billion on impaired non-agency mortgage-
related securities in the Investments segment. See CONSOLIDATED BALANCE SHEETS ANALYSIS Investments in
Securities for additional information regarding our mortgage-related securities.
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Segment Earnings net interest income increased $1.1 billion, and Segment Earnings net interest yield increased
31 basis points during 2011, compared to 2010. The primary driver was lower funding costs, primarily due to the
replacement of debt at lower rates. These lower funding costs were partially offset by the reduction in the average balance
of higher-yielding mortgage-related assets due to continued liquidations and limited purchase activity.
Segment Earnings non-interest income (loss) was $(4.6) billion in 2011, compared to $(6.1) billion in 2010. This
improvement in non-interest loss was mainly due to decreased net impairment of available-for-sale securities and
decreased losses on trading securities, partially offset by increased derivative losses.
Impairments recorded in our Investments segment decreased by $2.0 billion during 2011, compared to 2010,
primarily due to the impact of lower interest rates in 2011 resulting in a benefit from expected structural credit
enhancements on the securities. The impact of lower interest rates was partially offset by the impact of declines in
forecasted home prices. See CONSOLIDATED BALANCE SHEETS ANALYSIS Investments in Securities
Mortgage-Related Securities Other-Than-Temporary Impairments on Available-For-Sale Mortgage-Related Securities
for additional information on our impairments.
We recorded losses on trading securities of $(1.0) billion during 2011, compared to $(1.4) billion during 2010.
Losses in both periods are primarily due to the movement of securities with unrealized gains towards maturity. These
losses were partially offset by larger fair value gains in 2011, due to a more significant decline in long-term interest rates,
compared to 2010.
We recorded derivative gains (losses) for this segment of $(3.6) billion during 2011, compared to $(1.9) billion
during 2010. While derivatives are an important aspect of our strategy to manage interest-rate risk, they generally increase
the volatility of reported Segment Earnings, because while fair value changes in derivatives affect Segment Earnings, fair
value changes in several of the types of assets and liabilities being hedged do not affect Segment Earnings. During 2011
and 2010, swap interest rates decreased, resulting in fair value losses on our pay-fixed swaps, partially offset by fair value
gains on our receive-fixed swaps and purchased call swaptions. See Non-Interest Income (Loss) Derivative Gains
(Losses) for additional information on our derivatives.
Our Investments segments total other comprehensive income was $3.1 billion in 2011. Net unrealized losses in
AOCI on our available-for-sale securities decreased by $2.6 billion during 2011, primarily attributable to the impact of
declining interest rates, resulting in fair value gains on our agency securities, and the recognition in earnings of other-
than-temporary impairments on our non-agency mortgage-related securities, partially offset by the impact of widening
OAS levels on our single-family non-agency mortgage-related securities. The changes in fair value of CMBS, excluding
impacts from the changes in interest rates, are reflected in the Multifamily segment.
Segment Earnings for our Investments segment decreased by $5.2 billion to $1.3 billion in 2010, compared to
$6.5 billion in 2009. Comprehensive income for our Investments segment decreased by $6.3 billion to $11.5 billion in
2010, compared to $17.8 billion in 2009.
Segment Earnings net interest income and net interest yield decreased $1.9 billion and 12 basis points, respectively,
during 2010, compared to 2009. The primary driver underlying these decreases was a decrease in the average balance of
mortgage-related securities, partially offset by a decrease in funding costs as a result of the replacement of higher-cost
long-term debt at lower rates.
Segment Earnings non-interest loss increased $5.6 billion in 2010, compared to 2009. Included in other non-interest
income (loss) are gains (losses) on trading securities of $(1.4) billion in 2010, compared to $4.9 billion in 2009. In 2010,
the losses on trading securities was primarily due to the movement of securities with unrealized gains towards maturity,
particularly interest-only securities, partially offset by fair value gains on our non-interest-only securities classified as
trading primarily due to decreased interest rates. The net gains on trading securities during 2009 related primarily to
tightening OAS levels.
We recorded derivative gains (losses) for this segment of $(1.9) billion during 2010, compared to $4.7 billion during
2009. During 2010, swap interest rates decreased, resulting in fair value losses on our pay-fixed swaps, partially offset by
fair value gains on our receive-fixed swaps and purchased call swaptions. During 2009, longer-term swap interest rates
increased, resulting in fair value gains on our pay-fixed swaps, partially offset by fair value losses on our receive-fixed
swaps.
Impairments recorded in our Investments segment decreased by $6.1 billion during 2010, compared to 2009.
Impairments for 2010 and 2009 are not comparable because the adoption of the amendment to the accounting guidance
for investments in debt and equity securities on April 1, 2009 significantly impacted both the identification and
measurement of other-than-temporary impairments.
100 Freddie Mac
Our Investments segments total other comprehensive income was $10.2 billion during 2010. Net unrealized losses in
AOCI on our available-for-sale securities decreased by $9.5 billion during 2010, primarily attributable to the impact of
declining interest rates, resulting in fair value gains on our agency, single-family non-agency, and CMBS mortgage-related
securities. In addition, the impact of widening OAS levels on our single-family non-agency mortgage-related securities
during these periods was offset by fair value gains related to the movement of securities with unrealized losses towards
maturity and the recognition in earnings of other-than-temporary impairments on our non-agency mortgage-related
securities.
For a discussion of items that may impact our Investments segment net interest income over time, see
BUSINESS Conservatorship and Related Matters Impact of Conservatorship and Related Actions on Our
Business Limits on Investment Activity and Our Mortgage-Related Investments Portfolio and Net Interest Income.
Segment Earnings (loss) for our Single-family Guarantee segment improved to $(10.0) billion in 2011 compared to
$(16.3) billion in 2010, primarily due to a decline in Segment Earnings provision for credit losses.
Segment Earnings (loss) for our Single-family Guarantee segment improved to $(16.3) billion in 2010 compared to
$(27.1) billion in 2009, primarily due to a decline in our Segment Earnings provision for credit losses.
102 Freddie Mac
The table below provides summary information about the composition of Segment Earnings (loss) for this segment
for the years ended December 31, 2011 and 2010.
(1) Includes amortization of delivery fees of $1.2 billion and $1.1 billion for 2011 and 2010, respectively.
(2) Consists of the aggregate of the Segment Earnings provision for credit losses and Segment Earnings REO operations expense. Historical rates of
average credit expenses may not be representative of future results.
(3) Calculated as the amount of Segment Earnings management and guarantee income or credit expenses, respectively, divided by the sum of the
average carrying values of the single-family credit guarantee portfolio and the average balance of our single-family HFA initiative guarantees.
(4) Calculated as Segment Earnings management and guarantee income less credit expenses.
(5) Segment Earnings management and guarantee income is presented by year of guarantee origination, whereas credit expenses are presented based on
year of loan origination.
For the years ended December 31, 2011 and 2010, the guarantee-related revenue from mortgage guarantees we issued
after 2008 exceeded the credit-related and administrative expenses associated with these guarantees. We currently believe
our management and guarantee fee rates for guarantee issuances after 2008, when coupled with the higher credit quality
of the mortgages within our new guarantee issuances, will provide management and guarantee fee income, over the long
term, that exceeds our expected credit-related and administrative expenses associated with the underlying loans.
Nevertheless, various factors, such as continued high unemployment rates, further declines in home prices, or negative
impacts of HARP loans originated in recent years (which may not perform as well as other refinance mortgages, due in
part to the high LTV ratios of the loans), could require us to incur expenses on these loans beyond our current
expectations. Our management and guarantee fee income associated with guarantee issuances in 2005 through 2008 has
not been adequate to cover the credit and administrative expenses associated with such loans, primarily due to the high
rate of defaults on the loans originated in those years coupled with a high volume of refinancing since 2008. High levels
of refinancing and delinquency since 2008 have significantly reduced the balance of performing loans from those years
103 Freddie Mac
that remain in our portfolio and consequently reduced management and guarantee income associated with loans originated
in 2005 through 2008 (we do not recognize Segment Earnings management and guarantee income on non-accrual
mortgage loans). We also believe that the management and guarantee fees associated with originations after 2008 will not
be sufficient to offset the future expenses associated with our 2005 to 2008 guarantee issuances for the foreseeable future.
Consequently, we expect to continue reporting net losses for the Single-family Guarantee segment in 2012.
Segment Earnings management and guarantee income increased slightly in 2011, as compared to 2010, primarily due
to an increase in amortization of delivery fees, partially offset by a lower average balance of the single-family credit
guarantee portfolio during 2011. Segment Earnings management and guarantee income increased slightly in 2010
compared to 2009, primarily due to an increase in amortization of delivery fees. The increase in amortization of delivery
fees in 2011 and 2010 was due to the effect of declining interest rates during these years, which increased both actual
refinance activity and our expectation of future refinancing activity.
The UPB of the Single-family Guarantee managed loan portfolio was $1.7 trillion at December 31, 2011, compared
to $1.8 trillion and $1.9 trillion at December 31, 2010 and 2009, respectively. The declines in 2011 and 2010 reflect that
the amount of single-family loan liquidations has exceeded new loan purchase and guarantee activity, which we believe is
due, in part, to declines in the amount of single-family mortgage debt outstanding in the market and increased competition
from Ginnie Mae and FHA/VA. Our loan purchase and guarantee activity in 2011 was at the lowest level we have
experienced in the last several years. The liquidation rate on our securitized single-family credit guarantees was
approximately 24%, 29%, and 24% for 2011, 2010, and 2009, respectively. We expect the size of our Single-family
Guarantee managed loan portfolio will decline slightly during 2012.
Refinance volumes continued to be high during 2011 due to continued low interest rates, and, based on UPB,
represented 78% of our single-family mortgage purchase volume during 2011 compared to 80% of our single-family
mortgage purchase volume during 2010. Relief refinance mortgages comprised approximately 33% and 35% of our total
refinance volume during 2011 and 2010, respectively. Over time, relief refinance mortgages with LTV ratios above 80%
may not perform as well as relief refinance mortgages with LTV ratios of 80% and below because of the continued high
LTV ratios of these loans. There is an increase in borrower default risk as LTV ratios increase, particularly for loans with
LTV ratios above 80%. In addition, relief refinance mortgages may not be covered by mortgage insurance for the full
excess of their UPB over 80%. Approximately 12% of our single-family purchase volume in both 2011 and 2010 was
relief refinance mortgages with LTV ratios above 80%. Relief refinance mortgages of all LTV ratios comprised
approximately 11% and 7% of the UPB in our total single-family credit guarantee portfolio at December 31, 2011 and
2010, respectively.
On October 24, 2011, FHFA, Freddie Mac, and Fannie Mae announced a series of FHFA-directed changes to HARP
in an effort to attract more eligible borrowers whose monthly payments are current and who can benefit from refinancing
their home mortgages. For more information about our relief refinance mortgage initiative, see RISK
MANAGEMENT Credit Risk Mortgage Credit Risk Single-Family Mortgage Credit Risk Single-Family Loan
Workouts and the MHA Program.
Similar to our purchases in 2009 and 2010, the credit quality of the single-family loans we acquired in 2011
(excluding relief refinance mortgages) is significantly better than that of loans we acquired from 2005 through 2008, as
measured by early delinquency rate trends, original LTV ratios, FICO scores, and the proportion of loans underwritten
with fully documented income. Mortgages originated after 2008, including relief refinance mortgages, represent a growing
proportion of our single-family credit guarantee portfolio. The UPB of loans originated in 2005 to 2008 within our single-
family credit guarantee portfolio continues to decline due to liquidations, which include prepayments, refinancing activity,
foreclosure alternatives, and foreclosure transfers. We currently expect that, over time, the replacement (other than through
relief refinance activity) of the 2005 to 2008 vintages, which have a higher composition of loans with higher-risk
characteristics, should positively impact the serious delinquency rates and credit-related expenses of our single-family
credit guarantee portfolio. However, the rate at which this replacement is occurring slowed beginning in 2010, due
primarily to a decline in the volume of home purchase mortgage originations and delays in the foreclosure process.
Provision for credit losses for the Single-family Guarantee segment was $12.3 billion, $18.8 billion, and $29.1 billion
in 2011, 2010, and 2009, respectively. The provision for credit losses in 2011 reflects a decline in the rate at which
single-family loans transition into serious delinquency or are modified, but was partially offset by our lowered
expectations for mortgage insurance recoveries, which is due to the continued deterioration in the financial condition of
the mortgage insurance industry in 2011. See RISK MANAGEMENT Credit Risk Institutional Credit Risk for
further information on our mortgage insurance counterparties. Segment Earnings provision for credit losses declined in
104 Freddie Mac
2010, compared to 2009, primarily due to a decline in the rate at which delinquent loans transitioned into serious
delinquency, partially offset by a higher volume of loan modifications that were classified as TDRs in 2010.
We adopted an amendment to the accounting guidance on the classification of loans as TDRs in 2011, which
significantly increases the population of loans we account for and disclose as TDRs. The impact of this change in
guidance on our financial results for 2011 was not significant. We expect that the number of loans that newly qualify as
TDRs in 2012 will remain high, primarily because we anticipate that the majority of our modifications, both completed
and those still in trial periods, will be considered TDRs. See NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES, and NOTE 5: INDIVIDUALLY IMPAIRED AND NON-PERFORMING LOANS for additional
information on our TDR loans, including our implementation of changes to the accounting guidance on the classification
of loans as TDRs.
Single-family credit losses as a percentage of the average balance of the single-family credit guarantee portfolio and
HFA-related guarantees were 72.0 basis points, 75.8 basis points, and 42.7 basis points for 2011, 2010, and 2009,
respectively. Charge-offs, net of recoveries, associated with single-family loans were $12.4 billion, $13.4 billion, and
$7.6 billion in 2011, 2010, and 2009, respectively. See RISK MANAGEMENT Credit Risk Mortgage Credit
Risk Single-Family Mortgage Credit Risk for further information on our single-family credit guarantee portfolio,
including credit performance, charge-offs, and our non-performing assets.
The serious delinquency rate on our single-family credit guarantee portfolio was 3.58%, 3.84%, and 3.98% as of
December 31, 2011, 2010, and 2009, respectively, and declined during 2011 due to a high volume of loan modifications
and foreclosure transfers, as well as a slowdown in new serious delinquencies. Our serious delinquency rate remains high
compared to historical levels, reflecting continued stress in the housing and labor markets and extended foreclosure
timelines. The decline in size of our single-family credit guarantee portfolio in 2011 caused our serious delinquency rate
to be higher than it otherwise would have been because this rate is calculated on a smaller base of loans at year end.
Segment Earnings other non-interest income was $1.2 billion, $1.4 billion, and $0.7 billion in 2011, 2010, and 2009,
respectively. The decline in 2011, compared to 2010, was primarily due to lower recoveries on loans impaired upon
purchase due to a lower volume of foreclosure transfers and loan payoffs associated with these loans. The increase in
Segment Earnings other non-interest income in 2010 compared to 2009 was primarily due to higher recoveries on loans
impaired upon purchase driven by a higher volume of short sales and foreclosure transfers associated with these loans.
Segment Earnings REO operations expense was $0.6 billion, $0.7 billion, and $0.3 billion in 2011, 2010, and 2009,
respectively. The decrease in 2011, compared to 2010, was primarily due to the impact of a less significant decline in
home prices in certain geographical areas with significant REO activity resulting in lower write-downs of single-family
REO inventory during 2011, partially offset by lower recoveries on REO properties during 2011. Lower recoveries on
REO properties in 2011, compared to 2010, are primarily due to reduced recoveries from mortgage insurers, in part due to
the continued deterioration in the financial condition of the mortgage insurance industry, and a decline in reimbursements
of losses from seller/servicers associated with repurchase requests on loans on which we have foreclosed. The increase in
Segment Earnings REO operations expense in 2010, compared to 2009, is primarily a result of higher REO property
expenses and holding period write-downs that were partially offset by lower disposition losses and increased recoveries.
Our REO inventory (measured in number of properties) declined 16% during 2011 due to an increase in the volume
of REO dispositions and slowdowns in REO acquisition volume associated with delays in the foreclosure process.
Dispositions of REO increased 9% in 2011 compared to 2010, based on the number of properties sold. We continued to
experience high REO disposition severity ratios on sales of our REO inventory during 2011. We believe our single-family
REO acquisition volume and single-family credit losses in 2011 have been less than they otherwise would have been due
to delays in the single-family foreclosure process, particularly in states that require a judicial foreclosure process. See
RISK FACTORS Operational Risks We have incurred, and will continue to incur, expenses and we may otherwise
be adversely affected by delays and deficiencies in the foreclosure process for further information.
Segment Earnings other non-interest expense was $0.3 billion, $0.6 billion, and $4.9 billion in 2011, 2010, and 2009,
respectively. The decline in 2011, compared to 2010, was primarily due to lower expenses associated with transfers and
terminations of mortgage servicing. The decline in 2010, compared to 2009, was primarily due to a decline in losses on
loans purchased that resulted from changes in accounting guidance for consolidation of VIEs we implemented on
January 1, 2010.
105 Freddie Mac
Multifamily
The table below presents the Segment Earnings of our Multifamily segment.
(1) For reconciliations of Segment Earnings line items to the comparable line items in our consolidated financial statements prepared in accordance with
GAAP, see NOTE 14: SEGMENT REPORTING Table 14.2 Segment Earnings and Reconciliation to GAAP Results.
(2) Consists primarily of amortization and valuation adjustments pertaining to the guarantee assets and guarantee obligation, which were excluded from
segment earnings in 2009.
(3) Fair value-related adjustments in 2009 consist principally of the write-down of our investment in LIHTC partnerships in 2009. Tax-related
adjustments in 2009 consist of the establishment of a partial valuation allowance against our deferred tax assets that are not included in Multifamily
Segment Earnings.
(4) Excludes our guarantees issued under the HFA initiative.
(5) Represents Multifamily Segment Earnings management and guarantee income, excluding prepayment and certain other fees, divided by the sum
of the average balance of the multifamily guarantee portfolio and the average balance of guarantees associated with the HFA initiative, excluding
certain bonds under the NIBP.
(6) See RISK MANAGEMENT Credit Risk Mortgage Credit Risk Multifamily Mortgage Credit Risk for information on our reported
multifamily delinquency rate.
(7) Calculated as the amount of multifamily credit losses divided by the sum of the average carrying value of our multifamily loan portfolio and the
average balance of the multifamily guarantee portfolio, including multifamily HFA initiative guarantees.
Investments in Securities
The two tables below provide detail regarding our investments in securities as of December 31, 2011, 2010 and 2009.
The tables do not include our holdings of single-family PCs and certain Other Guarantee Transactions as of December 31,
2011 and 2010. For information on our holdings of such securities, see Table 16 Composition of Segment Mortgage
Portfolios and Credit Risk Portfolios.
Non-Mortgage-Related Securities
Our investments in non-mortgage-related securities provide an additional source of liquidity. We held investments in
non-mortgage-related securities classified as trading of $27.3 billion and $27.9 billion as of December 31, 2011 and 2010,
109 Freddie Mac
respectively. While balances may fluctuate from period to period, we continue to meet required liquidity and contingency
levels.
Mortgage-Related Securities
We are primarily a buy-and-hold investor in mortgage-related securities, which consist of securities issued by Fannie
Mae, Ginnie Mae, and other financial institutions. We also invest in our own mortgage-related securities. However, the
single-family PCs and certain Other Guarantee Transactions we purchase as investments are not accounted for as
investments in securities because we recognize the underlying mortgage loans on our consolidated balance sheets through
consolidation of the related trusts.
The table below provides the UPB of our investments in mortgage-related securities classified as available-for-sale or
trading on our consolidated balance sheets. The table below does not include our holdings of our own single-family PCs
and certain Other Guarantee Transactions. For further information on our holdings of such securities, see Table 16
Composition of Segment Mortgage Portfolios and Credit Risk Portfolios.
(1) Variable-rate 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.
(2) When we purchase REMICs and Other Structured Securities and certain Other Guarantee Transactions that we have issued, we account for these
securities as investments in debt securities as we are investing in the debt securities of a non-consolidated entity. We do not consolidate our
resecuritization trusts since we are not deemed to be the primary beneficiary of such trusts. We are subject to the credit risk associated with the
mortgage loans underlying our Freddie Mac mortgage-related securities. Mortgage loans underlying our issued single-family PCs and certain Other
Guarantee Transactions are recognized on our consolidated balance sheets as held-for-investment mortgage loans, at amortized cost. See NOTE 1:
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Investments in Securities for further information.
(3) Agency securities are generally not separately rated by nationally recognized statistical rating organizations, but have historically been viewed as
having a level of credit quality at least equivalent to non-agency mortgage-related securities AAA-rated or equivalent.
(4) For information about how these securities are rated, see Table 29 Ratings of Non-Agency Mortgage-Related Securities Backed by Subprime,
Option ARM, Alt-A and Other Loans, and CMBS.
(5) Consists of housing revenue bonds. Approximately 37% and 50% of these securities held at December 31, 2011 and 2010, respectively, were AAA-
rated as of those dates, based on the lowest rating available.
(6) Credit ratings for most non-agency mortgage-related securities are designated by no fewer than two nationally recognized statistical rating
organizations. Approximately 21% and 23% of total non-agency mortgage-related securities held at December 31, 2011 and 2010, respectively, were
AAA-rated as of those dates, based on the UPB and the lowest rating available.
(1) Represents an undivided beneficial interest in trusts that hold pools of mortgages.
(2) Represents securities where the holder receives only the interest cash flows.
(3) Represents securities where the holder receives only the principal cash flows.
(4) Represents securities where the holder receives interest cash flows that change inversely with the reference rate (i.e. higher cash flows when interest
rates are low and lower cash flows when interest rates are high). Additionally, these securities receive a portion of principal cash flows associated
with the underlying collateral.
(5) Includes fair values of $2 million and $5 million of interest-only securities at December 31, 2011 and December 31, 2010, respectively.
The total UPB of our investments in mortgage-related securities on our consolidated balance sheets decreased from
$288.7 billion at December 31, 2010 to $261.2 billion at December 31, 2011, while the fair value of these investments
decreased from $265.0 billion at December 31, 2010 to $242.2 billion at December 31, 2011. The reduction resulted from
our purchase activity remaining less than liquidations, consistent with our efforts to reduce our mortgage-related
investments portfolio, as described in BUSINESS Conservatorship and Related Matters Impact of Conservatorship
and Related Actions on Our Business Limits on Investment Activity and Our Mortgage-Related Investments Portfolio.
The UPB and fair value of inverse floating-rate securities increased as we created new inverse floating-rate securities from
existing mortgage-related securities that were on our consolidated balance sheets. We create inverse floating-rate securities
and other REMICs and sell tranches that are in demand by investors to reduce our asset balance, while conserving value
for the taxpayer. These securities are managed in the overall context of our interest-rate risk management strategy and
framework.
The table below summarizes our mortgage-related securities purchase activity for 2011, 2010 and 2009. The purchase
activity includes single-family PCs and certain Other Guarantee Transactions issued by trusts that we consolidated.
Effective January 1, 2010, purchases of single-family PCs and certain Other Guarantee Transactions issued by trusts that
we consolidated are recorded as an extinguishment of debt securities of consolidated trusts held by third parties on our
consolidated balance sheets.
(1) Based on UPB. Excludes mortgage-related securities traded but not yet settled.
(2) Purchases in 2011 and 2010 include HFA bonds we acquired and resecuritized under the NIBP. See NOTE 2: CONSERVATORSHIP AND
RELATED MATTERS for further information on this component of the HFA Initiative.
During the year ended December 31, 2011, we increased our participation in dollar roll transactions, primarily to
support the market and pricing of our PCs. When these transactions involve our consolidated PC trusts, the purchase and
sale represents an extinguishment and issuance of debt securities, respectively, and impacts our net interest income and
recognition of gain or loss on the extinguishment of debt on our consolidated statements of income and comprehensive
income. These transactions can cause short-term fluctuations in the balance of our mortgage-related investments portfolio.
The increase in our purchases of agency securities in 2011, reflected in Table 25 Total Mortgage-Related Securities
Purchase Activity is attributed primarily to these transactions. For more information, see RISK FACTORS
Competitive and Market Risks Any decline in the price performance of or demand for our PCs could have an adverse
effect on the volume and profitability of our new single-family guarantee business.
Unrealized Losses on Available-For-Sale Mortgage-Related Securities
At December 31, 2011, our gross unrealized losses, pre-tax, on available-for-sale mortgage-related securities were
$20.1 billion, compared to $23.1 billion at December 31, 2010. The decrease was primarily due to gains on our agency
securities and CMBS as a result of the impact of declining rates and the recognition in earnings of other-than-temporary
impairments on our non-agency mortgage-related securities, partially offset by losses on our single-family non-agency
mortgage-related securities primarily due to widening OAS levels. We believe the unrealized losses related to these
securities at December 31, 2011 were mainly attributable to poor underlying collateral performance, limited liquidity and
large risk premiums in the market for residential non-agency mortgage-related securities. All available-for-sale securities
in an unrealized loss position are evaluated to determine if the impairment is other-than-temporary. See Total Equity
(Deficit) and NOTE 7: INVESTMENTS IN SECURITIES for additional information regarding unrealized losses on
our available-for-sale securities.
Non-Agency Mortgage-Related Securities Backed by Subprime, Option ARM, and Alt-A Loans
We categorize our investments in non-agency mortgage-related securities as subprime, option ARM, or Alt-A if the
securities were identified as such based on information provided to us when we entered into these transactions. We have
not identified option ARM, CMBS, obligations of states and political subdivisions, and manufactured housing securities as
either subprime or Alt-A securities. Since the first quarter of 2008, we have not purchased any non-agency mortgage-
related securities backed by subprime, option ARM, or Alt-A loans. The two tables below present information about our
holdings of our available-for-sale non-agency mortgage-related securities backed by subprime, option ARM and Alt-A
loans.
For purposes of our cumulative credit deterioration analysis, our estimate of the present value of expected future
credit losses on our total portfolio of non-agency mortgage-related securities (which are set forth in Table 23
Characteristics of Mortgage-Related Securities on Our Consolidated Balance Sheets) decreased to $14.0 billion at
December 31, 2011 from $14.3 billion at December 31, 2010. All of these amounts have been reflected in our net
impairment of available-for-sale securities recognized in earnings in this period or prior periods. The decrease in the
present value of expected future credit losses was primarily due to the impact of lower interest rates in 2011 resulting in a
benefit from expected structural credit enhancements on the securities. The impact of lower interest rates was partially
offset by the impact of declines in forecasted home prices.
At the direction of our Conservator, we are working to enforce our rights as an investor with respect to the non-
agency mortgage-related securities we hold, and are engaged in efforts to mitigate losses on our investments in these
securities, in some cases in conjunction with other investors. The effectiveness of our efforts is highly uncertain and any
potential recoveries may take significant time to realize.
In June 2011, Bank of America Corporation announced that it, BAC Home Loans Servicing, LP, Countrywide
Financial Corporation and Countrywide Home Loans, Inc. entered into a settlement agreement with The Bank of New
York Mellon, as trustee, to resolve certain claims with respect to a number of Countrywide first-lien and second-lien
residential mortgage-related securitization trusts. Bank of America indicated that the settlement is subject to final court
approval and certain other conditions. There can be no assurance that final court approval of the settlement will be
obtained or that all conditions will be satisfied. Bank of America noted that, given the number of investors and the
complexity of the settlement, it is not possible to predict the timing or ultimate outcome of the court approval process,
which could take a substantial period of time. We have investments in certain of these Countrywide securitization trusts
and would expect to benefit from this settlement, if final court approval is obtained. For more information, see
NOTE 16: CONCENTRATION OF CREDIT AND OTHER RISKS.
On September 2, 2011, FHFA announced that, as Conservator for Freddie Mac and Fannie Mae, it had filed lawsuits
against 17 financial institutions and related defendants alleging: (a) violations of federal securities laws; and (b) in certain
lawsuits, common law fraud in the sale of residential non-agency mortgage-related securities to Freddie Mac and Fannie
Mae. FHFA, as Conservator, filed a similar lawsuit against UBS Americas, Inc. and related defendants on July 27, 2011.
FHFA seeks to recover losses and damages sustained by Freddie Mac and Fannie Mae as a result of their investments in
certain residential non-agency mortgage-related securities issued by these financial institutions.
Since the beginning of 2007, we have incurred actual principal cash shortfalls of $1.5 billion on impaired non-agency
mortgage-related securities, of which $193 million and $823 million related to the three months and year ended
December 31, 2011, respectively. Many of the trusts that issued non-agency mortgage-related securities we hold were
structured so that realized collateral losses in excess of structural credit enhancements are not passed on to investors until
the investment matures. We currently estimate that the future expected principal and interest shortfalls on non-agency
mortgage-related securities we hold will be significantly less than the fair value declines experienced on these securities.
The investments in non-agency mortgage-related securities we hold backed by subprime, option ARM, and Alt-A
loans were structured to include credit enhancements, particularly through subordination and other structural
enhancements. Bond insurance is an additional credit enhancement covering some of the non-agency mortgage-related
securities. These credit enhancements are the primary reason we expect our actual losses, through principal or interest
shortfalls, to be less than the underlying collateral losses in the aggregate. It is difficult to estimate the point at which
structural credit enhancements will be exhausted and we will incur actual losses. During the year ended December 31,
2011, we continued to experience the erosion of structural credit enhancements on many securities backed by subprime,
option ARM, and Alt-A loans due to poor performance of the underlying collateral. For more information, see RISK
MANAGEMENT Credit Risk Institutional Credit Risk Bond Insurers.
We recorded net impairment of available-for-sale mortgage-related securities recognized in earnings of $595 million
and $2.3 billion during the three months and year ended December 31, 2011, respectively, compared to $2.3 billion and
$4.3 billion during the three months and year ended December 31, 2010, respectively. We recorded these impairments
because our estimate of the present value of expected future credit losses on certain individual securities increased during
the periods. These impairments include $585 million and $1.9 billion of impairments related to securities backed by
subprime, option ARM, and Alt-A and other loans during the three months and year ended December 31, 2011,
respectively, compared to $2.2 billion and $4.2 billion during the three months and year ended December 31, 2010,
respectively. In addition, during the year ended December 31, 2011, these impairments include recognition of the fair
value declines related to certain investments in CMBS of $181 million as an impairment charge in earnings, as we have
the intent to sell these securities. For more information, see NOTE 7: INVESTMENTS IN SECURITIES Other-Than-
Temporary Impairments on Available-for-Sale Securities.
While it is reasonably possible that collateral losses on our available-for-sale mortgage-related securities where we
have not recorded an impairment charge in earnings could exceed our credit enhancement levels, we do not believe that
those conditions were likely at December 31, 2011. Based on our conclusion that we do not intend to sell our remaining
available-for-sale mortgage-related securities in an unrealized loss position and it is not more likely than not that we will
be required to sell these securities before a sufficient time to recover all unrealized losses and our consideration of other
available information, we have concluded that the reduction in fair value of these securities was temporary at
December 31, 2011 and have recorded these fair value losses in AOCI.
The credit performance of loans underlying our holdings of non-agency mortgage-related securities has declined
since 2007. This decline has been particularly severe for subprime, option ARM, and Alt-A and other loans. Economic
factors negatively impacting the performance of our investments in non-agency mortgage-related securities include high
unemployment, a large inventory of seriously delinquent mortgage loans and unsold homes, tight credit conditions, and
weak consumer confidence during recent years. In addition, subprime, option ARM, and Alt-A and other loans backing
the securities we hold have significantly greater concentrations in the states that are undergoing the greatest economic
stress, such as California and Florida. Loans in these states undergoing economic stress are more likely to become
seriously delinquent and the credit losses associated with such loans are likely to be higher than in other states.
We rely on bond insurance, including secondary coverage, to provide credit protection on some of our investments in
non-agency mortgage-related securities. We have determined that there is substantial uncertainty surrounding certain bond
insurers ability to pay our future claims on expected credit losses related to our non-agency mortgage-related security
investments. This uncertainty contributed to the impairments recognized in earnings during the years ended December 31,
116 Freddie Mac
2011 and 2010. See RISK MANAGEMENT Credit Risk Institutional Credit Risk Bond Insurers and
NOTE 16: CONCENTRATION OF CREDIT AND OTHER RISKS Bond Insurers for additional information.
Our assessments concerning other-than-temporary impairment require significant judgment and the use of models,
and are subject to potentially significant change. In addition, changes in the performance of the individual securities and
in mortgage market conditions may also affect our impairment assessments. Depending on the structure of the individual
mortgage-related security and our estimate of collateral losses relative to the amount of credit support available for the
tranches we own, a change in collateral loss estimates can have a disproportionate impact on the loss estimate for the
security. Additionally, servicer performance, loan modification programs and backlogs, bankruptcy reform and other forms
of government intervention in the housing market can significantly affect the performance of these securities, including
the timing of loss recognition of the underlying loans and thus the timing of losses we recognize on our securities.
Impacts related to changes in interest rates may also affect our losses due to the structural credit enhancements on our
investments in non-agency mortgage-related securities. Foreclosure processing suspensions can also affect our losses. For
example, while defaulted loans remain in the trusts prior to completion of the foreclosure process, the subordinate classes
of securities issued by the securitization trusts may continue to receive interest payments, rather than absorbing default
losses. This may reduce the amount of funds available for the tranches we own. Given the extent of the housing and
economic downturn, it is difficult to estimate the future performance of mortgage loans and mortgage-related securities
with high assurance, and actual results could differ materially from our expectations. Furthermore, various market
participants could arrive at materially different conclusions regarding estimates of future cash shortfalls.
For more information on risks associated with the use of models, see RISK FACTORS Operational Risks We
face risks and uncertainties associated with the internal models that we use for financial accounting and reporting
purposes, to make business decisions, and to manage risks. Market conditions have raised these risks and uncertainties.
For more information on how delays in the foreclosure process, including delays related to concerns about deficiencies in
foreclosure documentation practices, could adversely affect the values of, and the losses on, the non-agency mortgage-
related securities we hold, see RISK FACTORS Operational Risks We have incurred, and will continue to incur,
expenses and we may otherwise be adversely affected by delays and deficiencies in the foreclosure process.
For information regarding our efforts to mitigate losses on our investments in non-agency mortgage-related securities,
see RISK MANAGEMENT Credit Risk Institutional Credit Risk.
(1) Represents the amount of UPB covered by bond insurance. This amount does not represent the maximum amount of losses we could recover, as the
bond insurance also covers interest.
(2) Includes securities with S&P credit ratings below BBB and certain securities that are no longer rated.
(1) Fair value is categorized based on the period from December 31, 2011 until the contractual maturity of the derivative.
(2) 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.
(3) The value of derivatives on our consolidated balance sheets is reported as derivative assets, net and derivative liabilities, net, and includes derivative
interest receivable or (payable), net, trade/settle receivable or (payable), net and derivative cash collateral (held) or posted, net.
(4) Represents the notional weighted average rate for the fixed leg of the swaps.
(5) Represents interest-rate swap agreements that are scheduled to begin on future dates ranging from less than one year to thirteen years as of
December 31, 2011.
(6) Primarily includes purchased interest-rate caps and floors.
(7) Commitments include: (a) our commitments to purchase and sell investments in securities; (b) our commitments to purchase mortgage loans; and
(c) our commitments to purchase and extinguish or issue debt securities of our consolidated trusts.
At December 31, 2011, the net fair value of our total derivative portfolio was $(317) million, as compared to
$(1.1) billion at December 31, 2010. During the year ended December 31, 2011, the fair value of our total derivative
portfolio increased primarily due to additional cash collateral we posted to our counterparties during this period, partially
offset by the impact of declines in interest rates. See NOTE 11: DERIVATIVES for the notional or contractual amounts
and related fair values of our total derivative portfolio by product type at December 31, 2011 and 2010, as well as
derivative collateral posted and held.
(1) Refer to Table 31 Derivative Fair Values and Maturities for a reconciliation of net fair value to the amounts presented on our consolidated
balance sheets as of December 31, 2011.
(2) At December 31, 2010, fair value in this table excludes derivative interest receivable or (payable), net of $(820) million, trade/settle receivable or
(payable), net of $1 million, and derivative cash collateral posted, net of $6.3 billion.
(3) Commitments include: (a) our commitments to purchase and sell investments in securities; (b) our commitments to purchase mortgage loans; and
(c) our commitments to purchase and extinguish or issue debt securities of our consolidated trusts.
(4) Includes fair value changes for interest-rate swaps, option-based derivatives, futures, and foreign-currency swaps.
(5) Consists primarily of cash premiums paid or received on options.
See CONSOLIDATED RESULTS OF OPERATIONS Non-Interest Income (Loss) Derivative Gains (Losses)
for a description of gains (losses) on our derivative positions.
REO, Net
We acquire properties, which are recorded as REO assets on our consolidated balance sheets, typically as a result of
borrower default on mortgage loans that we own, or for which we have issued our financial guarantee. The balance of our
REO, net, declined to $5.7 billion at December 31, 2011 from $7.1 billion at December 31, 2010. We believe the volume
of our single-family REO acquisitions in 2011 was less than it otherwise would have been due to delays in the foreclosure
process, particularly in states that require a judicial foreclosure process. While we expect the delays to ease in 2012, we
also expect these delays will remain above historical levels. We also expect our REO inventory to remain at elevated
levels, as we have a large inventory of seriously delinquent loans in our single-family credit guarantee portfolio, many of
which will likely complete the foreclosure process and transition to REO during 2012 as our servicers work through their
foreclosure-related issues. To the extent a large volume of loans completes the foreclosure process in a short period of
time, the resulting REO inventory could have a negative impact on the housing market. See RISK MANAGEMENT
Credit Risk Mortgage Credit Risk Non-Performing Assets for additional information about our REO activity.
Other Assets
Other assets consist of the guarantee asset related to non-consolidated trusts and other guarantee commitments,
accounts and other receivables, and other miscellaneous assets. Other assets decreased to $10.5 billion as of December 31,
2011 from $10.9 billion as of December 31, 2010 primarily because of a decrease in other receivables related to mortgage
insurers and credit enhancements due to a decline in default volume. See NOTE 19: SELECTED FINANCIAL
STATEMENT LINE ITEMS for additional information.
Table 33 Reconciliation of the Par Value and UPB to Total Debt, Net
December 31,
2011 2010
(in millions)
Total debt:
Other debt:
Par value . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 674,314 $ 728,217
Unamortized balance of discounts and premiums(1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (13,891) (14,529)
Hedging-related and other basis adjustments(2) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 123 252
Subtotal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 660,546 713,940
Debt securities of consolidated trusts held by third parties:
UPB . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,452,476 1,517,001
Unamortized balance of discounts and premiums . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18,961 11,647
Subtotal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,471,437 1,528,648
Total debt, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $2,131,983 $2,242,588
2010
Average Outstanding
December 31, During the Year Maximum
Weighted Weighted Balance, Net
Average Average Outstanding at
Balance, Net(1) Effective Rate(2) Balance, Net(3) Effective Rate(4) Any Month End
(dollars in millions)
Reference Bills securities and discount notes . . . ...... $194,742 0.24% $213,465 0.25% $240,037
Medium-term notes . . . . . . . . . . . . . . . . . . . . . ...... 2,364 0.31 1,955 0.34 3,661
Federal funds purchased and securities sold under
agreements to repurchase . . . . . . . . . . . . . . . . ...... 72 0.30
Other short-term debt . . . . . . . . . . . . . . . . . . ...... $197,106 0.25
2009
Average Outstanding
December 31, During the Year Maximum
Weighted Weighted Balance, Net
Average Average Outstanding at
(1)
Balance, Net Effective Rate(2) Balance, Net (3)
Effective Rate(4) Any Month End
(dollars in millions)
Reference Bills securities and discount notes . . . ...... $227,611 0.26% $261,020 0.70% $340,307
Medium-term notes . . . . . . . . . . . . . . . . . . . . . ...... 10,560 0.69 19,372 1.10 34,737
Federal funds purchased and securities sold under
agreements to repurchase . . . . . . . . . . . . . . . . ...... 33 0.29
Other short-term debt . . . . . . . . . . . . . . . . . . ...... $238,171 0.28
(1) Represents par value, net of associated discounts and premiums, of which $0.2 billion, $0.9 billion, and $0.5 billion of short-term debt represents the
fair value of debt securities with the fair value option elected at December 31, 2011, 2010, and 2009, respectively.
(2) Represents the approximate weighted average effective rate for each instrument outstanding at the end of the period, which includes the amortization
of discounts or premiums and issuance costs.
(3) Represents par value, net of associated discounts, premiums, and issuance costs. Issuance costs are reported in the other assets caption on our
consolidated balance sheets.
(4) Represents the approximate weighted average effective rate during the period, which includes the amortization of discounts or premiums and
issuance costs.
(1) 2011 and 2010 amounts are based on UPB of the securities and excludes mortgage-related debt traded, but not yet settled. 2009 amounts are based
on UPB of the mortgage loans underlying our mortgage-related financial guarantees.
(2) Includes $1.2 billion, $1.3 billion, and $1.4 billion in UPB of option ARM mortgage loans as of December 31, 2011, 2010, and 2009, respectively.
See endnote (5) for additional information on option ARM loans that back our Other Guarantee Transactions.
(3) 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.
(4) Consists of bonds we acquired and resecuritized under the NIBP.
(5) Backed by non-agency mortgage-related securities that include prime, FHA/VA, and subprime mortgage loans and also include $7.3 billion,
$8.4 billion, and $9.6 billion in UPB of securities backed by option ARM mortgage loans at December 31, 2011, 2010, and 2009, respectively.
(6) Backed by FHA/VA loans.
(7) Represents the UPB of repurchased Freddie Mac mortgage-related securities that are consolidated on our balance sheets and includes certain
remittance amounts associated with our security trust administration that are payable to third-party mortgage-related security holders. Our holdings
of non-consolidated Freddie Mac mortgage-related securities are presented in Table 23 Characteristics of Mortgage-Related Securities on Our
Consolidated Balance Sheets.
Excluding Other Guarantee Transactions, the percentage of amortizing fixed-rate single-family loans underlying our
consolidated trust debt securities, based on UPB, was approximately 92% at both December 31, 2011 and 2010. The
majority of newly issued Freddie Mac single-family mortgage-related securities during 2011 were backed by refinance
mortgages. During 2011, the UPB of Freddie Mac mortgage-related securities issued by consolidated trusts declined
approximately 5.9%, as the volume of our new issuances has been less than the volume of liquidations of these securities.
The UPB of multifamily Other Guarantee Transactions, excluding HFA-related securities, increased to $19.7 billion as of
December 31, 2011 from $8.2 billion as of December 31, 2010, due to increased multifamily loan securitization activity.
(1) Based on UPB of the securities and excludes mortgage-related securities traded, but not yet settled.
(2) Beginning January 1, 2010, includes single-family single-class and certain multiclass securities held by us, which are recorded as extinguishments of
debt securities of consolidated trusts on our consolidated balance sheets. Prior to 2010, all Freddie Mac mortgage-related securities held by us were
accounted for as investments in securities on our consolidated balance sheets. See NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES for a discussion of our significant accounting policies related to our investments in securities and debt securities of consolidated trusts.
The table below presents issuances and extinguishments of the debt securities of our consolidated trusts during 2011
and 2010, as well as the UPB of consolidated trusts held by third parties.
Other Liabilities
Other liabilities consist of the guarantee obligation, the reserve for guarantee losses on non-consolidated trusts and
other mortgage-related financial guarantees, servicer liabilities, accounts payable and accrued expenses, and other
miscellaneous liabilities. Other liabilities decreased to $6.0 billion as of December 31, 2011 from $8.1 billion as of
December 31, 2010 primarily because of a decrease in: (a) credit loss-related liabilities, largely due to short sale
adjustments related to accrued estimated losses on unsettled transactions; and (b) servicer advanced interest liabilities, due
to a decrease in seriously delinquent loans during the year ended December 31, 2011. See NOTE 19: SELECTED
FINANCIAL STATEMENT LINE ITEMS for additional information.
We requested a total of $7.6 billion and $13.0 billion in draws from Treasury under the Purchase Agreement to
eliminate quarterly equity deficits for 2011 and 2010, respectively. In addition, we paid cash dividends to Treasury of
$6.5 billion and $5.7 billion during 2011 and 2010, respectively.
Net unrealized losses on our available-for-sale securities in AOCI decreased by $701 million and $3.5 billion during
the three months and year ended December 31, 2011, respectively. The decrease for the three months ended December 31,
2011 was primarily due to the impact of tightening OAS levels on our CMBS. The decrease for the year ended
December 31, 2011 was primarily due to gains on our agency securities and CMBS as a result of the impact of declining
rates and the recognition in earnings of other-than-temporary impairments on our non-agency mortgage-related securities,
partially offset by losses on our single-family non-agency mortgage-related securities due to widening OAS levels. Net
unrealized losses on our closed cash flow hedge relationships in AOCI decreased by $118 million and $509 million during
the three months and year ended December 31, 2011, respectively, primarily attributable to the reclassification of losses
into earnings related to our closed cash flow hedges as the originally forecasted transactions affected earnings.
RISK MANAGEMENT
Our investment and credit guarantee activities expose us to three broad categories of risk: (a) credit risk; (b) interest-
rate risk and other market risk; and (c) operational risk. See RISK FACTORS for additional information regarding these
and other risks.
Risk management is a critical aspect of our business. We manage risk through a framework whereby our executive
management is responsible for independent risk evaluation. Within this framework, executive management 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.
Overall, the legal, political and regulatory influences on the financial services industry and the capital markets have
increased and created significant challenges and, as a result, we believe that our risk profile increased in 2011. Drivers of
this increase are: (a) mandated participation in government-sponsored assistance programs; (b) continued deterioration of
the mortgage insurer sector, resulting in further concentration issues; and (c) weakened global macro-economic conditions
and increased market volatility.
Internally, our environment has also contributed to a higher risk profile. We have observed: (a) a significant increase
in people risk due to the uncertainty of the future of our company; (b) an increase in operational risk due to employee
turnover, key person dependencies, and the level and pace of organizational change within our company; and (c) an
127 Freddie Mac
inadequacy of our business continuity and disaster recovery plans that may inhibit our ability to return to normal business
operations in the event of a disaster event.
We expect legal, political and regulatory influences to continue to increase in 2012, which could increase uncertainty
in the mortgage industry, increase our operational and people risks, and increase the uncertainty associated with the use of
our models.
Credit Risk
We are subject primarily to two types of credit risk: institutional credit risk and mortgage 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 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 Freddie Mac mortgage-related security, or other
guarantee commitment.
(1) Beginning and ending balances represent the UPB of the loans associated with the repurchase requests. New requests issued and requests cancelled
represent the amount of the request, while requests collected represent cash payment received.
(2) Requests collected include payments received upon fulfillment of the repurchase request, reimbursement of losses for requests associated with
foreclosed mortgage loans, negotiated settlements, and other alternative remedies.
(3) Consists primarily of those requests that were resolved by the servicer providing missing documentation or a successful appeal of the request.
(4) Other includes items that affect the UPB of the loan while the repurchase request is outstanding, such as changes in UPB due to payments made on
the loan. Also includes requests deemed uncollectible due to counterparty failures.
As shown in the table above, the amount of new repurchase requests declined from $16.5 billion in 2010 to
$9.2 billion in 2011. This decline reflects: (a) a lower volume of loan reviews performed in 2011 relating to loans
originated in 2008 and prior years; (b) the reduction in the number of loans originated in 2005 to 2008, including those
with higher risk characteristics, within our single-family credit guarantee portfolio; and (c) the increase in the number of
loans covered by negotiated agreements (as discussed below) or originated by counterparties that defaulted in recent years.
The UPB of loans subject to open repurchase requests declined to approximately $2.7 billion as of December 31,
2011 from $3.8 billion as of December 31, 2010 because the combined volume of requests collected and cancelled
exceeded the volume of new request issuances. As measured by UPB, approximately 39% and 34% of the repurchase
requests outstanding at December 31, 2011 and December 31, 2010, respectively, were outstanding for four months or
more since issuance of the initial request (these figures include repurchase requests for which appeals were pending). As
of December 31, 2011, two of our largest seller/servicers had aggregate repurchase requests outstanding, based on UPB,
of $1.4 billion, and approximately 48% of these requests were outstanding for four months or more since issuance of the
initial request. The amount we expect to collect on the outstanding requests is significantly less than the UPB of the loans
subject to repurchase requests primarily because many of these requests will likely be satisfied by reimbursement of our
realized credit losses by seller/servicers, instead of repurchase of loans at their UPB. Some of these requests also may be
rescinded in the course of the contractual appeal process. Based on our historical loss experience and the fact that many
of these loans are covered by credit enhancements, we expect the actual credit losses experienced by us should we fail to
collect on these repurchase requests will also be less than the UPB of the loans.
Mortgage insurance rescission repurchase requests tend to be outstanding longer than other repurchase requests for a
number of reasons, including: (a) lenders do not agree with the basis used by the mortgage insurers to rescind coverage;
(b) the mortgage insurers appeals process for rescissions can be lengthy (as long as one year or more); (c) lenders expect
us to suspend repurchase enforcement until after the appeal decision by the mortgage insurer is made (although this is not
our practice); and (d) in certain cases, we have agreed to consider a repurchase alternative that would allow certain of our
seller/servicers to provide us a commitment for the amount of lost mortgage insurance coverage in lieu of a full
repurchase. Until a decision on such a repurchase alternative is made, we temporarily suspend the collection efforts for
outstanding repurchases associated with mortgage insurance rescission for these seller/servicers. Of the total amount of
repurchase requests outstanding at December 31, 2011, approximately $1.2 billion were issued due to mortgage insurance
rescission or mortgage insurance claim denial. Our actual credit losses could increase should the mortgage insurance
coverage not be reinstated and we fail to collect on these repurchase requests.
During 2010 and 2009, we entered into agreements with certain of our seller/servicers to release specified loans from
certain repurchase obligations in exchange for one-time cash payments. In a memorandum to the FHFA Office of
Inspector General dated September 19, 2011, FHFA stated that in 2011 it had suspended certain future repurchase
agreements with seller/servicers concerning their repurchase obligations pending the outcome of a review by Freddie
Mac of its loan sampling methodology. We are in discussions with FHFA concerning our review of our sampling
methodology. We cannot predict when this process will be completed or whether or when FHFA will terminate or revise
its suspension. It is possible that our loan sampling methodology could change in ways that increase our repurchase
request volumes with our seller/servicers. During 2011, we expanded our reviews of defaulted loans to include certain
loans that were previously excluded from our review process.
In order to resolve outstanding repurchase requests on a more timely basis with our single-family seller/servicers in
the future, we have begun to require certain of our larger seller/servicers to commit to plans for completing repurchases,
130 Freddie Mac
with financial consequences or with stated remedies for non-compliance, as part of the annual renewals of our contracts
with them. As of December 31, 2011, our 13 largest seller/servicers, which hold more than 81% of all outstanding
repurchase requests, are subject to the revised contract terms. We continue to review loans and pursue our rights to issue
repurchase requests to our counterparties, as appropriate.
Our estimate of recoveries from seller/servicer repurchase obligations is considered in our allowance for loan losses
as of December 31, 2011 and December 31, 2010; however, our actual recoveries may be different than our estimates. See
NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Allowance for Loan Losses and Reserve for
Guarantee Losses for further information. We believe we have appropriately provided for these exposures, based upon
our estimates of incurred losses, in our loan loss reserves at December 31, 2011 and December 31, 2010; however, our
actual losses may exceed our estimates.
The table below summarizes the percentage of our single-family credit guarantee portfolio by year of loan origination
that is subject to agreements releasing loans from certain repurchase obligations, including TBW and other defaulted
counterparties. Since January 1, 2009, we have entered into three negotiated agreements (including the agreements with
GMAC and Bank of America discussed below) and have released repurchase obligations with 27 other seller/servicers
who were either no longer in operation or no longer approved as our seller/servicers, at December 31, 2011.
(1) Consists of all loans released from certain repurchase obligations since January 1, 2009.
(2) Consists of loans associated with seller/servicers who were either no longer in business or no longer approved as our seller/servicers at,
December 31, 2011. We received or, in some cases, expect to receive cash totaling approximately $0.1 billion from the FDIC or other third parties
for the release of related loans from servicing obligations for defaulted seller/servicers.
GMAC Mortgage, LLC and Residential Funding Company, LLC (collectively GMAC), indirect subsidiaries of Ally
Financial Inc. (formerly, GMAC Inc.), are seller/servicers that together serviced and subserviced for an affiliated entity
approximately 4% of the single-family loans in our single-family credit guarantee portfolio as of December 31, 2011. In
March 2010, we entered into an agreement with GMAC, under which they made a one-time payment to us for the partial
release of repurchase obligations relating to loans sold to us prior to January 1, 2009. The partial release does not affect
any of GMACs potential repurchase obligations for loans sold to us by GMAC after January 1, 2009, nor does it affect
the ability to recover amounts associated with failure to comply with our servicing requirements. This agreement did not
have a material impact on our 2011 or 2010 consolidated statements of income and comprehensive income. Ally
Financial Inc. recently stated that the protracted period of adverse developments in the mortgage finance and credit
markets has adversely affected Residential Capital LLCs business, liquidity, and its capital position and has raised
substantial doubt about Residential Capital LLCs ability to continue as a going concern. Residential Capital LLC is the
parent company of Residential Funding Company, LLC, one of our mortgage servicers. For information on our exposure
to institutional counterparties, see RISK FACTORS Competitive and Market Risks We depend on our institutional
counterparties to provide services that are critical to our business, and our results of operations or financial condition
may be adversely affected if one or more of our institutional counterparties do not meet their obligations to us.
On December 31, 2010, we entered into an agreement with Bank of America, N.A., and two of its affiliates, BAC
Home Loans Servicing, LP and Countrywide Home Loans, Inc., to resolve our currently outstanding and future claims for
repurchases arising from the breach of representations and warranties on certain loans purchased by us from Countrywide
131 Freddie Mac
Home Loans, Inc. and Countrywide Bank FSB. Under the terms of the agreement, we received a $1.28 billion cash
payment in consideration for releasing Bank of America and its two affiliates from current and future repurchase requests
arising from loans sold to us by the Countrywide entities for which the first regularly scheduled monthly payments were
due on or before December 31, 2008. The UPB of the loans in this portfolio as of December 31, 2010, was approximately
$114 billion. The agreement applies only to certain claims for repurchase based on breaches of representations and
warranties and the agreement contains specified limitations and does not cover loans sold to us or serviced for us by other
Bank of America entities. This agreement did not have a material impact on our 2011 or 2010 consolidated statements of
income and comprehensive income.
On August 24, 2009, TBW filed for bankruptcy. Prior to that date, we had terminated TBWs status as a seller/
servicer of our loans. We had exposure to TBW with respect to its loan repurchase obligations. We also had exposure with
respect to certain borrower funds that TBW held for the benefit of Freddie Mac. TBW received and processed such funds
in its capacity as a servicer of loans owned or guaranteed by Freddie Mac. TBW maintained certain bank accounts,
primarily at Colonial Bank, to deposit such borrower funds and to provide remittance to Freddie Mac. Colonial Bank was
placed into receivership by the FDIC in August 2009.
On or about June 14, 2010, we filed a proof of claim in the TBW bankruptcy aggregating $1.78 billion. Of this
amount, approximately $1.15 billion related to current and projected repurchase obligations and approximately
$440 million related to funds deposited with Colonial Bank, or with the FDIC as its receiver, which were attributable to
mortgage loans owned or guaranteed by us and previously serviced by TBW. The remaining $190 million represented
miscellaneous costs and expenses incurred in connection with the termination of TBWs status as a seller/servicer of our
loans.
In June 2011, with the approval of FHFA, as Conservator, we entered into a settlement with TBW and the creditors
committee appointed in the TBW bankruptcy proceeding to represent the interests of the unsecured trade creditors of
TBW. At the time of settlement, we estimated our uncompensated loss exposure to TBW to be approximately $0.7 billion.
This estimated exposure largely relates to outstanding repurchase claims that have already been substantially provided for
in our financial statements through our provision for loan losses. Our ultimate losses could exceed our recorded estimate.
Potential changes in our estimate of uncompensated loss exposure or the potential for additional claims as discussed
below could cause us to record additional losses in the future.
We understand that Ocala Funding, LLC, which is a wholly owned subsidiary of TBW, or its creditors, may file an
action to recover certain funds paid to us prior to the TBW bankruptcy. However, no actions against Freddie Mac related
to Ocala have been initiated in bankruptcy court or elsewhere to recover assets. We are also involved in an adversary
proceeding in bankruptcy court brought by certain underwriters at Lloyds, London and London Market Insurance
Companies against TBW, Freddie Mac, and other parties. For more information on these matters, including terms of the
TBW settlement, see NOTE 18: LEGAL CONTINGENCIES Taylor, Bean & Whitaker Bankruptcy.
A significant portion of our single-family mortgage loans are serviced by several large seller/servicers. Our top three
single-family loan servicers, Wells Fargo Bank N.A., JPMorgan Chase Bank, N.A., and Bank of America N.A., together
serviced approximately 49% of our single-family mortgage loans as of December 31, 2011. Wells Fargo Bank N.A.,
JPMorgan Chase Bank, N.A., and Bank of America N.A. serviced approximately 26%, 12%, and 11%, respectively, of our
single-family mortgage loans, as of December 31, 2011. Because we do not have our own servicing operation, if our
servicers lack appropriate process controls, experience a failure in their controls, or experience an operating disruption in
their ability to service mortgage loans, our business and financial results could be adversely affected.
During the second half of 2010, a number of our single-family servicers, including several of our largest, announced
that they were evaluating the potential extent of issues relating to the possible improper execution of documents
associated with foreclosures of loans they service, including those they service for us. Some of these companies
temporarily suspended foreclosure proceedings in certain states in which they do business. While these servicers generally
resumed foreclosure proceedings in the first quarter of 2011, the rate at which they are effecting foreclosures has been
slower than prior to the suspensions. See RISK FACTORS Operational Risks We have incurred, and will continue
to incur, expenses and we may otherwise be adversely affected by delays and deficiencies in the foreclosure process for
further information.
We also are exposed to the risk that seller/servicers might fail to service mortgages in accordance with our
contractual requirements, resulting in increased credit losses. For example, our seller/servicers have an active role in our
loan workout efforts, including under the MHA Program and the recent servicing alignment initiative, and therefore, we
also have exposure to them to the extent a decline in their performance results in a failure to realize the anticipated
benefits of our loss mitigation plans. In addition, during 2011, there have been several regulatory developments that have
132 Freddie Mac
affected and will continue to significantly impact our single-family mortgage servicers. For more information on
regulatory and other developments in mortgage servicing, and how these developments may impact our business, see
BUSINESS Regulation and Supervision Legislative and Regulatory Developments Developments Concerning
Single-Family Servicing Practices.
While we have legal remedies against seller/servicers who fail to comply with our contractual servicing requirements,
we are exposed to institutional credit risk in the event of their insolvency or if, for other causes, seller/servicers fail to
perform their obligations to repurchase affected mortgages, or (at our option) indemnify us for losses resulting from any
breach, or pay damages for any breach. In the event a seller/servicer does not fulfill its repurchase or other
responsibilities, we may seek partial recovery of amounts owed by the seller/servicer by transferring the applicable
mortgage servicing rights of the seller/servicer to a different servicer. However, this option may be difficult to accomplish
with respect to our largest seller/servicers due to the operational and capacity challenges of transferring a large servicing
portfolio. In 2011, we changed most of our servicing standards to permit full or partial termination of loan servicing in
order to transfer portions of the servicing portfolios to new servicers.
Mortgage Insurers
We have institutional credit risk relating to the potential insolvency of, or non-performance by, mortgage insurers that
insure single-family mortgages we purchase or guarantee. 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 provide credit enhancement fail to fulfill their obligation, we could experience increased credit losses.
We attempt to manage this risk by establishing eligibility standards for mortgage insurers and by monitoring our
exposure to individual mortgage insurers. Our monitoring includes performing regular analysis of the estimated financial
capacity of mortgage insurers under different adverse economic conditions. In addition, state insurance authorities regulate
mortgage insurers and we periodically meet with certain state authorities to discuss their views. We also monitor the
mortgage insurers credit ratings, as provided by nationally recognized statistical rating organizations, and we periodically
review the methods used by such organizations. None of our mortgage insurers had a rating higher than BBB as of
February 27, 2012. In evaluating the likelihood that an insurer will have the ability to pay our expected claims, we
consider our own analysis of the insurers financial capacity, any downgrades in the insurers credit rating, and various
other factors.
As part of the estimate of our loan loss reserves, we evaluate the recovery and collectability related to mortgage
insurance policies for mortgage loans that we hold on our consolidated balance sheets as well as loans underlying our
non-consolidated Freddie Mac mortgage-related securities or covered by other guarantee commitments. We believe that
many of our mortgage insurers are not sufficiently capitalized to withstand the stress of the current weak economic
environment. Additionally, a number of our mortgage insurers have exceeded risk to capital ratios required by their state
insurance regulators. In many cases, such states have issued waivers to allow the companies to continue writing new
business in their states. Most waivers are temporary in duration or contain other conditions that the companies may be
unable to continue to meet due to their weakened condition or other factors. As a result of these and other factors, we
reduced our expectations of recovery from several of these insurers in determining our allowance for loan losses
associated with our single-family loans on our consolidated balance sheet as of December 31, 2011.
133 Freddie Mac
The table below summarizes our exposure to mortgage insurers as of December 31, 2011. In the event that a
mortgage insurer fails to perform, the coverage outstanding represents our maximum exposure to credit losses resulting
from such failure. As of December 31, 2011, most of the coverage outstanding from mortgage insurance shown in the
table below is attributed to primary policies rather than pool insurance policies.
(1) Latest rating available as of February 27, 2012. Represents the lower of S&P and Moodys credit ratings and outlooks. In this table, the rating and
outlook of the legal entity is stated in terms of the S&P equivalent.
(2) Represents the amount of UPB at the end of the period for our single-family credit guarantee portfolio covered by the respective insurance type.
These amounts are based on our gross coverage without regard to netting of coverage that may exist to the extent an affected mortgage is covered
under both types of insurance. See Table 4.5 Recourse and Other Forms of Credit Protection in NOTE 4: MORTGAGE LOANS AND LOAN
LOSS RESERVES for further information.
(3) Represents the remaining aggregate contractual limit for reimbursement of losses under policies of both primary and pool insurance. These amounts
are based on our gross coverage without regard to netting of coverage that may exist to the extent an affected mortgage is covered under both types
of insurance.
(4) Beginning in October 2011, PMI began paying valid claims 50% in cash and 50% in deferred payment obligations under order of its state regulator.
(5) In January 2012, RMIC began paying valid claims 50% in cash and 50% in deferred payment obligations under order of its state regulator.
(6) Beginning in June 2009, Triad began paying valid claims 60% in cash and 40% in deferred payment obligations under order of its state regulator.
We received proceeds of $2.5 billion and $1.8 billion during the years ended December 31, 2011 and 2010,
respectively, from our primary and pool mortgage insurance policies for recovery of losses on our single-family loans. We
had outstanding receivables from mortgage insurers, net of associated reserves, of $1.0 billion and $1.5 billion as of
December 31, 2011 and December 31, 2010, respectively.
The UPB of single-family loans covered by pool insurance declined approximately 29% during 2011, primarily due
to prepayments and other liquidation events. We did not purchase pool insurance on single-family loans in 2011. Our pool
insurance policies generally have coverage periods that range from 10 to 12 years. In many cases, we entered into these
agreements to cover higher-risk mortgage product types delivered to us through bulk transactions. As of December 31,
2011, pool insurance policies that will expire: (a) during 2012 covered approximately $2.4 billion in UPB of loans, and
the remaining contractual limit for reimbursement of losses on such loans was approximately $0.2 billion; and
(b) between 2013 and 2018 covered approximately $35.0 billion in UPB of loans, and the remaining contractual limit for
reimbursement of losses on such loans was approximately $0.8 billion. The remaining pool insurance policies, for which
the remaining contractual limit for reimbursement of losses was approximately $0.9 billion, expire after 2018. Any losses
in excess of the contractual limit will be borne by us. These figures include coverage under our pool insurance policies
based on the stated coverage amounts under such policies. As noted below, we do not expect to receive full payment of
our claims from several of these counterparties.
Based on information we received from MGIC, we understand that MGIC may challenge our future claims under
certain of their pool insurance policies. We believe that our pool insurance policies with MGIC provide us with the right
to obtain recoveries for losses up to the aggregate limit indicated in the table above. However, MGICs interpretation of
these policies would result in claims coverage approximately $0.6 billion lower than the amount of coverage outstanding
set forth in the table above. We expect this difference to increase but not to exceed approximately $0.7 billion.
In August 2011, we suspended PMI and its affiliates and RMIC and its affiliates as approved mortgage insurers,
making loans insured by either company (except relief refinance loans with pre-existing insurance) ineligible for sale to
Freddie Mac. Both of these companies ceased writing new business during the third quarter of 2011, and have been put
under state supervision. PMI instituted a partial claim payment plan in October 2011, under which claim payments will be
made 50% in cash, with the remaining amount deferred as a policyholder claim. RMIC instituted a partial claim payment
plan in January 2012, under which claim payments will be made 50% in cash and 50% in deferred payment obligations
for an initial period not to exceed one year. We and FHFA are in discussions with the state regulators of PMI and RMIC
134 Freddie Mac
concerning future payments of our claims. It is not yet clear how the state regulators of PMI and RMIC will administer
their respective deferred payment plans.
Triad is continuing to pay claims 60% in cash and 40% in deferred payment obligations under orders of its state
regulator. To date, the state regulator has not allowed Triad to begin paying its deferred payment obligations, and it is
uncertain when or if Triad will be permitted to do so. If Triad, PMI, and RMIC do not pay their deferred payment
obligations, we would lose a significant portion of the coverage from these counterparties shown in the table above.
Given the difficulties in the mortgage insurance industry, we believe it is likely that other companies may also exceed
their regulatory capital limit in the future. In addition to Triad, RMIC, and PMI, we believe that certain other of our
mortgage insurance counterparties may lack sufficient ability to meet all their expected lifetime claims paying obligations
to us as those claims emerge. In the future, we believe our mortgage insurance exposure will likely be concentrated
among a smaller number of counterparties.
At least one of our largest servicers entered into arrangements with two of our mortgage insurance counterparties for
settlement of future rescission activity for certain mortgage loans. Under such agreements, servicers pay and/or indemnify
mortgage insurers in exchange for the mortgage insurers agreeing not to issue mortgage insurance rescissions and /or
denials of coverage related to origination defects on Freddie Mac-owned mortgages. For loans covered by these
agreements, we may be at risk of additional loss to the extent we do not independently uncover loan defects and require
lender repurchase for loans that otherwise would have resulted in mortgage insurance rescission. Additionally, this type of
activity could adversely affect our mortgage insurers ability to pay in some economic scenarios. In April 2011, we issued
an industry letter to our servicers reminding them that they may not enter into these types of agreements without our
consent. Several of our servicers have asked us to consent to these types of agreements. We are evaluating these requests
on a case-by-case basis. For more information, see RISK FACTORS Competitive and Market Risks We could incur
increased credit losses if our seller/servicers enter into arrangements with mortgage insurers for settlement of future
rescission activity and such agreements could potentially reduce the ability of mortgage insurers to pay claims to us.
Bond Insurers
Bond insurance, which may be either primary or secondary policies, is a credit enhancement covering certain of the
non-agency mortgage-related securities we hold. Primary policies are acquired by the securitization trust issuing the
securities we purchase, while secondary policies are acquired by us. Bond insurance exposes us to the risk that the bond
insurer will be unable to satisfy claims.
The table below presents our coverage amounts of bond insurance, including secondary coverage, for the non-agency
mortgage-related securities we hold. In the event a bond insurer fails to perform, the coverage outstanding represents our
maximum exposure to credit losses related to such a failure.
(1) Latest ratings available as of February 27, 2012. Represents the lower of S&P and Moodys credit ratings. In this table, the rating and outlook of the
legal entity is stated in terms of the S&P equivalent.
(2) Represents the remaining contractual limit for reimbursement of losses, including lost interest and other expenses, on non-agency mortgage-related
securities.
(3) Ambac, FGIC, and Syncora Guarantee Inc. are currently operating under regulatory supervision.
We monitor the financial strength of our bond insurers in accordance with our risk management policies. Some of
our larger bond insurers are in runoff mode where no new business is being issued. We expect to receive substantially less
than full payment of our claims from several of our bond insurers, including Ambac and FGIC, due to adverse
developments concerning these companies. Ambac and FGIC are currently not paying any of their claims. We believe that
we will likely receive substantially less than full payment of our claims from some of our other bond insurers, because we
believe they also lack sufficient ability to fully meet all of their expected lifetime claims-paying obligations to us as such
135 Freddie Mac
claims emerge. In the event one or more of our other bond insurers were to become subject to a regulatory order or
insolvency proceeding, our ability to recover certain unrealized losses on our mortgage-related securities would be
negatively impacted. We considered our expectations regarding our bond insurers ability to meet their obligations in
making our impairment determinations at December 31, 2011 and December 31, 2010. See NOTE 7: INVESTMENTS
IN SECURITIES Other-Than-Temporary Impairments on Available-For-Sale Securities for additional information
regarding impairment losses on securities covered by bond insurers.
The table below shows the non-agency mortgage-related securities we hold that were covered by primary bond
insurance at December 31, 2011 and December 31, 2010.
(1) Assured Guaranty Municipal Corp. was formerly known as Financial Security Assurance.
(2) Represents insurance provided by Syncora Guarantee Inc., Radian Group, Inc., and CIFG Holdings Ltd, and includes certain exposures to bonds
insured by NPFGC, formerly known as MBIA Insurance Corp. of Illinois, which is a subsidiary of MBIA Inc., the parent company of MBIA
Insurance Corp.
(3) Represents the amount of UPB covered by insurance coverage. This amount does not represent the maximum amount of losses we could recover, as
the insurance also covers unpaid interest.
(4) Represents the amount of gross unrealized losses at the respective reporting date on the securities with insurance.
(5) The majority of the Alt-A and other loans covered by bond insurance are securities backed by home equity lines of credit.
Document Custodians
We use third-party document custodians to provide loan document certification and custody services for the loans
that we purchase and securitize. In many cases, our seller/servicer customers or their affiliates also serve as document
custodians for us. Our ownership rights to the mortgage loans that we own or that back our PCs and REMICs and Other
Structured Securities could be challenged if a seller/servicer intentionally or negligently pledges or sells the loans that we
purchased or fails to obtain a release of prior liens on the loans that we purchased, which could result in financial losses
to us. When a seller/servicer or one of its affiliates acts as a document custodian for us, the risk that our ownership
interest in the loans may be adversely affected is increased, particularly in the event the seller/servicer were to become
insolvent. We seek to mitigate these risks through legal and contractual arrangements with these custodians that identify
136 Freddie Mac
our ownership interest, as well as by establishing qualifying standards for document custodians and requiring transfer of
the documents to our possession or to an independent third-party document custodian if we have concerns about the
solvency or competency of the document custodian.
Derivative Counterparties
We execute OTC derivatives and exchange-traded derivatives and are exposed to institutional credit risk with respect
to both types of derivative transactions. We are an active user of exchange-traded derivatives, such as Treasury and
Eurodollar futures, and are required to post initial and maintenance margin with our clearing firm in connection with such
transactions. The posting of this margin exposes us to institutional credit risk in the event that our clearing firm or the
exchanges clearinghouse fail to meet their obligations. However, the use of exchange-traded derivatives lessens our
institutional credit risk exposure to individual counterparties because a central counterparty is substituted for individual
counterparties, and changes in the value of open exchange-traded contracts are settled daily via payments made through
the financial clearinghouse established by each exchange. OTC derivatives, however, expose us to institutional credit risk
to individual counterparties because transactions are executed and settled directly between us and each counterparty,
exposing us to potential losses if a counterparty fails to meet its contractual obligations. When our net position with a
counterparty in OTC derivatives subject to a master netting agreement has a market value above zero (i.e., it is an asset
reported as derivative assets, net on our consolidated balance sheets), the counterparty is obligated to deliver collateral in
the form of cash, securities, or a combination of both, in an amount equal to that market value (less a small unsecured
threshold amount) as necessary to satisfy its net obligation to us under the master agreement.
The Dodd-Frank Act will require central clearing and trading on exchanges or comparable trading facilities of many
types of derivatives. Pursuant to the Dodd-Frank Act, the U.S. Commodity Futures Trading Commission, or CFTC, is in
the process of determining the types of derivatives that must be subject to this requirement. See BUSINESS
Regulation and Supervision Legislative and Regulatory Developments Dodd-Frank Act for more information. We
continue to work with the Chicago Mercantile Exchange and others to implement a central clearing platform for interest
rate derivatives. We will be exposed to institutional credit risk with respect to the Chicago Mercantile Exchange or other
comparable exchanges or trading facilities in the future, to the extent we use them to clear and trade derivatives, and to
the members of such clearing organizations that execute and submit our transactions for clearing.
We seek to manage our exposure to institutional credit risk related to our OTC derivative counterparties using several
tools, including:
review of external rating analyses;
strict standards for approving new derivative counterparties;
ongoing monitoring and internal analysis of our positions with, and credit rating of, each counterparty;
managing diversification mix among counterparties;
master netting agreements and collateral agreements; and
stress-testing to evaluate potential exposure under possible adverse market scenarios.
On an ongoing basis, we review the credit fundamentals of all of our OTC 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 certain events affecting an individual counterparty occur.
All of our OTC derivative counterparties are major financial institutions and are experienced participants in the OTC
derivatives market. However, a large number of OTC derivative counterparties had credit ratings of A+ or below as of
February 27, 2012. We require counterparties with credit ratings of A+ or below to post collateral if our net exposure to
them on derivative contracts exceeds $1 million. See NOTE 16: CONCENTRATION OF CREDIT AND OTHER
RISKS for additional information.
The relative concentration of our derivative exposure among our primary derivative counterparties remains high. This
concentration has increased significantly since 2008 due to industry consolidation and the failure of certain counterparties,
and could further increase. The table below summarizes our exposure to our derivative counterparties, 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 which are
recorded as derivative assets). In addition, we have derivative liabilities where we post collateral to counterparties.
Pursuant to certain collateral agreements we have with derivative counterparties, the amount of collateral that we are
required to post is based on the credit rating of our long-term senior unsecured debt securities from S&P or Moodys. The
137 Freddie Mac
lowering or withdrawal of our credit rating by S&P or Moodys may increase our obligation to post collateral, depending
on the amount of the counterpartys exposure to Freddie Mac with respect to the derivative transactions. At December 31,
2011, our collateral posted exceeded our collateral held. See CONSOLIDATED BALANCE SHEETS ANALYSIS
Derivative Assets and Liabilities, Net and Table 31 Derivative Fair Values and Maturities for a reconciliation of fair
value to the amounts presented on our consolidated balance sheets as of December 31, 2011, which includes both cash
collateral held and posted by us, net.
(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) 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.
(4) For each counterparty, this amount includes derivatives with a positive fair value (recorded as derivative assets, net), including the related accrued
interest receivable/payable, when applicable. For counterparties included in the subtotal, positions are shown netted at the counterparty level
including accrued interest receivable/payable and trade/settle fees.
(5) Calculated as Total Exposure at Fair Value less cash collateral held as determined at the counterparty level. Includes amounts related to our posting
of cash collateral in excess of our derivative liability as determined at the counterparty level. For derivatives settled through an exchange or
clearinghouse, excludes consideration of maintenance margin posted by our counterparty.
(6) Counterparties are required to post collateral when their exposure exceeds agreed-upon collateral posting thresholds. These thresholds are typically
based on the counterpartys credit rating and are individually negotiated.
(7) Consists of OTC derivative agreements for interest-rate swaps, option-based derivatives (excluding certain written options), foreign-currency swaps,
and purchased interest-rate caps.
(8) Commitments include: (a) our commitments to purchase and sell investments in securities; (b) our commitments to purchase mortgage loans; and
(c) our commitments to purchase and extinguish or issue debt securities of our consolidated trusts.
(9) Consists primarily of 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.
Over time, our exposure to individual counterparties for OTC interest-rate swaps, option-based derivatives, foreign-
currency swaps, and purchased interest rate caps varies depending on changes in fair values, which are affected by
changes in period-end interest rates, the implied volatility of interest rates, foreign-currency exchange rates, and the
amount of derivatives held. If all of our counterparties for these derivatives defaulted simultaneously on December 31,
2011, the combined amount of our uncollateralized and overcollateralized exposure to these counterparties, or our
maximum loss for accounting purposes after applying netting agreements and collateral, would have been approximately
138 Freddie Mac
$71 million. Our similar exposure as of December 31, 2010 was $32 million. Three counterparties each accounted for
greater than 10% and collectively accounted for 97% of our net uncollateralized exposure to derivative counterparties,
excluding commitments, at December 31, 2011. These counterparties were HSBC Bank USA, Royal Bank of Scotland,
and UBS AG., all of which were rated A or above by S&P as of February 27, 2012.
Approximately 99% of our counterparty credit exposure for OTC interest-rate swaps, option-based derivatives,
foreign-currency swaps, and purchased interest rate caps was collateralized at December 31, 2011 (excluding amounts
related to our posting of cash collateral in excess of our derivative liability as determined at the counterparty level). The
remaining exposure was primarily due to exposure amounts below the applicable counterparty collateral posting threshold,
as well as market movements during the time period between when a derivative was marked to fair value and the date we
received the related collateral. In some instances, these market movements result in us having provided collateral that has
fair value in excess of our obligation, which represents our overcollateralization exposure. Collateral is typically
transferred within one business day based on the values of the related derivatives.
In the event a derivative counterparty defaults, our economic loss may be higher than the uncollateralized exposure
of our derivatives if we are not able to replace the defaulted derivatives in a timely and cost-effective fashion. We could
also incur economic loss if the collateral held by us cannot be liquidated at prices that are sufficient to recover the amount
of such exposure. We monitor the risk that our uncollateralized exposure to each of our OTC counterparties for interest-
rate swaps, option-based derivatives, foreign-currency swaps, and purchased interest rate caps will increase under certain
adverse market conditions by performing daily market stress tests. These tests, which involve significant management
judgment, evaluate the potential additional uncollateralized exposure we would have to each of these derivative
counterparties on OTC derivatives contracts assuming certain changes in the level and implied volatility of interest rates
and certain changes in foreign currency exchange rates over a brief time period. Our actual exposure could vary
significantly from amounts forecasted by these tests.
The total exposure on our OTC forward purchase and sale commitments, which are treated as derivatives for
accounting purposes, was $38 million and $103 million at December 31, 2011 and December 31, 2010, respectively.
These commitments are 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 in an effort to ensure that they continue
to meet our internal risk-management standards.
Property Type
Detached/townhome(9) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 94% 94% 94% 92% 92% 92%
Condo/Co-op . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6 6 6 8 8 8
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 100% 100% 100% 100% 100% 100%
Occupancy Type
Primary residence . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 92% 93% 93% 91% 91% 91%
Second/vacation home . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4 4 5 5 5 5
Investment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4 3 2 4 4 4
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 100% 100% 100% 100% 100% 100%
(1) Purchases and ending balances are based on the UPB of the single-family credit guarantee portfolio. Other Guarantee Transactions with ending balances of
$2 billion at December 31, 2011, 2010, and 2009, are excluded from portfolio balance data since these securities are backed by non-Freddie Mac issued
securities for which the loan characteristics data was not available.
(2) Includes loans acquired under our relief refinance initiative, which began in 2009.
(3) Purchases columns exclude mortgage loans acquired under our relief refinance initiative. See Table 52 Single-Family Refinance Loan Volume for further
information on the LTV ratios of these loans.
(4) 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 the 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 because we generally do not receive data about them. The existence of a second lien mortgage reduces the borrowers equity in
the home and, therefore, can increase the risk of default.
(5) Current LTV ratios are management estimates, which are updated on a monthly basis. Current market values are estimated by adjusting the value of the
property at origination based on changes in the market value of homes in the same geographical area since origination. Estimated current LTV ratio range is
not applicable to purchase activity, and excludes any secondary financing by third parties.
(6) Relief refinance mortgages comprised approximately 11%,7%, and 2% of our single-family credit guarantee portfolio by UPB as of December 31, 2011, 2010,
and 2009, respectively.
(7) Credit score data is based on FICO scores. Although we obtain updated credit information on certain borrowers after the origination of a mortgage, such as
those borrowers seeking a modification, the scores presented in this table represent only the credit score of the borrower at the time of loan origination.
(8) Other refinance transactions include: (a) refinance mortgages with no cash-out to the borrower; and (b) refinance mortgages for which the delivery data
provided was not sufficient for us to determine whether the mortgage was a cash-out or a no cash-out refinance transaction.
(9) Includes manufactured housing and homes within planned unit development communities. The UPB of manufactured housing mortgage loans purchased during
2011, 2010, and 2009, was $376 million, $403 million, and $607 million, respectively.
Credit Score
Credit scores are a useful measure for assessing the credit quality of a borrower. Credit scores are numbers reported
by credit repositories, based on statistical models, that summarize an individuals credit record. FICO scores are the most
commonly used credit scores today. FICO scores are ranked on a scale of approximately 300 to 850 points. Statistically,
borrowers with higher credit scores are more likely to repay or have the ability to refinance than those with lower scores.
We only obtain credit scores of borrowers at the time of origination and do not typically receive updated data on borrower
credit scores after origination. Credit scores presented within this Annual Report on Form 10-K are at the time of
origination and may not be indicative of borrowers creditworthiness at December 31, 2011.
Loan Purpose
Mortgage loan purpose indicates how the borrower intends to use the funds from a mortgage loan. In a purchase
transaction, the funds are used to acquire a property. In a cash-out refinance transaction, in addition to paying off existing
mortgage liens, the borrower obtains additional funds that may be used for other purposes, including paying off
subordinate mortgage liens and providing unrestricted cash proceeds to the borrower. In other refinance transactions, the
funds are used to pay off existing mortgage liens and may be used in limited amounts for certain specified purposes; such
refinances are generally referred to as no cash-out or rate and term refinances. The percentage of home purchase
loans in our loan acquisition volume remained at low levels during 2011. Historically low interest rates contributed to
high refinance activity in 2011, though it declined from 2010 levels. Cash-out refinancings generally have had a higher
risk of default than mortgages originated in no cash-out, or rate and term, refinance transactions.
Property Type
Townhomes and detached single-family houses are the predominant type of single-family property. Condominiums
are a property type that historically experiences greater volatility in home prices than detached single-family residences.
Condominium loans in our single-family credit guarantee portfolio have a higher percentage of first-time homebuyers and
homebuyers whose purpose is for investment or for a second home. In practice, investors and second home borrowers
often seek to finance the condominium purchase with loans having a higher original LTV ratio than other borrowers.
Approximately 36% of the condominium loans within our single-family credit guarantee portfolio are in California,
Florida, and Illinois, which are among the states that have been most adversely affected by the economic recession and
housing downturn. Condominium loans comprised 15% of our credit losses during both years ended December 31, 2011
and 2010, while these loans comprised 8% of our single-family credit guarantee portfolio at both dates.
Occupancy Type
Borrowers may purchase a home as a primary residence, second/vacation home or investment property that is
typically a rental property. Mortgage loans on properties occupied by the borrower as a primary residence tend to have a
lower credit risk than mortgages on investment properties or secondary residences.
143 Freddie Mac
Geographic Concentration
Local economic conditions can affect borrowers ability to repay loans and the value of the collateral underlying the
loans. Because our business involves purchasing mortgages from every geographic region in the U.S., we maintain a
geographically diverse single-family credit guarantee portfolio. While our single-family credit guarantee portfolios
geographic distribution was relatively stable in recent years and remains broadly diversified across these regions, we were
negatively impacted by overall home price declines in each region since 2006. Our credit losses continue to be greatest in
those states that experienced significant decreases in property values since 2006, such as California, Florida, Nevada and
Arizona. See NOTE 16: CONCENTRATION OF CREDIT AND OTHER RISKS for more information concerning the
distribution of our single-family credit guarantee portfolio by geographic region.
Attribute Combinations
Certain combinations of 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 serious delinquency and default. We estimate that there were $11.1 billion and $11.8 billion at December 31, 2011 and
December 31, 2010, respectively, of loans in our single-family credit guarantee portfolio with both original LTV ratios
greater than 90% and FICO scores less than 620 at the time of loan origination. Certain mortgage product types, including
interest-only or option ARM loans, that have additional higher risk characteristics, such as lower credit scores or higher
LTV ratios, will also have a higher risk of default than those same products without these characteristics. The presence of
a second lien mortgage can also increase the risk that a borrower will default. A second lien mortgage reduces the
borrowers equity in the home, and has a similar negative effect on the borrowers ability to refinance or sell the property
for an amount at or above the combined balances of the first and second mortgages. As of December 31, 2011 and
December 31, 2010, approximately 15% and 14% of loans in our single-family credit guarantee portfolio had second lien
financing by third parties at the time of origination of the first mortgage, and we estimate that these loans comprised 17%
and 19%, respectively, of our seriously delinquent loans, based on UPB. However, borrowers are free to obtain second lien
financing after origination and we are not entitled to receive notification when a borrower does so. Therefore, it is likely
that additional borrowers have post-origination second lien mortgages.
Table 46 Single-Family Loans Scheduled Payment Change to Include Principal by Year at December 31, 2011(1)
2017 and
2011 and Prior 2012 2013 2014 2015 2016 Beyond Total
(in millions)
ARM/interest-only . . . . . . . . . . . . . . . . . . . . . . . . $13,002 $4,725 $3,498 $1,673 $4,207 $7,400 $19,526 $54,031
Fixed/interest-only . . . . . . . . . . . . . . . . . . . . . . . . 15 377 2,229 15,321 17,942
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $13,002 $4,725 $3,498 $1,688 $4,584 $9,629 $34,847 $71,973
(1) Based on the UPBs of mortgage products that contain interest-only provisions and that begin amortization of principal in each of the years shown.
These reported balances are based on the UPB of the underlying mortgage loans and do not reflect the publicly-available security balances we use to
report the composition of our PCs and REMICs and Other Structured Securities. Excludes: (a) mortgage loans underlying Other Guarantee
Transactions; and (b) any mortgage loans which completed a modification before the end of the respective period and for which the terms of the
loan were changed to an amortizing loan product.
The table below presents the trend of serious delinquency information for single-family interest-only mortgage loans
in our single-family credit guarantee portfolio, excluding Other Guarantee Transactions, categorized by the year in which
the loan begins to require payments of principal. Loans where the year of payment change is 2011 or prior have already
changed to require payments of principal as of December 31, 2011; loans where the year of payment change is 2012 or
later still require only payments of interest as of December 31, 2011 and will not require payments of principal until a
future period.
As shown in the table above, the serious delinquency rates of interest-only loans that experienced a change in
payment to include principal during the last three years were not significantly impacted in the year the loan began the
amortization of principal. We believe that the higher serious delinquency rates for interest-only loans with payment
changes in 2010 and after (compared to those interest-only loans with payment changes in 2009 and prior) reflect that
those borrowers have been more negatively impacted by the ongoing adverse economic conditions, including declines in
home prices, than interest-only loans that experienced payment changes in earlier years.
In recent years, interest-only loans experienced high serious delinquency rates well before reaching the dates at
which the loans begin to require amortization of principal. We believe that interest-only loan performance during the last
three years was more adversely affected by changes in employment, home prices, and other regional and macro-economic
conditions, than the increase in the borrowers monthly payment (when the loans begin to require payments of principal).
In addition, a number of these loans were categorized as Alt-A, due to reduced documentation standards at the time of
loan origination. The overall serious delinquency rate for all interest-only loans in our single-family credit guarantee
portfolio was 17.6% as of December 31, 2011. Approximately 82% of all interest-only loans in our single-family credit
guarantee portfolio had not yet begun amortization of principal and 69% of all interest-only loans in our single-family
credit guarantee portfolio had current LTV ratios greater than 100% as of December 31, 2011. Since a substantial portion
145 Freddie Mac
of these loans were originated in 2005 through 2008 and are located in geographical areas that have been most impacted
by declines in home prices since 2006, we believe that the serious delinquency rate for interest-only loans will remain
high in 2012.
(1) Based on the UPBs of mortgage products that contain adjustable-rate interest provisions and are scheduled to reset during the periods specified
above. These reported balances are based on the UPB of the underlying mortgage loans and do not reflect the publicly-available security balances
we use to report the composition of our PCs and REMICs and Other Structured Securities. Excludes: (a) mortgage loans underlying Other Guarantee
Transactions since rate reset information is not available to us for these loans; and (b) any amortizing ARM loans which completed a modification
before the end of the respective period and for which the terms of the loan were changed to a fixed-rate loan product.
(2) Reflects the UPB of interest-only loans that reset in each of the years shown. We report loans in the interest-only category if their original terms
include interest-only provisions for a pre-determined period of time before the monthly payment changes to include amortization of principal.
Includes $13.0 billion of loans that were interest-only at origination that have converted to include amortization of principal as of December 31,
2011.
The table below presents serious delinquency information for single-family adjustable-rate mortgage loans in our
single-family credit guarantee portfolio, excluding Other Guarantee Transactions, categorized by the year in which the
loan first had an interest rate reset. Loans where the year of first interest rate reset is 2011 or prior have already had one
or more interest rate resets as of December 31, 2011; loans where the year of first interest rate reset is 2012 or later have
not yet had an interest rate reset as of December 31, 2011 and will not have an interest rate reset until a future period.
As shown in the table above, the trend in serious delinquency rates of adjustable-rate loans that experienced an
interest rate reset during the last three years has not been significantly impacted by the change in interest rate of the loan.
146 Freddie Mac
Except for interest-only loans that began to amortize at the reset date, there were not significant increases to the
borrowers payments when these loans reached their first reset dates because market interest rates have generally declined
in recent years. Interest-only loans are a higher-risk mortgage product, which feature an increase in the monthly payment
at the date of first reset which is not solely related to the contractual interest rate (i.e., when the monthly payment begins
to include principal). In recent years, ARM loans have experienced high serious delinquency rates well before reaching
dates at which the loans have reached their first rate reset. We believe that ARM loan performance during the last three
years has been more adversely affected by changes in employment, home prices, and other regional and macro-economic
conditions, than by changes in the interest rates of the loans. See RISK FACTORS Competitive and Market Risks
Changes in interest rates could negatively impact our results of operations, stockholders equity (deficit) and fair value of
net assets for additional information. Since a substantial portion of ARM loans were originated in 2005 through 2008
and are located in geographical areas that have been most impacted by declines in home prices since 2006, we believe
that the serious delinquency rate for ARM loans will continue to remain high in 2012.
Subprime Loans
Participants in the mortgage market may characterize single-family loans based upon their overall credit quality at
the time of origination, generally considering them to be prime or subprime. While we have not historically characterized
the loans in our single-family credit guarantee portfolio 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 Loans in the Single-
Family Credit Guarantee Portfolio and Table 57 Single-Family Credit Guarantee Portfolio by Attribute
Combinations for further information). In addition, we estimate that approximately $2.3 billion and $2.5 billion of
security collateral underlying our Other Guarantee Transactions at December 31, 2011 and December 31, 2010,
respectively, were identified as subprime based on information provided to us when we entered into these transactions.
We also categorize our investments in non-agency mortgage-related securities as subprime if they were identified as
such based on information provided to us when we entered into these transactions. At December 31, 2011 and
December 31, 2010, we held $49.0 billion and $54.2 billion, respectively, in UPB of non-agency mortgage-related
securities backed by subprime loans. These securities were structured to provide credit enhancements, and 7% and 10% of
these securities were investment grade at December 31, 2011 and December 31, 2010, respectively. The credit
performance of loans underlying these securities deteriorated significantly beginning in 2008. For more information on our
exposure to subprime mortgage loans through our investments in non-agency mortgage-related securities see
CONSOLIDATED BALANCE SHEETS ANALYSIS Investments in Securities.
Alt-A Loans
Although there is no universally accepted definition of Alt-A, 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, may be underwritten with lower or alternative income or
asset documentation requirements compared to a full documentation mortgage loan, or both. The UPB of Alt-A loans in
our single-family credit guarantee portfolio declined to $94.3 billion as of December 31, 2011 from $115.5 billion as of
December 31, 2010. The UPB of our Alt-A loans declined in 2011 primarily due to refinancing into other mortgage
products, foreclosure transfers, and other liquidation events. As of December 31, 2011, for Alt-A loans in our single-
147 Freddie Mac
family credit guarantee portfolio, the average FICO score at origination was 718. Although Alt-A mortgage loans
comprised approximately 5% of our single-family credit guarantee portfolio as of December 31, 2011, these loans
represented approximately 28% of our credit losses during 2011.
During the first quarter of 2011, we identified approximately $0.6 billion in UPB of single-family loans underlying
certain Other Guarantee Transactions that had been previously reported in both the Alt-A and subprime categories.
Commencing March 31, 2011, we no longer report these loans as Alt-A (but continue to report them as subprime) and we
revised the prior periods to conform to the current period presentation.
We did not purchase any new single-family Alt-A mortgage loans in our single-family credit guarantee portfolio
during 2011. Although we discontinued new purchases of mortgage loans with lower documentation standards for assets
or income beginning March 1, 2009 (or later, as our customers contracts permitted), we continued to purchase certain
amounts of these mortgages in cases where the loan was either: (a) purchased pursuant to a previously issued other
guarantee commitment; (b) part of our relief refinance mortgage initiative; or (c) in another refinance mortgage initiative
and the pre-existing mortgage (including Alt-A loans) was originated under less than full documentation standards.
However, in the event we purchase a refinance mortgage in one of these programs and the original loan had been
previously identified as Alt-A, such refinance loan may no longer be categorized or reported as an Alt-A mortgage in this
Form 10-K and our other financial reports because the new refinance loan replacing the original loan would not be
identified by the seller/servicer as an Alt-A loan. As a result, our reported Alt-A balances may be lower than would
otherwise be the case had such refinancing not occurred. From the time the relief refinance initiative began in 2009 to
December 31, 2011, we purchased approximately $15.3 billion of relief refinance mortgages that were previously
categorized as Alt-A loans in our portfolio, including $5.1 billion during 2011.
We also hold investments in non-agency mortgage-related securities backed by single-family Alt-A loans. At
December 31, 2011 and December 31, 2010, we held investments of $16.8 billion and $18.8 billion, respectively, of non-
agency mortgage-related securities backed by Alt-A and other mortgage loans and 15% and 22%, respectively, of these
securities were categorized as investment grade. The credit performance of loans underlying these securities deteriorated
significantly since the beginning of 2008 and continued to deteriorate during 2011. We categorize our investments in non-
agency mortgage-related securities as Alt-A if the securities were identified as such based on information provided to us
when we entered into these transactions. For more information on our exposure to Alt-A mortgage loans through our
investments in non-agency mortgage-related securities see CONSOLIDATED BALANCE SHEETS ANALYSIS
Investments in Securities.
Loans with one or more of the above characteristics comprised approximately 20% of our single-family credit
guarantee portfolio as of both December 31, 2011 and 2010. The total UPB of loans in our single-family credit guarantee
portfolio with one or more of these characteristics declined approximately 7% to $343 billion as of December 31, 2011
from $369 billion as of December 31, 2010. This decline was principally due to liquidations resulting from prepayments,
refinancing activity, and liquidations resulting from foreclosure events and foreclosure alternatives, but was partially offset
by increases in loans with original LTV ratios greater than 90% due to our relief refinance mortgage activity in 2011. The
serious delinquency rates associated with these loans declined to 9.3% as of December 31, 2011 from 10.3% as of
December 31, 2010.
Credit Enhancements
The portfolio information below excludes our holdings of non-Freddie Mac mortgage-related securities. See
CONSOLIDATED BALANCE SHEETS ANALYSIS Investments in Securities Mortgage-Related Securities for
credit enhancement and other information about our investments in non-Freddie Mac mortgage-related securities.
Our charter requires that single-family mortgages with LTV ratios above 80% at the time of purchase be covered by
specified credit enhancements or participation interests. However, as discussed below, under HARP, we allow eligible
borrowers who have mortgages with high current LTV ratios to refinance their mortgages without obtaining new mortgage
insurance in excess of what was already in place. Primary mortgage insurance is the most prevalent type of credit
enhancement protecting our single-family credit guarantee portfolio, and is typically provided on a loan-level basis. In
addition, for some mortgage loans, we elect to share the default risk by transferring a portion of that risk to various third
parties through a variety of other credit enhancements.
At December 31, 2011 and December 31, 2010, our single-family credit-enhanced mortgages represented 14% and
15%, respectively, of our single-family credit guarantee portfolio, excluding those backing Ginnie Mae Certificates and
149 Freddie Mac
HFA bonds guaranteed by us under the HFA initiative. Freddie Mac securities backed by Ginnie Mae Certificates and
HFA bonds guaranteed by us under the HFA initiative are excluded because we consider the incremental credit risk to
which we are exposed to be insignificant.
We had recoveries (excluding reimbursements for our expenses) of $2.8 billion and $3.4 billion that reduced our
charge-offs of single-family loans during the years ended December 31, 2011 and 2010, respectively. These amounts
include $1.8 billion and $2.1 billion during the years ended December 31, 2011 and 2010, respectively, in recoveries
associated with our primary and pool mortgage insurance policies and other credit enhancements. We had additional
recoveries from credit enhancements that provided reimbursement for and reduced our expenses by $0.3 billion during
both 2011 and 2010. During 2011 and 2010, the credit enhancement coverage for our single-family loan purchases was
lower than in periods before 2009 and earlier, primarily as a result of high refinance activity. Refinance loans (other than
relief refinance mortgages) typically have lower LTV ratios, and are more likely to have an LTV ratio below 80% and not
require credit protection as specified in our charter. In addition, we have been purchasing significant amounts of relief
refinance mortgages. These mortgages allow for the refinance of existing loans guaranteed by us under terms such that we
may not have mortgage insurance for some or all of the UPB of the mortgage in excess of 80% of the value of the
property for certain of these loans.
Our ability and desire to expand or reduce the portion of our total mortgage portfolio covered by credit
enhancements will depend on: (a) our evaluation of the credit quality of new business purchase opportunities; (b) the risk
profile of our portfolio; (c) the credit worthiness of potential counterparties; and (d) the future availability of effective
credit enhancements at prices that permit an attractive return. While the use of credit enhancements reduces our exposure
to mortgage credit risk, it increases our exposure to institutional credit risk. As guarantor, we remain responsible for the
payment of principal and interest if mortgage insurance or other credit enhancements do not provide full reimbursement
for covered losses. Our credit losses could increase if an entity that provides credit enhancement fails to fulfill its
obligation, as this would reduce the amount of our credit loss recoveries.
Primary mortgage insurance is the most prevalent type of credit enhancement protecting our single-family credit
guarantee portfolio and is typically provided on a loan-level basis. Primary mortgage insurance transfers varying portions
of the credit risk associated with a mortgage to a third-party insurer. Generally, in order to file a claim under a primary
mortgage insurance policy, the insured loan must be in default and the borrowers interest in the underlying property must
have been extinguished, such as through a foreclosure action. The mortgage insurer has a prescribed period of time within
which to process a claim and make a determination as to its validity and amount.
Other prevalent types of credit enhancements that we use are lender recourse (under which we may require a lender
to repurchase a loan upon default) 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. In certain instances, the cumulative losses we have incurred as of December 31, 2011
combined with our expectations of potential future claims may exceed the maximum limit of loss allowed by the policy.
In order to file a claim under a pool insurance policy, we generally must have finalized the primary mortgage claim,
disposed of the foreclosed property, and quantified the net loss payable to us with respect to the insured loan to determine
the amount due under the pool insurance policy. Certain pool insurance policies have specified loss deductibles that must
be met before we are entitled to recover under the policy. We have institutional credit risk relating to the potential
insolvency or non-performance of mortgage insurers that insure mortgages we purchase or guarantee. See Institutional
Credit Risk Mortgage Insurers for further discussion about pool insurance coverage and our mortgage loan insurers.
Certain of our single-family Other Guarantee Transactions utilize subordinated security structures as a form of credit
enhancement. At December 31, 2011 and 2010, the UPB of single-family Other Guarantee Transactions with
subordination coverage at origination was $3.3 billion and $3.9 billion, and the subordination coverage on these securities
was $647 million and $825 million, respectively. At December 31, 2011 and 2010, the average serious delinquency rate
on single-family Other Guarantee Transactions with subordination coverage was 20.9% and 21.1%, respectively.
See NOTE 4: MORTGAGE LOANS AND LOAN LOSS RESERVES for additional information about credit
protection and other forms of credit enhancements covering loans in our single-family credit guarantee portfolio as of
December 31, 2011 and December 31, 2010.
As of December 31, 2011, the borrowers monthly payment was reduced on average by an estimated $565, which
amounts to an average of $6,780 per year, and a total of $1.0 billion in annual reductions for all of our completed HAMP
modifications (these amounts are calculated by multiplying the number of completed modifications by the average
reduction in monthly payment, and have not been adjusted to reflect the actual performance of the loans following
modification). Except in limited instances, each borrowers reduced payment will remain in effect for a minimum of five
years, and borrowers whose interest rates were adjusted below market levels will have their interest rate and payment
gradually increased after the fifth year to a rate consistent with the market rate at the time of modification. We bear the
cost associated with the borrowers payment reductions. Although mortgage investors under the MHA Program are
entitled to certain subsidies from Treasury for reducing the borrowers monthly payments from 38% to 31% of the
borrowers income, we do not receive such subsidies on modified mortgages owned or guaranteed by us.
A standard trial period plan is three months in duration. Our servicers are permitted to add an interim month, which
will be reported as a fourth trial period month. In addition, our servicers are authorized to extend a trial period for up to
an additional two months when the borrower is in bankruptcy in order to provide additional time to have the mortgage
removed from the bankruptcy plan, which is a pre-requisite to a modification under HAMP. The number of our loans in
the HAMP trial period declined to 12,802 as of December 31, 2011 from 22,352 as of December 31, 2010. A large
number of borrowers entered into HAMP trial period plans when the program was initially introduced in 2009.
Significantly fewer new borrowers entered into HAMP trial period plans beginning in the second half of 2010, when we
changed the income documentation requirements as discussed below. We expect fewer borrowers will initiate HAMP
modification during 2012 than 2011, because a large number of the delinquent borrowers that were eligible for the
program have already completed the trial period or attempted to do so, but failed.
To address documentation issues experienced when the program began, guidelines for HAMP provide that, beginning
with trial periods that became effective on or after June 1, 2010, borrowers must provide income documentation before
entering into a HAMP trial period. Prior to the June 1, 2010 changes to HAMP, we experienced approximately a 38%
modification completion rate under the program. Given the changes made to the program effective June 1, 2010, we have
since experienced a modification completion rate in excess of 80%. When a borrowers HAMP trial period is cancelled,
the loan is considered for our other workout activities.
Approximately 40% of our loans in the HAMP trial period as of December 31, 2011 have been in the trial period for
more than the minimum duration of three months. Based on information provided by the program administrator, the
average length of the trial period for loans in the program as of December 31, 2011 was five months. For more
information on our redefault rates on these loans, see Table 54 Reperformance Rates of Modified Single-Family
Loans.
HAMP is one modification option for single-family loans, but we also have completed a large volume of
modifications through our non-HAMP loan modification initiatives.
The costs we incur related to HAMP have been, and will likely continue to be, significant for the following reasons:
Except for certain Other Guarantee Transactions and loans underlying our other guarantee commitments, we bear
the full cost of the monthly payment reductions related to modifications of loans we own or guarantee and all
servicer and borrower incentives, and we will not receive a reimbursement of these costs from Treasury. We paid
$184 million of servicer incentives during 2011, as compared to $178 million of such incentives during 2010. As
of December 31, 2011, we accrued $77 million for both initial and recurring servicer incentives not yet due. We
paid $111 million of borrower incentives during 2011, as compared to $64 million of these incentives during 2010.
153 Freddie Mac
As of December 31, 2011, we accrued $60 million for borrower incentives not yet due. We also have the potential
to incur additional servicer incentives and borrower incentives as long as the borrower remains current on a loan
modified under HAMP.
Under HAMP, we typically provide concessions to borrowers, which generally include interest rate reductions and
often also provide for forbearance (but not forgiveness) of principal.
Some borrowers will fail to complete the HAMP trial period and others will default on their HAMP modified
loans. For those borrowers who redefault or who do not complete the trial period and do not qualify for another
loan workout, HAMP will have delayed the resolution of the loans through the foreclosure process. If home prices
decline while these events take place, such delay in the foreclosure process may increase the losses we recognize
on these loans, to the extent the prices we ultimately receive for the foreclosed properties are less than the prices
we could have received had we foreclosed upon the properties earlier.
Non-GSE mortgages modified under HAMP include mortgages backing our investments in non-agency mortgage-
related securities. Such modifications reduce the monthly payments due from affected borrowers, and thus reduce
the payments we receive on these securities (to the extent the payment reductions have not been absorbed by
subordinated investors or by other credit enhancement).
(1) Consists of all single-family refinance mortgage loans that we either purchased or guaranteed during the period, excluding those associated with
other guarantee commitments and Other Guarantee Transactions.
(2) Consists of relief refinance mortgages and other refinance mortgages.
Relief refinance mortgages comprised approximately 33% and 35% of our total refinance volume during 2011 and
2010, respectively. Relief refinance mortgages with LTV ratios above 80% represented approximately 12% of our total
single-family credit guarantee portfolio purchases during both 2011 and 2010. Relief refinance mortgages comprised
approximately 11% and 7% of the UPB in our total single-family credit guarantee portfolio at December 31, 2011 and
December 31, 2010, respectively. As of December 31, 2011, the serious delinquency rates for relief refinance loans with:
(a) LTV ratios of 80% or less; (b) LTV ratios from 80% to 100%; (c) LTV ratios of more than 100%; and (d) total relief
refinance mortgage loans for all LTV ratios were 0.2%, 0.9%, 1.5%, and 0.6%, respectively.
On October 24, 2011 FHFA, Freddie Mac, and Fannie Mae announced a series of FHFA-directed changes to HARP
in an effort to attract more eligible borrowers whose monthly payments are current and who can benefit from refinancing
their home mortgages. The Acting Director of FHFA stated that the goal of pursuing these changes is to create refinancing
opportunities for more borrowers whose mortgages are owned or guaranteed by Freddie Mac and Fannie Mae while
reducing risk for these entities and bringing a measure of stability to housing markets. The revisions to HARP enable us
to expand the assistance we may provide to homeowners by making their mortgage payments more affordable through one
or more of the following ways: (a) a reduction in payment; (b) a reduction in rate; (c) movement to a more stable
155 Freddie Mac
mortgage product type (i.e., from an ARM to a fixed-rate mortgage); or (d) a reduction in amortization term. See
BUSINESS Our Business Segments Single-Family Guarantee Segment Loss Mitigation and Loan Workout
Activities for additional information about recent changes to HARP.
In November 2011, Freddie Mac and Fannie Mae issued guidance with operational details about the HARP changes
to mortgage lenders and servicers after receiving information from FHFA about the fees that we may charge associated
with the refinancing program. Since industry participation in HARP is not mandatory, we anticipate that implementation
schedules will vary as individual lenders, mortgage insurers and other market participants modify their processes. It is too
early to estimate how many eligible borrowers are likely to refinance under the revised program.
The revisions to HARP will help to reduce our exposure to credit risk to the extent that HARP refinancing strengthen
the borrowers capacity to repay their mortgages and, in some cases, reduce the payments under their mortgages. These
revisions to HARP could also reduce our credit losses to the extent that the revised program contributes to bringing
stability to the housing market. However, we may face greater exposure to credit and other losses on these HARP loans
because we are not requiring lenders to provide us with certain representations and warranties on the refinanced HARP
loans. We could also experience declines in the fair values of certain agency security investments classified as available-
for-sale or trading resulting from changes in expectations of mortgage prepayments and lower net interest yields over time
on other mortgage-related investments. As a result, there can be no assurance that the benefits from the revised program
will exceed our costs. See RISK FACTORS Competitive and Market Risks The servicing alignment initiative, MHA
Program and other efforts to reduce foreclosures, modify loan terms and refinance mortgages, including HARP, may fail
to mitigate our credit losses and may adversely affect our results of operations or financial condition for additional
information.
Home Affordable Foreclosure Alternatives Program
HAFA is designed to permit borrowers who meet basic HAMP eligibility requirements to sell their homes in short
sales, if such borrowers did not qualify for or participate in a HAMP trial period, failed to complete their HAMP trial
period, or defaulted on their HAMP modification. HAFA also provides a process for borrowers to convey title to their
homes through a deed in lieu of foreclosure. HAFA took effect in April 2010 and ends on December 31, 2013. We began
our implementation of this program in August 2010. We completed a small number of HAFA transactions on our single-
family mortgage loans during 2011.
(1) Based on completed actions with borrowers for loans within our single-family credit guarantee portfolio. Excludes those modification, repayment
and forbearance activities for which the borrower has started the required process, but the actions have not been made permanent or effective, such
as loans in modification trial periods. Also excludes certain loan workouts where our single-family seller/servicers have executed agreements in the
current or prior periods, but these have not been incorporated into certain of our operational systems, due to delays in processing. These categories
are not mutually exclusive and a loan in one category may also be included within another category in the same period (see endnote 6).
(2) As a result of our adoption of an amendment to the accounting guidance on the classification of loans as TDRs, which became effective in the third
quarter of 2011, the population of loans we account for as TDRs significantly increased due to the inclusion of loans that were not previously
considered TDRs, including those loans that were subject to workout activities that occurred during the first half of 2011. See NOTE 5:
INDIVIDUALLY IMPAIRED AND NON-PERFORMING LOANS for more information.
(3) Under this modification type, past due amounts are added to the principal balance and reamortized based on the original contractual loan terms.
(4) Includes completed loan modifications under HAMP; however, the number of such completions differs from that reported by the MHA Program
administrator in part due to differences in the timing of recognizing the completions by us and the administrator.
(5) Represents the number of borrowers as reported by our seller/servicers that have completed the full term of a repayment plan for past due amounts.
Excludes the number of borrowers that are actively repaying past due amounts under a repayment plan, which totaled 21,382 and 23,151 borrowers
as of December 31, 2011 and 2010, respectively.
(6) Excludes loans with long-term forbearance under a completed loan modification. Many borrowers complete a short-term forbearance agreement
before another loan workout is pursued or completed. We only report forbearance activity for a single loan once during each quarterly period;
however, a single loan may be included under separate forbearance agreements in separate periods.
(7) Represents the number of our single-family loans that complete foreclosure transfers, including third-party sales at foreclosure auction in which
ownership of the property is transferred directly to a third-party rather than to us.
We experienced declines in home retention actions, particularly loan modifications, in 2011 compared to 2010,
primarily due to declines in the number of seriously delinquent loan additions and in borrower participation in HAMP in
2011. A large number of borrowers entered into HAMP trial period plans when the program was initially introduced in
2009, and completed or terminated their modifications in 2010. Significantly fewer borrowers entered into HAMP trial
period plans beginning in the second half of 2010 when we changed the income documentation requirements. The UPB of
loans in our single-family credit guarantee portfolio for which we have completed a loan modification increased to
$69 billion as of December 31, 2011 from $52 billion as of December 31, 2010. The number of modified loans in our
single-family credit guarantee portfolio continued to increase and such loans comprised approximately 2.9% and 2.1% of
our single-family credit guarantee portfolio as of December 31, 2011 and December 31, 2010, respectively. The estimated
current LTV ratio for all modified loans in our single-family credit guarantee portfolio was 123% and the serious
delinquency rate on these loans was 17.2% as of December 31, 2011.
Foreclosure alternative volume increased 18% in 2011, compared to 2010, and we expect the volume of foreclosure
alternatives to remain high in 2012 primarily because we offer incentives to servicers to complete short sales instead of
foreclosures. We plan to introduce additional initiatives in 2012 designed to help more distressed borrowers avoid
foreclosure through short sale and deed in lieu of foreclosure transactions.
The table below presents the reperformance rate of modified single-family loans in each of the last eight quarterly
periods.
157 Freddie Mac
Table 54 Reperformance Rates of Modified Single-Family Loans(1)
Quarter of Loan Modification Completion(2)
HAMP loan modifications: 3Q 2011 2Q 2011 1Q 2011 4Q 2010 3Q 2010 2Q 2010 1Q 2010 4Q 2009
The redefault rate is the percentage of our modified loans that became seriously delinquent, transitioned to REO, or
completed a loss-producing foreclosure alternative, and is the inverse of the reperformance rate. As of December 31,
2011, the redefault rate for all of our single-family loan modifications (including those under HAMP) completed during
the first nine months of 2011, and full years 2010, 2009, and 2008 was 10%, 20%, 50%, and 67%, respectively. Many of
the borrowers that received modifications in 2008 and 2009 were negatively affected by worsening economic conditions,
including high unemployment rates during the last several years. As of December 31, 2011, the redefault rate for loans
modified under HAMP in the first nine months of 2011, and full years 2010 and 2009 was approximately 7%, 16% and
19%, respectively. These redefault rates may not be representative of the future performance of modified loans, including
those modified under HAMP. We believe the redefault rate for loans modified in the last three years, including those
modified under HAMP, is likely to increase, particularly since the housing and economic environments remain
challenging.
Credit Performance
Delinquencies
We report single-family serious delinquency rate information based on the number of loans that are three monthly
payments or more past due or in the process of foreclosure, as reported by our servicers. Mortgage loans whose
contractual terms have been modified under agreement with the borrower are not counted as delinquent as long as the
borrower is current under the modified terms. Single-family loans for which the borrower is subject to a forbearance
agreement will continue to reflect the past due status of the borrower. To the extent our borrowers participate in the HFA
unemployment assistance initiatives and the full contractual payment is made by an HFA, a borrowers mortgage
delinquency status will remain static and will not fall into further delinquency.
158 Freddie Mac
Our single-family delinquency rates include all single-family loans that we own, that back Freddie Mac securities,
and that are covered by our other guarantee commitments, except financial guarantees that are backed by either Ginnie
Mae Certificates or HFA bonds because these securities do not expose us to meaningful amounts of credit risk due to the
guarantee or credit enhancements provided on them by the U.S. government.
Some of our workout and other loss mitigation activities create fluctuations in our delinquency statistics. For
example, single-family loans that we report as seriously delinquent before they enter a trial period under HAMP or our
new non-HAMP standard modification continue to be reported as seriously delinquent for purposes of our delinquency
reporting until the modifications become effective and the loans are removed from delinquent status by our servicers.
However, under our previous non-HAMP modifications, the borrower would return to a current payment status sooner,
because these modifications did not have trial periods. Consequently, the volume, timing, and type of loan modifications
impact our reported serious delinquency rate. As discussed above in Single-Family Loan Workouts and the MHA
Program, the new non-HAMP standard loan modification initiative includes a trial period comparable to that of our
HAMP modification initiative. In addition, there may be temporary timing differences, or lags, in the reporting of
payment status and modification completion due to differing practices of our servicers that can affect our delinquency
reporting.
Our serious delinquency rates have been affected by delays, including those due to temporary actions to suspend
foreclosure transfers of occupied homes, increases in foreclosure process timeframes, process requirements of HAMP,
general constraints on servicer capacity (which affects the rate at which servicers modify or foreclose upon loans), and
court backlogs (in states that require a judicial foreclosure process). These delays lengthen the period of time in which
loans remain in seriously delinquent status, as the delays extend the time it takes for seriously delinquent loans to be
modified, foreclosed upon or otherwise resolved and thus transition out of seriously delinquent status. As a result, we
believe our single-family serious delinquency rates were higher in 2011 and 2010 than they otherwise would have been.
As of December 31, 2011 and 2010, the percentage of seriously delinquent loans that have been delinquent for more than
six months was 70% and 66%, respectively.
The table below presents serious delinquency rates for our single-family credit guarantee portfolio.
Single-family:
Non-credit-enhanced . . . . . . . . . . . . . . . . . . . . . . . . . . . 86% 2.84% 85% 3.01% 84% 3.02%
Credit-enhanced . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14 8.03 15 8.27 16 8.68
Total single-family credit guarantee portfolio(1) . . . . . . . . . . 100% 3.58 100% 3.84 100% 3.98
(1) As of December 31, 2011, 2010, and 2009, approximately 68%, 61%, and 49%, respectively, of the single-family loans reported as seriously
delinquent were in the process of foreclosure.
Serious delinquency rates of our single-family credit guarantee portfolio declined to 3.58% as of December 31, 2011
from 3.84% as of December 31, 2010. Our serious delinquency rate remains high compared to historical levels, reflecting
continued stress in the housing and labor markets. The improvement in our single-family serious delinquency rate during
2011 was primarily due to a high volume of loan modifications and foreclosure transfers, as well as a slowdown in new
serious delinquencies. See Table 54 Reperformance Rates of Modified Single-Family Loans for information on the
performance of modified loans. Although the number of seriously delinquent loans declined in both 2010 and 2011, the
decline in the size of our single-family credit guarantee portfolio in 2011 caused our delinquency rates to be higher than
they otherwise would have been, because these rates are calculated on a smaller base of loans at the end the year.
Serious delinquency rates for interest-only and option ARM products, which together represented approximately 5%
of our total single-family credit guarantee portfolio at December 31, 2011, were 17.6% and 20.5%, respectively, at
December 31, 2011, compared with 18.4% and 21.2%, respectively, at December 31, 2010. Serious delinquency rates of
single-family 30-year, fixed rate amortizing loans, a more traditional mortgage product, were approximately 3.9% and
4.0% at December 31, 2011 and 2010, respectively.
The tables below present serious delinquency rates categorized by borrower and loan characteristics, including
geographic region and origination year, which indicate that certain concentrations of loans have been more adversely
affected by declines in home prices since 2006. In certain states, our single-family serious delinquency rates have
remained persistently high. As of December 31, 2011, single-family loans in Arizona, California, Florida, and Nevada
159 Freddie Mac
comprised 25% of our single-family credit guarantee portfolio, and the serious delinquency rate of loans in these states
was 6.2%. During the year ended December 31, 2011, we also continued to experience high serious delinquency rates on
single-family loans originated between 2005 and 2008. We purchased significant amounts of loans with higher-risk
characteristics in those years. In addition, those borrowers are more susceptible to the declines in home prices since 2006
than those homeowners that have built up equity in their homes over time.
The table below presents credit concentrations for certain loan groups in our single-family credit guarantee portfolio.
Table 56 Credit Concentrations in the Single-Family Credit Guarantee Portfolio
As of December 31, 2011
Estimated Serious
Alt-A Non Alt-A Current LTV Percentage Delinquency
UPB UPB Total UPB Ratio(1) Modified(2) Rate
(dollars in billions)
Geographical distribution:
Arizona, California, Florida, and Nevada . . . . . . . . . . . . . . . . $ 38 $ 406 $ 444 93% 4.6% 6.2%
All other states . . . . . . . . . . . . ...................... 56 1,246 1,302 75 2.5 2.9
Year of origination:
2011 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 250 250 70 0.1
2010 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 324 324 71 0.1 0.3
2009 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 315 315 72 0.1 0.5
2008 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7 113 120 92 4.4 5.7
2007 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29 138 167 113 10.2 11.6
2006 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25 99 124 112 9.3 10.8
2005 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18 124 142 96 5.1 6.5
2004 and prior . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15 289 304 61 2.5 2.8
As of December 31, 2010
Estimated Serious
Alt-A Non Alt-A Current LTV Percentage Delinquency
UPB UPB Total UPB Ratio(1) Modified(2) Rate
(dollars in billions)
Geographical distribution:
Arizona, California, Florida, and Nevada . . . . . . . . . . . . . . . . $ 47 $ 410 $ 457 91% 3.3% 7.1%
All other states . . . . . . . . . . . . ...................... 69 1,283 1,352 73 1.9 3.0
Year of origination:
2010 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 323 323 70 0.1
2009 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 391 391 70 0.1 0.3
2008 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10 149 159 86 2.2 4.9
2007 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36 172 208 104 6.2 11.6
2006 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31 125 156 104 5.8 10.5
2005 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21 156 177 91 3.3 6.0
2004 and prior . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18 377 395 58 1.7 2.5
2011 2010
Alt-A Non Alt-A Total Alt-A Non Alt-A Total
(in millions) (in millions)
Credit Losses
Geographical distribution:
Arizona, California, Florida, and Nevada . . . . . . . . . . . . . . . . $2,641 $5,081 $7,722 $3,708 $4,950 $8,658
All other states . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,050 4,209 5,259 1,438 3,964 5,402
Year of origination:
2011 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 2
2010 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 62 62 1 1
2009 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 177 177 1 63 63
2008 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 102 903 1,005 116 777 893
2007 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,455 3,245 4,700 1,905 2,836 4,741
2006 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,314 2,328 3,642 1,920 2,340 4,260
2005 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 713 1,566 2,279 1,091 1,701 2,792
2004 and prior . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 107 1,007 1,114 114 1,197 1,311
(1) See endnote (5) to Table 45 Characteristics of the Single-Family Credit Guarantee Portfolio for information on our calculation of estimated
current LTV ratios.
(2) Represents the percentage of loans, based on loan count in our single-family credit guarantee portfolio, that have been modified under agreement
with the borrower, including those with no changes in interest rate or maturity date, but where past due amounts are added to the outstanding
principal balance of the loan.
The table below presents statistics for combinations of certain characteristics of the mortgages in our single-family
credit guarantee portfolio as of December 31, 2011 and December 31, 2010.
By Product Type
FICO scores 620:
20 and 30- year or more amortizing
fixed-rate . . . . . . . . . . . . . . . . 0.9% 8.1% 0.8% 13.4% 1.0% 23.7% 2.7% 16.6% 14.2%
15- year amortizing fixed-rate . . . . . 0.2 4.2 0.1 10.1 0.1 17.6 0.2 1.2 4.7
ARMs/adjustable rate(4) . . . . . . . . . 0.1 10.8 0.1 17.2 0.1 25.4 0.1 9.8 15.4
Interest-only(5) . . . . . . . . . . . . . . 0.1 16.0 0.1 22.4 0.1 34.9 0.1 0.4 30.3
Other(6) . . . . . . . . . . . . . . . . . . 0.1 3.6 0.1 7.4 0.1 14.1 0.1 4.2 5.6
Total FICO scores 620 . . . . . . . 1.2 7.0 0.8 13.5 1.2 24.1 3.2 13.4 12.9
FICO scores of 620 to 659:
20 and 30- year or more amortizing
fixed-rate . . . . . . . . . . . . . . . . 2.0 5.2 1.5 8.9 2.0 18.4 5.5 11.5 10.1
15- year amortizing fixed-rate . . . . . 0.6 2.5 0.1 6.1 0.1 15.1 0.6 0.6 2.8
ARMs/adjustable rate(4) . . . . . . . . . 0.1 5.5 0.1 11.7 0.1 23.6 0.3 2.0 12.6
Interest-only(5) . . . . . . . . . . . . . . 0.1 10.4 0.1 18.6 0.3 31.7 0.4 0.3 27.2
Other(6) . . . . . . . . . . . . . . . . . . 0.1 2.8 0.1 4.8 0.1 5.5 0.1 1.4 4.5
Total FICO scores of 620 to 659 . . . 2.7 4.4 1.7 9.1 2.4 19.4 6.8 8.9 9.4
FICO scores of = 660:
20 and 30- year or more amortizing
fixed-rate . . . . . . . . . . . . . . . . 34.6 1.0 20.3 2.4 12.4 9.2 67.3 2.7 2.8
15- year amortizing fixed-rate . . . . . 13.1 0.4 1.0 1.1 0.2 6.0 14.3 0.1 0.5
ARMs/adjustable rate(4) . . . . . . . . . 2.5 1.1 0.8 4.3 0.8 14.8 4.1 0.5 4.5
Interest-only(5) . . . . . . . . . . . . . . 0.4 3.7 0.7 9.2 2.5 20.7 3.6 0.2 16.2
Other(6) . . . . . . . . . . . . . . . . . . 0.1 2.0 0.1 2.0 0.1 2.0 0.1 0.5 2.0
Total FICO scores = 660 . . . . . . . 50.6 0.8 22.8 2.6 16.0 10.8 89.4 1.9 2.6
FICO scores not available . . . . . . . . . 0.3 4.8 0.2 11.9 0.1 21.4 0.6 5.5 8.9
All FICO scores:
20 and 30- year or more amortizing
fixed-rate . . . . . . . . . . . . . . . . 37.7 1.6 22.5 3.4 15.6 11.5 75.8 4.1 3.9
15- year amortizing fixed-rate . . . . . 13.8 0.6 1.1 1.5 0.2 7.3 15.1 0.1 0.7
ARMs/adjustable rate(4) . . . . . . . . . 2.7 1.8 1.0 5.5 0.9 16.4 4.6 1.0 5.5
Interest-only(5) . . . . . . . . . . . . . . 0.5 4.4 0.8 10.5 2.8 22.2 4.1 0.2 17.6
Other(6) . . . . . . . . . . . . . . . . . . 0.1 8.9 0.1 8.4 0.2 8.4 0.4 6.8 8.6
Total single-family credit guarantee
portfolio(7) . . . . . . . . . . . . . . . 54.8% 1.3% 25.5% 3.6% 19.7% 12.8% 100.0% 2.9% 3.6%
By Region(8)
FICO scores 620:
North Central . . . . . . . . . . . . . . . 0.2% 6.3% 0.2% 11.7% 0.2% 20.1% 0.6% 13.4% 12.0%
Northeast . . . . . . . . . . . . . . . . . 0.4 9.3 0.2 19.0 0.3 28.9 0.9 14.3 14.9
Southeast . . . . . . . . . . . . . . . . . 0.2 7.9 0.2 13.9 0.3 29.5 0.7 13.9 15.9
Southwest . . . . . . . . . . . . . . . . . 0.2 5.1 0.1 11.0 0.1 19.5 0.4 9.4 8.0
West . . . . . . . . . . . . . . . . . . . . 0.2 4.6 0.1 9.1 0.3 19.5 0.6 16.2 11.8
Total FICO scores 620 . . . . . . . 1.2 7.0 0.8 13.5 1.2 24.1 3.2 13.4 12.9
FICO scores of 620 to 659:
North Central . . . . . . . . . . . . . . . 0.5 4.0 0.3 8.2 0.5 15.1 1.3 8.7 8.4
Northeast . . . . . . . . . . . . . . . . . 0.8 5.8 0.5 12.9 0.4 23.3 1.7 9.1 10.3
Southeast . . . . . . . . . . . . . . . . . 0.5 5.2 0.3 9.5 0.6 24.1 1.4 9.1 12.2
Southwest . . . . . . . . . . . . . . . . . 0.5 3.1 0.3 7.0 0.1 13.6 0.9 5.9 5.1
West . . . . . . . . . . . . . . . . . . . . 0.4 3.1 0.3 6.8 0.8 17.6 1.5 12.0 10.0
Total FICO scores of 620 to 659 . . . 2.7 4.4 1.7 9.1 2.4 19.4 6.8 8.9 9.4
FICO scores =660:
North Central . . . . . . . . . . . . . . . 8.5 0.7 4.7 2.3 2.8 7.4 16.0 1.6 2.0
Northeast . . . . . . . . . . . . . . . . . 14.9 1.0 5.7 3.9 2.0 12.6 22.6 1.6 2.3
Southeast . . . . . . . . . . . . . . . . . 7.1 1.2 3.9 2.8 3.8 14.4 14.8 2.1 4.2
Southwest . . . . . . . . . . . . . . . . . 7.4 0.6 2.7 2.0 0.4 6.2 10.5 0.9 1.1
West . . . . . . . . . . . . . . . . . . . . 12.7 0.5 5.8 1.7 7.0 10.1 25.5 2.9 3.0
Total FICO scores = 660 . . . . . . . 50.6 0.8 22.8 2.6 16.0 10.8 89.4 1.9 2.6
Total FICO scores not available . . . . 0.3 4.8 0.2 11.9 0.1 21.4 0.6 5.5 8.9
All FICO scores:
North Central . . . . . . . . . . . . . . . 9.1 1.0 5.3 3.2 3.6 9.5 18.0 2.6 2.9
Northeast . . . . . . . . . . . . . . . . . 16.1 1.6 6.4 5.3 2.7 15.8 25.2 2.7 3.4
Southeast . . . . . . . . . . . . . . . . . 7.9 1.8 4.4 4.0 4.7 16.8 17.0 3.4 5.5
Southwest . . . . . . . . . . . . . . . . . 8.2 1.1 3.2 3.1 0.6 9.4 12.0 1.8 1.8
West . . . . . . . . . . . . . . . . . . . . 13.5 0.7 6.2 2.1 8.1 11.3 27.8 3.8 3.6
Total single-family credit guarantee
portfolio(7) . . . . . . . . . . . . . . . . 54.8% 1.3% 25.5% 3.6% 19.7% 12.8% 100.0% 2.9% 3.6%
By Product Type
FICO scores 620:
20 and 30- year or more amortizing
fixed-rate . . . . . . . . . . . . . . . . 1.1% 8.6% 0.8% 15.1% 0.9% 27.5% 2.8% 12.9% 15.1%
15- year amortizing fixed-rate . . . . . 0.2 4.6 0.1 11.8 0.1 22.2 0.2 1.8 5.1
ARMs/adjustable rate(4) . . . . . . . . . 0.1 12.2 0.1 18.4 0.1 28.6 0.1 7.6 16.9
Interest only(5) . . . . . . . . . . . . . . 0.1 17.6 0.1 25.3 0.1 39.9 0.2 0.9 33.3
Other(6) . . . . . . . . . . . . . . . . . . 0.1 3.7 0.1 8.5 0.1 13.2 0.1 3.1 5.6
Total FICO scores 620 . . . . . . . 1.4 7.6 0.9 15.3 1.1 27.9 3.4 10.4 13.9
FICO scores of 620 to 659:
20 and 30- year or more amortizing
fixed-rate . . . . . . . . . . . . . . . . 2.4 5.2 1.7 9.8 1.8 20.5 5.9 8.3 10.3
15- year amortizing fixed-rate . . . . . 0.6 2.6 0.1 7.3 0.1 16.6 0.6 0.9 3.0
ARMs/adjustable rate(4) . . . . . . . . . 0.1 6.0 0.1 13.5 0.1 25.9 0.3 1.5 13.6
Interest only(5) . . . . . . . . . . . . . . 0.1 10.9 0.2 20.6 0.3 35.6 0.5 0.9 29.2
Other(6) . . . . . . . . . . . . . . . . . . 0.1 2.6 0.1 5.4 0.1 5.3 0.1 1.0 4.3
Total FICO scores of 620 to 659 . . . 3.1 4.5 2.0 10.3 2.2 22.0 7.3 6.5 9.9
FICO scores of = 660:
20 and 30- year or more amortizing
fixed-rate . . . . . . . . . . . . . . . . 36.5 1.0 20.0 2.8 10.4 10.4 66.9 1.9 2.8
15- year amortizing fixed-rate . . . . . 12.5 0.4 0.9 1.4 0.1 7.3 13.5 0.1 0.5
ARMs/adjustable rate(4) . . . . . . . . . 1.9 1.6 0.8 5.4 0.8 17.0 3.5 0.4 5.6
Interest only(5) . . . . . . . . . . . . . . 0.7 3.7 1.2 10.3 2.8 23.1 4.7 0.4 16.7
Other(6) . . . . . . . . . . . . . . . . . . 0.1 2.1 0.1 2.0 0.1 1.3 0.1 0.4 1.7
Total FICO scores = 660 . . . . . . . 51.6 0.8 22.9 3.1 14.2 12.6 88.7 1.3 2.7
FICO scores not available . . . . . . . . . 0.4 4.6 0.1 11.9 0.1 23.7 0.6 4.1 8.8
All FICO scores:
20 and 30- year or more amortizing
fixed-rate . . . . . . . . . . . . . . . . 40.2 1.6 22.6 3.9 13.2 13.1 76.0 2.9 4.0
15- year amortizing fixed-rate . . . . . 13.3 0.6 0.9 2.0 0.2 8.8 14.4 0.2 0.8
ARMs/adjustable rate(4) . . . . . . . . . 2.1 2.4 1.0 7.0 0.9 18.7 4.0 0.8 6.7
Interest only(5) . . . . . . . . . . . . . . 0.7 4.5 1.3 11.7 3.2 24.9 5.2 0.5 18.4
Other(6) . . . . . . . . . . . . . . . . . . 0.2 9.3 0.1 8.6 0.1 7.3 0.4 5.2 8.6
Total single-family credit guarantee
portfolio(7) . . . . . . . . . . . . . . . 56.5% 1.4% 25.9% 4.3% 17.6% 14.9% 100.0% 2.1% 3.8%
By Region(8)
FICO scores 620:
North Central . . . . . . . . . . . . . . . 0.2% 7.1% 0.2% 13.7% 0.2% 22.5% 0.6% 10.9% 13.0%
Northeast . . . . . . . . . . . . . . . . . 0.5 9.4 0.3 19.9 0.2 30.5 1.0 10.7 14.5
Southeast . . . . . . . . . . . . . . . . . 0.2 8.4 0.2 15.5 0.3 31.9 0.7 10.7 16.4
Southwest . . . . . . . . . . . . . . . . . 0.3 5.9 0.1 12.7 0.1 24.1 0.5 7.6 9.2
West . . . . . . . . . . . . . . . . . . . . 0.2 5.6 0.1 13.5 0.3 28.0 0.6 12.3 15.8
Total FICO scores 620 . . . . . . . 1.4 7.6 0.9 15.3 1.1 27.9 3.4 10.4 13.9
FICO scores of 620 to 659:
North Central . . . . . . . . . . . . . . . 0.6 4.3 0.4 9.6 0.4 16.6 1.4 6.6 8.9
Northeast . . . . . . . . . . . . . . . . . 0.9 5.4 0.6 13.7 0.3 23.2 1.8 6.4 9.6
Southeast . . . . . . . . . . . . . . . . . 0.5 5.3 0.4 10.0 0.6 25.5 1.5 6.6 12.1
Southwest . . . . . . . . . . . . . . . . . 0.6 3.4 0.3 8.1 0.1 15.3 1.0 4.5 5.6
West . . . . . . . . . . . . . . . . . . . . 0.5 3.5 0.3 9.6 0.8 23.7 1.6 8.5 12.7
Total FICO scores of 620 to 659 . . . 3.1 4.5 2.0 10.3 2.2 22.0 7.3 6.5 9.9
FICO scores of = 660:
North Central . . . . . . . . . . . . . . . 8.9 0.7 4.9 2.8 2.3 7.9 16.1 1.2 2.1
Northeast . . . . . . . . . . . . . . . . . 15.0 1.0 5.6 4.4 1.5 12.0 22.1 1.1 2.1
Southeast . . . . . . . . . . . . . . . . . 7.4 1.2 4.1 3.0 3.6 15.1 15.1 1.4 4.1
Southwest . . . . . . . . . . . . . . . . . 7.3 0.7 2.9 2.3 0.3 6.8 10.5 0.7 1.2
West . . . . . . . . . . . . . . . . . . . . 13.0 0.6 5.4 2.7 6.5 13.8 24.9 2.1 3.9
Total FICO scores = 660 . . . . . . . 51.6 0.8 22.9 3.1 14.2 12.6 88.7 1.3 2.7
FICO scores not available . . . . . . . 0.4 4.6 0.1 11.9 0.1 23.7 0.6 4.1 8.8
All FICO scores:
North Central . . . . . . . . . . . . . . . 9.6 1.2 5.6 3.9 3.0 10.5 18.2 2.0 3.1
Northeast . . . . . . . . . . . . . . . . . 16.6 1.6 6.4 6.0 2.0 15.4 25.0 1.9 3.2
Southeast . . . . . . . . . . . . . . . . . 8.2 1.9 4.7 4.3 4.5 17.8 17.4 2.4 5.6
Southwest . . . . . . . . . . . . . . . . . 8.2 1.2 3.4 3.6 0.5 10.9 12.1 1.5 2.1
West . . . . . . . . . . . . . . . . . . . . 13.9 0.9 5.8 3.4 7.6 15.5 27.3 2.7 4.7
Total single-family credit guarantee
portfolio(7) . . . . . . . . . . . . . . . . 56.5% 1.4% 25.9% 4.3% 17.6% 14.9% 100.0% 2.1% 3.8%
(1) The current LTV ratios are our estimates. See endnote (5) to Table 45 Characteristics of the Single-Family Credit Guarantee Portfolio for further information.
(2) Based on UPB of the single-family credit guarantee portfolio.
(3) See endnote (2) to Table 56 Credit Concentrations in the Single-Family Credit Guarantee Portfolio.
(4) Includes balloon/resets and option ARM mortgage loans.
(5) Includes both fixed rate and adjustable rate loans. The percentages of interest-only loans which have been modified at period end reflect that a number of these loans have
not yet been assigned to their new product category(post-modification), primarily due to delays in processing.
(6) Consist of FHA/VA and other government guaranteed mortgages.
(7) The total of all FICO scores categories may not sum due to the inclusion of loans where FICO scores are not available in the respective totals for all loans. See
endnote (7) to Table 45 Characteristics of the Single-Family Credit Guarantee Portfolio for further information about our use of FICO scores.
(8) Presentation 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).
2011 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14% % % % % %
2010 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19 0.05 18
2009 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18 0.17 21 0.04 23
2008 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7 2.23 9 1.26 12 0.37
2007 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10 7.49 11 4.92 14 2.24
2006 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7 6.95 9 5.00 11 2.70
2005 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8 4.07 10 2.95 12 1.63
2000 through 2004 . . . . . . . . . . . . . . . . . . . . . . . 17 1.04 22 0.88 28 0.69
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 100% 100% 100%
(1) Calculated for each year of origination as the number of loans that have proceeded to foreclosure transfer or short sale and resulted in a credit loss,
excluding any subsequent recoveries during the period from origination to December 31, 2011, 2010, and 2009, respectively, divided by the number
of loans in our single-family credit guarantee portfolio originated in that year.
The UPB of loans originated after 2008 comprised 51% of our portfolio as of December 31, 2011, including 11% of
our portfolio that were relief refinance mortgages (regardless of LTV ratio). At December 31, 2011, approximately 32% of
our single-family credit guarantee portfolio consisted of mortgage loans originated from 2005 through 2008. Loans
originated from 2005 through 2008 have experienced higher serious delinquency rates in the earlier years of their terms as
compared to our historical experience. We attribute this serious delinquency performance to a number of factors,
including: (a) the expansion of credit terms under which loans were underwritten during these years; (b) an increase in the
origination and our purchase of interest-only and Alt-A mortgage products in these years; and (c) an environment of
persistently high unemployment, decreasing home sales, and broadly declining home prices in the period following the
loans origination. Interest-only and Alt-A products have higher inherent credit risk than traditional fixed-rate mortgage
products.
Legal Structure
Credit Enhancement
(1) Beginning in the second quarter of 2011, we exclude non-consolidated mortgage-related securities for which we do not provide our guarantee. The
prior period has been revised to conform to the current period presentation.
(2) See Delinquencies below for more information about our multifamily delinquency rates.
(3) Original LTV ratios are calculated as the UPB of the mortgage, divided by the lesser of the appraised value of the property at the time of mortgage
origination or, except for refinance loans, the mortgage borrowers purchase price. Second liens not owned or guaranteed by us are excluded from
the LTV ratio calculation. The existence of a second lien reduces the borrowers equity in the property and, therefore, can increase the risk of
default.
(4) Based on either: (a) the year of acquisition, for loans recorded on our consolidated balance sheets; or (b) the year that we issued our guarantee, for
the remaining loans in our multifamily mortgage portfolio.
Our multifamily mortgage portfolio consists of product types that are categorized based on loan terms. Multifamily
loans may be interest-only or amortizing, fixed or variable rate, or may switch between fixed and variable rate over time.
However, our multifamily loans generally have balloon maturities ranging from five to ten years. Amortizing loans reduce
our credit exposure over time because the UPB declines with each mortgage payment. Fixed-rate loans may also create
less risk for us because the borrowers payments are determined at origination, and, therefore, the risk that the monthly
mortgage payment could increase if interest rates rise as with a variable-rate mortgage is eliminated. As of both
December 31, 2011 and 2010, approximately 85% of the multifamily loans on our consolidated balance sheets had fixed
interest rates while the remaining loans had variable interest rates.
164 Freddie Mac
Because most multifamily loans require a significant lump sum (i.e., balloon) payment of unpaid principal at
maturity, the inability to refinance or pay off the loan at maturity is a serious concern for us. Borrowers may be less able
to refinance their obligations during periods of rising interest rates, which could lead to default if the borrower is unable
to find affordable refinancing. Loan size at origination does not generally indicate the degree of a loans risk, but it does
indicate our potential exposure to default.
While we believe the underwriting practices we employ for our multifamily loan portfolio are prudent, the ongoing
weak economic conditions in the U.S. negatively impacted multifamily rental properties. Our delinquency rates have
remained relatively low compared to other industry participants, which we believe to be, in part, the result of our
underwriting standards versus those used by others in the industry.
Although property values increased in recent quarters, they are still below the highs of a few years ago and are lower
than when many of the loans were originally underwritten, particularly in areas where economic conditions remain weak.
As a result, if property values do not continue to improve, borrowers may experience significant difficulty refinancing as
their loans approach maturity, which could increase borrower defaults or increase modification volumes. Of the
$116.1 billion in UPB of our multifamily mortgage portfolio as of December 31, 2011, only 3% and 5% will mature
during 2012 and 2013, respectively, and the remaining 92% will mature in 2014 and beyond.
In certain cases, we may provide short-term loan extensions of up to 12 months for certain borrowers. Modifications
and extensions of loans are performed in an effort to minimize our losses. During the year ended December 31, 2011, we
extended and modified unsecuritized multifamily loans totaling $391 million in UPB, compared with $816 million during
the year ended December 31, 2010. Multifamily unsecuritized loan modifications during the year ended December 31,
2011 included: (a) $99 million in UPB for short-term loan extensions; and (b) $292 million in UPB for loan
modifications. Where we have granted a concession to borrowers experiencing financial difficulties, we account for these
loans as TDRs. When we execute a modification classified as a TDR, the loan is then classified as nonperforming for the
life of the loan regardless of its delinquency status. At December 31, 2011, we had $893 million of multifamily loan UPB
classified as TDRs on our consolidated balance sheets.
We use credit enhancements to mitigate risk of loss on certain multifamily mortgages and housing revenue bonds.
Historically, we required credit enhancements on loans in situations where we delegated the underwriting process for the
loan to the seller/servicer, which provides first loss coverage on the mortgage loan. We may also require credit
enhancements during construction or rehabilitation in cases where we commit to purchase or guarantee a permanent loan
upon completion and in cases where occupancy has not yet reached a level that produces the operating income that was
the basis for underwriting the mortgage. Additionally, certain Other Guarantee Transactions issued by our Multifamily
segment have related subordinated classes, that we do not guarantee, that provide credit loss protection to the senior
classes that we guarantee. Subordinated classes are allocated credit losses prior to the senior classes. See NOTE 4:
MORTGAGE LOANS AND LOAN LOSS RESERVES for information about credit protections and other forms of credit
enhancements covering loans in our multifamily mortgage portfolio as of December 31, 2011 and 2010.
Delinquencies
Our multifamily delinquency rates include all multifamily loans that we own, that are collateral for Freddie Mac
securities, and that are covered by our other guarantee commitments, except financial guarantees that are backed by HFA
bonds because these securities do not expose us to meaningful amounts of credit risk due to the guarantee or credit
enhancement provided by the U.S. government. We report multifamily delinquency rates based on UPB of mortgage loans
that are two monthly payments or more past due or in the process of foreclosure, as reported by our servicers. Mortgage
loans whose contractual terms have been modified under agreement with the borrower are not counted as delinquent as
long as the borrower is current under the modified terms. In addition, multifamily loans are not counted as delinquent if
the borrower has entered into a forbearance agreement and is abiding by the terms of the agreement, whereas single-
family loans for which the borrower has been granted forbearance will continue to reflect the past due status of the
borrower, if applicable.
Our delinquency rates for multifamily loans are positively impacted to the extent we have been successful in working
with troubled borrowers to modify their loans prior to becoming delinquent or by providing temporary relief through loan
modifications, including short-term extensions. Some geographic areas, including the states of Arizona, Georgia, and
Nevada, continue to exhibit weaker than average fundamentals that increase our risk of future losses. We own or
guarantee loans in these states that are non-performing, or we believe are at risk of default. For further information
regarding concentrations in our multifamily mortgage portfolio, including regional geographic composition, see
NOTE 16: CONCENTRATION OF CREDIT AND OTHER RISKS.
165 Freddie Mac
Our multifamily mortgage portfolio delinquency rate declined to 0.22% at December 31, 2011 from 0.26% at
December 31, 2010. Our delinquency rate for credit-enhanced loans was 0.52% and 0.85% at December 31, 2011 and
2010, respectively, and for non-credit-enhanced loans was 0.11% and 0.12% at December 31, 2011 and 2010, respectively.
As of December 31, 2011, more than one-half of our multifamily loans that were two monthly payments or more past
due, measured both in terms of number of loans and on a UPB basis, had credit enhancements that we currently believe
will mitigate our expected losses on those loans.
Non-Performing Assets
Non-performing assets consist of single-family and multifamily loans that have undergone a TDR, single-family
seriously delinquent loans, multifamily loans that are three or more payments past due or in the process of foreclosure,
and REO assets, net. Non-performing assets also include multifamily loans that are deemed impaired based on
management judgment. We place non-performing loans on non-accrual status when we believe the collectability of interest
and principal on a loan is not reasonably assured, unless the loan is well secured and in the process of collection. When a
loan is placed on non-accrual status, any interest income accrued but uncollected is reversed. Thereafter, interest income is
recognized only upon receipt of cash payments. We did not accrue interest on any loans three monthly payments or more
past due in 2011 or 2010.
We classify TDRs as those loans where we have granted a concession to a borrower that is experiencing financial
difficulties. TDRs remain categorized as non-performing throughout the remaining life of the loan regardless of whether
the borrower makes payments which return the loan to a current payment status after modification. See NOTE 5:
INDIVIDUALLY IMPAIRED AND NON-PERFORMING LOANS for further information about our TDRs.
The table below provides detail on non-performing loans and REO assets on our consolidated balance sheets and
non-performing loans underlying our financial guarantees.
(1) Mortgage loan amounts are based on UPB and REO, net is based on carrying values.
(2) As of December 31, 2011, approximately $872 million in UPB of these loans were current.
(3) Represents loans recognized by us on our consolidated balance sheets, including loans removed from PC trusts due to the borrowers serious
delinquency.
(4) Of this amount, $1.8 billion, $1.6 billion, and $1.1 billion of UPB were current at December 31, 2011, December 31, 2010, and December 31, 2009
respectively.
The amount of non-performing assets increased to $129.2 billion as of December 31, 2011, from $125.4 billion at
December 31, 2010, primarily due to a significant increase in single-family loans classified as TDRs, which was
substantially offset by a decline in the rate at which loans transitioned into serious delinquency. The UPB of loans
categorized as TDRs increased to $57.0 billion at December 31, 2011 from $30.7 billion at December 31, 2010, largely
due to a continued high volume of loan modifications during 2011 in which we extended the term of the loan, decreased
the contractual interest rate, deferred the balance on which contractual interest is computed, or made a combination of
these changes. TDRs during 2011 include HAMP and non-HAMP loan modifications as well as loans in modification trial
periods and certain other loss mitigation actions. See NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING
166 Freddie Mac
POLICIES, and NOTE 5: INDIVIDUALLY IMPAIRED AND NON-PERFORMING LOANS for information about our
implementation of an amendment to the accounting guidance on classification of loans as TDRs in 2011. In 2011, our
non-HAMP modifications comprised a greater portion of our completed loan modification volume and the volume of
HAMP modifications declined, compared to 2010 activity. We expect our non-performing assets, including loans deemed
to be TDRs, to remain at elevated levels in 2012.
The table below 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 serious delinquency trends of our single-family credit guarantee portfolio. See Table 57
Single-Family Credit Guarantee Portfolio by Attribute Combinations for information about regional serious delinquency
rates.
(1) See endnote (8) to Table 57 Single-Family Credit Guarantee Portfolio by Attribute Combinations for a description of these regions.
(2) Represents REO assets associated with previously non-consolidated mortgage trusts recognized upon adoption of the amendment to the accounting
guidance for consolidation of VIEs on January 1, 2010.
After having increased 60% in 2010, our REO property inventory declined 16% in 2011. The decline in 2011 is
primarily due to a decline in the volume of single-family foreclosures caused by delays in the foreclosure process,
combined with continued strong levels of REO disposition activity during the period. The increase in 2010 was due, in
part, to increased levels of foreclosures associated with borrowers that did not qualify for or did not successfully complete
a modification or short sale. The average length of time for foreclosure of a Freddie Mac loan significantly increased in
recent years due to temporary suspensions, delays, and other factors. During 2011 and 2010, the nationwide average for
completion of a foreclosure (as measured from the date of the last scheduled payment made by the borrower) on our
single-family delinquent loans, excluding those underlying our Other Guarantee Transactions, was 506 days and 446 days,
respectively, which included: (a) an average of 633 days and 551 days, respectively, for foreclosures completed in states
that require a judicial foreclosure process; and (b) an average of 449 days and 384 days, respectively, for foreclosures
completed in states that do not require a judicial foreclosure process. We experienced significant variability in the average
time for foreclosure by state in 2011. For example, during 2011, the average time for completion of foreclosures
associated with loans in our single-family credit guarantee portfolio, excluding Other Guarantee Transactions, was
375 days in Michigan and 841 days in Florida.
We expect the pace of our REO acquisitions will continue to be affected by delays in the foreclosure process in
2012. However, we expect the volume of our REO acquisitions will likely remain elevated, as we have a large inventory
of seriously delinquent loans in our single-family credit guarantee portfolio, many of which will likely complete the
foreclosure process and transition to REO during 2012 as our servicers continue to work through their foreclosure-related
issues. This inventory of seriously delinquent loans arose due to various factors and events that have lengthened the
problem loan resolution process and delayed the transition of such loans to a workout or foreclosure transfer (and then, to
REO). These factors and events include the effect of HAMP, suspensions of foreclosure transfers, and the increasingly
lengthy foreclosure process in many states.
167 Freddie Mac
Our single-family REO acquisitions in 2011 were most significant in the states of California, Michigan, Georgia,
Florida, and Arizona, which collectively represented 43% of total REO acquisitions based on the number of properties.
These states collectively represented 48% of total REO acquisitions in 2010. The states with the most properties in our
REO inventory as of December 31, 2011 were Michigan and California. At December 31, 2011, our REO inventory in
Michigan and California comprised 12% and 10%, respectively, of total REO property inventory, based on the number of
properties.
We are limited in our REO disposition efforts by the capacity of the market to absorb large numbers of foreclosed
properties. An increasing portion of our REO acquisitions are: (a) located in jurisdictions that require a period of time
after foreclosure during which the borrower may reclaim the property; or (b) occupied and we have either retained the
tenant under an existing lease or begun the process of eviction. All of these factors resulted in an increase in the aging of
our inventory. During the period when the borrower may reclaim the property, or we are completing the eviction process,
we are not able to market the property. As of December 31, 2011, 2010, and 2009, approximately 33%, 28%, and 35%,
respectively, of our REO properties were not marketable due to the above conditions. Our temporary suspension of certain
REO sales during the fourth quarter of 2010 (for up to three months) due to concerns about deficiencies in foreclosure
documentation practices also caused the average holding period to increase. Primarily for these reasons, the average
holding period of our REO properties increased in the last two years, though it varies significantly in different states.
Excluding any post-foreclosure period during which borrowers may reclaim a foreclosed property, the average holding
period associated with our REO dispositions during the years ended December 31, 2011 and 2010 was 197 days and
155 days, respectively. As of December 31, 2011 and 2010, the percentage of our single-family REO property inventory
that had been held for sale longer than one year was 7.1% and 3.4%, respectively. We continue to actively market these
properties through our established initiatives.
The percentage of interest-only and Alt-A loans in our single-family credit guarantee portfolio, based on UPB, was
approximately 4% and 5%, respectively, at December 31, 2011 and was 8% on a combined basis. The percentage of our
REO acquisitions in 2011 that had been financed by either of these loan types represented approximately 30% of our total
REO acquisitions, based on loan amount prior to acquisition.
We began to expand our methods for REO sales during 2010, including the expanded use of REO auctions and bulk
sale transactions of properties in certain geographical areas. Although auction and bulk sales are potentially available for
use in all geographical areas, these methods of REO disposition have to date only been used for our more difficult to sell
or highly distressed inventory. As a result, in 2011, auction and bulk sales represented an insignificant portion of our REO
dispositions. In addition, in certain locations we have offered REO properties for purchase by Neighborhood Stabilization
Program grant recipients prior to listing the properties for sale to the general public. For the first 15 days following
listing, we also offer most of our REO properties exclusively to Neighborhood Stabilization Program grant recipients and
purchasers who intend to occupy the properties.
On August 10, 2011, FHFA, in consultation with Treasury and HUD, announced a request for information seeking
input on new options for sales and rentals of single-family REO properties held by Freddie Mac, Fannie Mae and FHA.
According to the announcement, the objective of the request for information was to help address current and future REO
inventory. The request for information solicited alternatives for maximizing value to taxpayers and increasing private
investment in the housing market, including approaches that support rental and affordable housing needs. We are
participating in discussions with FHFA and other agencies with respect to this initiative. It is too early to determine the
impact this initiative may have on the levels of our REO property inventory, the process for disposing of REO property or
our REO operations expense.
(1) Represent the carrying amount of a loan that has been discharged in order to remove the loan from our consolidated balance sheets at the time of
resolution, regardless of when the impact of the credit loss was recorded on our consolidated statements of income and comprehensive income
through the provision for credit losses or losses on loans purchased. Charge-offs primarily result from foreclosure transfers and short sales and are
generally calculated as the recorded investment of a loan at the date it is discharged less the estimated value in final disposition or actual net sales in
a short sale.
(2) Recoveries of charge-offs primarily result from foreclosure transfers and short sales on loans where a share of default risk has been assumed by
mortgage insurers, servicers, or other third parties through credit enhancements.
(3) Excludes foregone interest on non-performing loans, which reduces our net interest income but is not reflected in our total credit losses. In addition,
excludes other market-based credit losses: (a) incurred on our investments in mortgage loans and mortgage-related securities; and (b) recognized in
our consolidated statements of income and comprehensive income.
(4) Calculated as credit losses divided by the average carrying value of our total mortgage portfolio, excluding non-Freddie Mac mortgage-related
securities and that portion of REMICs and Other Structured Securities that are backed by Ginnie Mae Certificates.
Our credit loss performance metric generally measures losses at the conclusion of the loan and related collateral
resolution process. There is a significant lag in time from the implementation of problem loan workout activities until the
final resolution of seriously delinquent mortgage loans and REO assets. Our credit loss performance is based on our
charge-offs and REO expenses. We primarily record charge-offs at the time we take ownership of a property through
foreclosure and at the time of settlement of foreclosure alternative transactions. Single-family charge-offs, gross, for 2011
and 2010 were $15.1 billion and $16.7 billion, respectively, and were associated with approximately $31.5 billion and
$33.9 billion, respectively, in UPB of loans. Our net charge-offs in 2011 remained elevated, but reflect suppression of
activity due to delays in the foreclosure process and continuing weak market conditions. We expect our charge-offs and
credit losses to remain high in 2012 and they may increase over 2011 levels, due to the large number of single-family
non-performing loans that will likely be resolved as our servicers work through their foreclosure-related issues and
because market conditions, such as home prices and the rate of home sales, continue to remain weak.
Our credit losses during 2011 continued to be disproportionately high in those states that experienced significant
declines in property values since 2006, such as California, Florida, Nevada, and Arizona, which collectively comprised
approximately 60% of our total credit losses in 2011. Due to declines in property values since 2006, we continued to
experience high REO disposition severity ratios on sales of our REO inventory during 2011. In addition, although Alt-A
loans comprised approximately 5% and 6% of our single-family credit guarantee portfolio at December 31, 2011 and
2010, respectively, these loans accounted for approximately 28% and 37% of our credit losses in 2011 and 2010,
169 Freddie Mac
respectively. See Table 3 Credit Statistics, Single-Family Credit Guarantee Portfolio for information on REO
disposition severity ratios, and see NOTE 16: CONCENTRATION OF CREDIT AND OTHER RISKS for additional
information about our credit losses.
The table below provides detail by region for charge-offs. Regional charge-off trends generally follow a pattern that
is similar to, but lags, that of regional serious delinquency trends.
(1) See endnote (8) to Table 57 Single-Family Credit Guarantee Portfolio by Attribute Combinations for a description of these regions.
(2) Recoveries of charge-offs primarily result from foreclosure transfers and short sales on loans where a share of default risk has been assumed by
mortgage insurers, servicers, or other third parties through credit enhancements.
(1) Consists of foreclosure transfer or foreclosures alternative, such as a deed in lieu of foreclosure or short sale transaction.
(2) Consists of loans impaired upon purchase which experienced further deterioration in borrower credit.
See CONSOLIDATED RESULTS OF OPERATIONS Provision for Credit Losses, for a discussion of our
provision for credit losses and charge-off activity.
Liquidity
Our business activities require that we maintain adequate liquidity to fund our operations, which may include the
need to make payments of principal and interest on our debt securities, including securities issued by our consolidated
trusts, and otherwise make payments related to our guarantees of mortgage assets; make payments upon the maturity,
redemption or repurchase of our debt securities; make net payments on derivative instruments; pay dividends on our
senior preferred stock; purchase mortgage-related securities and other investments; purchase mortgage loans; and remove
modified or seriously delinquent loans from PC trusts.
We fund our cash requirements primarily by issuing short-term and long-term debt. Other sources of cash include:
receipts of principal and interest payments on securities or mortgage loans we hold;
other cash flows from operating activities, including the management and guarantee fees we receive in connection
with our guarantee activities (excluding those we must remit to Treasury pursuant to the Temporary Payroll Tax
Cut Continuation Act of 2011 commencing in April 2012);
borrowings against mortgage-related securities and other investment securities we hold; and
sales of securities we hold.
174 Freddie Mac
We have also received substantial amounts of cash from Treasury pursuant to draws under the Purchase Agreement,
which are made to address deficits in our net worth. We received $8.0 billion in cash from Treasury during 2011 pursuant
to draws under the Purchase Agreement.
We believe that the support provided by Treasury pursuant to the Purchase Agreement currently enables us to
maintain our access to the debt markets and to have adequate liquidity to conduct our normal business activities, although
the costs of our debt funding could vary.
As a result of the potential that the U.S. would exhaust its borrowing authority under the statutory debt limit and
market concerns regarding the potential for a downgrade in the credit rating of the U.S. government, beginning in the
third quarter of 2011, we changed the composition of our portfolio of liquid assets to hold more cash and overnight
investments. On August 5, 2011, S&P lowered the long-term credit rating of the U.S. government to AA+ from AAA
and assigned a negative outlook to the rating. On August 8, 2011, S&P lowered our senior long-term debt credit rating to
AA+ from AAA and assigned a negative outlook to the rating. While this could adversely affect our liquidity, and the
supply and cost of debt financing available to us in the future, we have not yet experienced such adverse effects. For more
information, see Other Debt Securities Credit Ratings and RISK FACTORS Competitive and Market Risks
Any downgrade in the credit ratings of the U.S. government would likely be followed by a downgrade in our credit
ratings. A downgrade in the credit ratings of our debt could adversely affect our liquidity and other aspects of our
business.
We may require cash in order to fulfill our mortgage purchase commitments. Historically, we fulfilled our purchase
commitments related to our mortgage purchase flow business primarily by swap transactions, whereby our customers
exchanged mortgage loans for PCs, rather than using cash. However, it is at the discretion of the seller, subject to
limitations imposed by the contract governing the commitment, whether the purchase commitment is fulfilled through a
swap transaction or with cash. We provide liquidity to our seller/servicers through our cash purchase program. Loans
purchased through the cash purchase program can be sold to investors through a cash auction of PCs, and, in the interim,
are carried as mortgage loans on our consolidated balance sheets. See OFF-BALANCE SHEET ARRANGEMENTS for
additional information regarding our mortgage purchase commitments.
We make extensive use of the Fedwire system in our business activities. The Federal Reserve requires that we fully
fund our account in the Fedwire system to the extent necessary to cover cash payments on our debt and mortgage-related
securities each day, before the Federal Reserve Bank of New York, acting as our fiscal agent, will initiate such payments.
We routinely use an open line of credit with a third party, which provides intraday liquidity to fund our activities through
the Fedwire system. This line of credit is an uncommitted intraday loan facility. As a result, while we expect to continue
to use the facility, we may not be able to draw on it, if and when needed. This line of credit requires that we post
collateral that, in certain circumstances, the secured party has the right to repledge to other third parties, including the
Federal Reserve Bank. As of December 31, 2011, we pledged approximately $10.5 billion of securities to this secured
party. See NOTE 7: INVESTMENTS IN SECURITIES Collateral Pledged for further information.
Depending on market conditions and the mix of derivatives we employ in connection with our ongoing risk
management activities, our derivative portfolio can be either a net source or a net use of cash. For example, depending on
the prevailing interest-rate environment, interest-rate swap agreements could cause us either to make interest payments to
counterparties or to receive interest payments from counterparties. Purchased options require us to pay a premium while
written options allow us to receive a premium.
We are required to pledge collateral to third parties in connection with secured financing and daily trade activities. In
accordance with contracts with certain derivative counterparties, we post collateral to those counterparties for derivatives
in a net loss position, after netting by counterparty, above agreed-upon posting thresholds. See NOTE 7:
INVESTMENTS IN SECURITIES Collateral Pledged for information about assets we pledge as collateral.
We are involved in various legal proceedings, including those discussed in LEGAL PROCEEDINGS, which may
result in a use of cash in order to settle claims or pay certain costs.
For more information on our short- and long-term liquidity needs, see CONTRACTUAL OBLIGATIONS.
Liquidity Management
Maintaining sufficient liquidity is of primary importance and we continually strive to enhance our liquidity
management practices and policies. Under these practices and policies, we maintain an amount of cash and cash
equivalent reserves in the form of liquid, high quality short-term investments that is intended to enable us to meet ongoing
cash obligations for an extended period, in the event we do not have access to the short- or long-term unsecured debt
markets. We also actively manage the concentration of debt maturities and closely monitor our monthly maturity profile.
175 Freddie Mac
Our liquidity management policies provide for us to:
maintain funds sufficient to cover our maximum cash liquidity needs for at least the following 35 calendar days,
assuming no access to the short- or long-term unsecured debt markets. At least 50% of such amount, which is
based on the average daily 35-day cash liquidity needs of the preceding three months, must be held: (a) in
U.S. Treasury securities with remaining maturities of five years or less or other U.S. government-guaranteed
securities with remaining maturities of one year or less; or (b) as uninvested cash at the Federal Reserve Bank of
New York;
limit the proportion of debt maturing within the next year. We actively manage the composition of short-and long-
term debt, as well as our patterns of redemption of callable debt, to manage the proportion of effective short-term
debt to reduce the risk that we will be unable to refinance our debt as it comes due; and
maintain unencumbered collateral with a value greater than or equal to the largest projected cash shortfall on any
one day over the following 365 calendar days, assuming no access to the short- and long-term unsecured debt
markets. This is based on a daily forecast of all existing contractual cash obligations over the following 365
calendar days.
Throughout 2011, we complied with all requirements under our liquidity management policies. Furthermore, the
majority of the funds used to cover our short-term cash liquidity needs was invested in short-term assets with a rating of
A-1/P-1 or AAA or was issued by a counterparty with that rating. In the event of a downgrade of a position or
counterparty, as applicable, below minimum rating requirements, our credit governance policies require us to exit from the
position within a specified period.
We also continue to manage our debt issuances to remain in compliance with the aggregate indebtedness limits set
forth in the Purchase Agreement.
We are monitoring events related to troubled European countries and have taken a number of actions designed to
reduce our exposures, including exposures related to certain derivative portfolio and cash and other investments portfolio
counterparties. For more information, see RISK MANAGEMENT Credit Risk Institutional Credit Risk Selected
European Sovereign and Non-Sovereign Exposures.
To facilitate cash management, we forecast cash outflows. These forecasts help us to manage our liabilities with
respect to asset purchases and runoff, when financial markets are not in crisis. For further information on our management
of interest-rate risk associated with asset and liability management, see QUANTITATIVE AND QUALITATIVE
DISCLOSURES ABOUT MARKET RISK.
Notwithstanding these practices and policies, our ability to maintain sufficient liquidity, including by pledging
mortgage-related and other securities as collateral to other financial institutions, could cease or change rapidly and the
cost of the available funding could increase significantly due to changes in market confidence and other factors. For more
information, see RISK FACTORS Competitive and Market Risks Our investment activities may be adversely
affected by limited availability of financing and increased funding costs.
(1) Excludes federal funds purchased and securities sold under agreements to repurchase, and lines of credit. Also excludes debt securities of
consolidated trusts held by third parties.
(2) Includes $450 million and $1.4 billion of medium-term notes non-callable issued for the years ended December 31, 2011 and 2010, respectively,
which were related to debt exchanges.
Medium-term Notes
We issue a variety of fixed- and variable-rate medium-term notes, including callable and non-callable fixed-rate
securities, zero-coupon securities and variable-rate securities, with various maturities ranging up to 30 years. Medium-term
178 Freddie Mac
notes with original maturities of one year or less are classified as short-term debt. Medium-term notes typically contain
call provisions, effective as early as three months or as long as ten years after the securities are issued.
Subordinated Debt
During 2011 and 2010, we did not call or issue any Freddie SUBS securities. At December 31, 2011 and 2010, the
balance of our subordinated debt outstanding was $0.4 billion and $0.7 billion, respectively. 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 our subordinated debt. Under the Purchase Agreement, we may not issue subordinated
debt without Treasurys consent.
Other Debt Retirement Activities
We repurchase, call, or exchange our outstanding medium- and long-term debt securities from time to time to help
support the liquidity and predictability of the market for our other debt securities and to manage our mix of liabilities
funding our assets. When our debt securities become seasoned or one-time call options on our debt securities expire, they
may become less liquid, which could cause their price to decline. By repurchasing debt securities, we help preserve the
liquidity of our debt securities and improve their price performance, which helps to reduce our funding costs over the
long-term. Our repurchase activities also help us manage the funding mismatch, or duration gap, created by changes in
interest rates. For example, when interest rates decline, the expected lives of our investments in mortgage-related
securities decrease, reducing the need for long-term debt. We use a number of different means to shorten the effective
weighted average lives of our outstanding debt securities and thereby manage the duration gap, including retiring long-
term debt through repurchases or calls; changing our debt funding mix between short- and long-term debt; or using
derivative instruments, such as entering into receive-fixed swaps or terminating or assigning pay-fixed swaps. From time
to time, we may also enter into transactions in which we exchange newly issued debt securities for similar outstanding
debt securities held by investors.
The table below provides the par value, based on settlement dates, of other debt securities we repurchased, called,
and exchanged during 2011 and 2010.
Table 68 Other Debt Security Repurchases, Calls, and Exchanges(1)
Year Ended December 31,
2011 2010
(in millions)
Repurchases of outstanding AReference Notes securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 258 $ 262
Repurchases of outstanding medium-term notes. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12,064 5,301
Calls of callable medium-term notes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 185,489 256,256
Exchanges of medium-term notes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 450 1,364
(1) Excludes debt securities of consolidated trusts held by third parties.
Our credit ratings are primarily based on the support we receive from Treasury, and therefore are affected by changes
in the credit ratings of the U.S. government.
On November 21, 2011, the Joint Select Committee (formed as a result of the Budget and Control Act of
2011) announced that efforts to reach a deficit reduction agreement had been unsuccessful. Subsequent to this
announcement, on November 28, 2011, Fitch affirmed the U.S. governments long-term Issuer Default Rating, or IDR, at
AAA and revised the rating outlook to negative from stable. On this date, Fitch also affirmed the ratings on our senior
long-term debt, short-term debt, subordinated debt, and preferred stock, while affirming our AAA IDR and revising the
outlook on this rating to negative from stable.
For information about other ratings actions in 2011 and factors that could lead to future ratings actions and the
potential impact of a downgrade in our credit ratings, see RISK FACTORS Competitive and Market Risks Any
downgrade in the credit ratings of the U.S. government would likely be followed by a downgrade in our credit ratings. A
downgrade in the credit ratings of our debt could adversely affect our liquidity and other aspects of our business.
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.
Cash and Cash Equivalents, Federal Funds Sold, Securities Purchased Under Agreements to Resell, and Non-
Mortgage-Related Securities
Excluding amounts related to our consolidated VIEs, we held $67.8 billion in the aggregate of cash and cash
equivalents, securities purchased under agreements to resell, and non-mortgage-related securities at December 31, 2011.
These investments are important to our cash flow and asset and liability management and our ability to provide liquidity
and stability to the mortgage market. At December 31, 2011, our non-mortgage-related securities primarily consisted of
FDIC-guaranteed corporate medium-term notes and Treasury notes that we could sell to provide us with an additional
source of liquidity to fund our business operations. For additional information on these assets, see CONSOLIDATED
BALANCE SHEETS ANALYSIS Cash and Cash Equivalents, Federal Funds Sold and Securities Purchased Under
Agreements to Resell and Investments in Securities Non-Mortgage-Related Securities.
Capital Resources
Our entry into conservatorship resulted in significant 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. FHFA continues to monitor our capital levels, but the existing
statutory and FHFA-directed regulatory capital requirements are not binding during conservatorship. We continue to
provide submissions to FHFA on minimum capital. See NOTE 15: REGULATORY CAPITAL for our minimum capital
requirement, core capital, and GAAP net worth results as of December 31, 2011 and 2010. In addition, notwithstanding
our failure to maintain required capital levels, FHFA directed us to continue to make interest and principal payments on
our subordinated debt. For more information, see BUSINESS Regulation and Supervision Federal Housing Finance
Agency Subordinated Debt.
Under the Purchase Agreement, Treasury made a commitment to provide us with funding, under certain conditions,
to eliminate deficits in our net worth. 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. In each case, the
amount of the draw cannot exceed the maximum aggregate amount that may be funded under the Purchase Agreement.
We are focusing our risk and capital management, consistent with the objectives of conservatorship, on, among other
things, maintaining a positive balance of GAAP equity in order to reduce the likelihood that we will need to make
additional draws on the Purchase Agreement with Treasury. Our business objectives and strategies have in some cases
been altered since we were placed into conservatorship, and may continue to change. Certain changes to our business
objectives and strategies are designed to provide support for the mortgage market in a manner that serves public policy
and other non-financial objectives. In this regard, we are focused on serving our mission, helping families keep their
homes, and stabilizing the economy by playing a vital role in the Administrations housing programs. However, these
changes to our business objectives and strategies may conflict with maintaining positive GAAP equity.
Under the GSE Act, FHFA must place us into receivership if FHFA determines in writing that our assets are and
have been less than our obligations for a period of 60 days. Obtaining funding from Treasury pursuant to its commitment
under the Purchase Agreement enables us to avoid being placed into receivership by FHFA. At December 31, 2011, our
liabilities exceeded our assets under GAAP by $146 million. Accordingly, we must obtain funding from Treasury pursuant
to its commitment under the Purchase Agreement in order to avoid being placed into receivership by FHFA. FHFA, as
Conservator, will submit a draw request to Treasury under the Purchase Agreement in the amount of $146 million, which
we expect to receive by March 31, 2012. See BUSINESS Regulation and Supervision Federal Housing Finance
Agency Receivership for additional information on mandatory receivership.
We expect to make further draws under the Purchase Agreement in future periods. Given the substantial senior
preferred stock dividend obligation to Treasury, which will increase with additional draws, senior preferred stock dividend
payments will increasingly drive our future draw requests. The size and timing of our future draws will be determined by
the dividend obligation and a variety of other factors that could adversely affect our net worth. For more information, see
181 Freddie Mac
RISK FACTORS Conservatorship and Related Matters We expect to make additional draws under the Purchase
Agreement in future periods, which will adversely affect our future results of operations and financial condition.
For more information on the Purchase Agreement, its effect on our business and capital management activities,
factors that could adversely affect the size and timing of further draws, and the potential impact of making additional
draws, see Liquidity Dividend Obligation on the Senior Preferred Stock, BUSINESS Executive Summary
Government Support for Our Business and RISK FACTORS.
(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.
(1) Includes the funds received from Treasury of $8.0 billion and $12.5 billion for 2011 and 2010, respectively, under the Purchase Agreement, which
increased the liquidation preference of our senior preferred stock.
During 2011, the fair value of net assets, before capital transactions, decreased by $21.3 billion, compared to a
$2.9 billion decrease during 2010. The decrease in the fair value of net assets, before capital transactions, during 2011,
was primarily due to: (a) a decrease in the fair value of our single-family loans due to our fourth quarter 2011 change in
estimate discussed below, coupled with a decline in seasonally adjusted home prices in the continued weak credit
environment; and (b) unrealized losses from the widening of OAS levels on our single-family non-agency mortgage-
related securities. The decrease in fair value was partially offset by a tightening of OAS levels on our agency securities
and high estimated core spread income.
During the fourth quarter of 2011, our fair value results as presented in our consolidated fair value balance sheets
were affected by a change in estimate which increased the implied capital costs included in our valuation of single-family
mortgage loans due to a change in the estimation of a risk premium assumption embedded in our modeled valuation of
such loans. This change in estimate led to a $14.2 billion decrease in our fair value measurement of mortgage loans.
186 Freddie Mac
During 2010, the decrease in the fair value of net assets, before capital transactions, was primarily due to: (a) an
increase in the risk premium related to our single-family loans as higher capital was applied reflecting the continued weak
and uncertain credit environment; and (b) a change in the estimation of a risk premium assumption embedded in our
model to apply credit costs, which led to a $6.9 billion decrease in our fair value measurement of mortgage loans. The
decrease in fair value was partially offset by high estimated core spread income and an increase in the fair value of our
investments in residential and commercial mortgage-related securities driven by the tightening of OAS levels.
When the OAS on a given asset widens, the fair value of that asset will typically decline, all other market factors
being equal. However, we believe such OAS widening has the effect of increasing the likelihood that, in future periods,
we will recognize income at a higher spread on this existing asset. The reverse is true when the OAS on a given asset
tightens current period fair values for that asset typically increase due to the tightening in OAS, while future income
recognized on the asset is more likely to be earned at a reduced spread. However, as market conditions change, our
estimate of expected fair value gains and losses from OAS may also change, and the actual core spread income
recognized in future periods could be significantly different from current estimates.
Other Agreements
We own interests in numerous entities that are considered to be VIEs for which we are not the primary beneficiary
and which we do not consolidate in accordance with the accounting guidance for the consolidation of VIEs. These VIEs
relate primarily to our investment activity in mortgage-related assets and non-mortgage assets, and include LIHTC
partnerships, certain Other Guarantee Transactions, and certain asset-backed investment trusts. Our consolidated balance
sheets reflect only our investment in the VIEs, rather than the full amount of the VIEs assets and liabilities. See
NOTE 3: VARIABLE INTEREST ENTITIES for additional information related to our variable interests in these VIEs.
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. For more
information, see RISK MANAGEMENT Credit Risk Institutional Credit Risk Derivative Counterparties. We
also have purchase commitments primarily related to our mortgage purchase flow business, which we principally fulfill by
issuing PCs in swap transactions, and, to a lesser extent, commitments to purchase or guarantee multifamily mortgage
loans that are not accounted for as derivatives and are not recorded on our consolidated balance sheets. These non-
derivative commitments totaled $271.8 billion, $220.7 billion and $325.9 billion, in notional value at December 31, 2011,
2010, and 2009, respectively.
In connection with the execution of the Purchase Agreement, we, through FHFA, in its capacity as Conservator,
issued a warrant to Treasury to purchase 79.9% of our common stock outstanding on a fully diluted basis on the date of
exercise. See NOTE 12: FREDDIE MAC STOCKHOLDERS EQUITY (DEFICIT) for further information.
CONTRACTUAL OBLIGATIONS
The table below provides aggregated information about the listed categories of our contractual obligations as of
December 31, 2011. These contractual obligations affect our short- and long-term liquidity and capital resource needs.
The table includes information about undiscounted future cash payments due under these contractual obligations,
aggregated by type of contractual obligation, including the contractual maturity profile of our debt securities (other than
debt securities of consolidated trusts held by third parties). The timing of actual future payments may differ from those
presented due to a number of factors, including discretionary debt repurchases. Our contractual obligations include other
purchase obligations that are enforceable and legally binding. For purposes of this table, purchase obligations are included
through the termination date specified in the respective agreement, even if the contract is renewable. Many of our
purchase agreements for goods or services include clauses that would allow us to cancel the agreement prior to the
expiration of the contract within a specified notice period; however, this table includes these obligations without regard to
such termination clauses (unless we have provided the counterparty with actual notice of our intention to terminate the
agreement).
In the table below, the amounts of future interest payments on debt securities outstanding at December 31, 2011 are
based on the contractual terms of our debt securities at that date. These amounts were determined using the key
assumptions that: (a) variable-rate debt continues to accrue interest at the contractual rates in effect at December 31, 2011
until maturity; and (b) callable debt continues to accrue interest until its contractual maturity. The amounts of future
interest payments on debt securities presented do not reflect certain factors that will change the amounts of interest
payments on our debt securities after December 31, 2011, such as: (a) changes in interest rates; (b) the call or retirement
of any debt securities; and (c) the issuance of new debt securities. Accordingly, the amounts presented in the table do not
represent a forecast of our future cash interest payments or interest expense.
The table below excludes certain obligations that could significantly affect our short- and long-term liquidity and
capital resource needs. These items, which are listed below, have generally been excluded because the amount and timing
of the related future cash payments are uncertain:
future payments related to debt securities of consolidated trusts held by third parties, because the amount and
timing of such payments are generally contingent upon the occurrence of future events and are therefore uncertain.
These payments generally include payments of principal and interest we make to the holders of our guaranteed
mortgage-related securities in the event a loan underlying a security becomes delinquent. We also remove
188 Freddie Mac
mortgages from pools underlying our PCs in certain circumstances, including when loans are 120 days or more
delinquent, and retire the associated PC debt;
any future cash payments associated with the liquidation preference of the senior preferred stock, as well as the
quarterly commitment fee and the dividends on the senior preferred stock because the timing and amount of any
such future cash payments are uncertain. As of December 31, 2011, the aggregate liquidation preference of the
senior preferred stock was $72.2 billion and our annual dividend obligation was $7.22 billion. See BUSINESS
Conservatorship and Related Matters Treasury Agreements for additional information;
future cash settlements on derivative agreements not yet accrued, because the amount and timing of such payments
are dependent upon changes in the underlying financial instruments in response to items such as changes in interest
rates and foreign exchange rates and are therefore uncertain;
future dividends on the preferred stock we have issued (other than the senior preferred stock), because dividends on
these securities are non-cumulative;
the guarantee arrangements pertaining to multifamily housing revenue bonds, where we provided commitments to
advance funds, commonly referred to as liquidity guarantees, because the amount and timing of such payments
are generally contingent upon the occurrence of future events and are therefore uncertain; and
future cash contributions to our Pension Plan, as we have not yet determined whether to make a cash contribution
in 2012.
(1) Represents par value. Callable debt is included in this table at its contractual maturity. Excludes debt securities of consolidated trusts held by third
parties. For additional information about our debt, see NOTE 8: DEBT SECURITIES AND SUBORDINATED BORROWINGS.
(2) Includes estimated future interest payments on our short-term and long-term debt securities as well as the accrual of periodic cash settlements of
derivatives, netted by counterparty. Also includes accrued interest payable recorded on our consolidated balance sheet, which consists primarily of
the accrual of interest for our PCs and certain Other Guarantee Transactions, and the accrual of interest on short-term and long-term debt.
(3) Accrued obligations related to our defined benefit plans, defined contribution plans, and executive deferred compensation plan are included in the
Total and 2012 columns. However, the timing of payments due under these obligations is uncertain.
(4) Other contractual liabilities include future cash payments due under our contractual obligations to make delayed equity contributions to LIHTC
partnerships and payables to the consolidated trusts established for the administration of cash remittances received related to the underlying assets of
Freddie Mac mortgage-related securities.
(5) As of December 31, 2011, we have recorded tax liabilities for unrecognized tax benefits totaling $1.4 billion and allocated interest of $266 million.
These amounts have been excluded from this table because we cannot estimate the years in which these liabilities may be settled. See NOTE 13:
INCOME TAXES for additional information.
(6) Purchase commitments represent our obligations to purchase mortgage loans and mortgage-related securities from third parties. The majority of
purchase commitments included in this caption are accounted for as derivatives in accordance with the accounting guidance for derivatives and
hedging.
Volatility Risk
Volatility risk is the risk that changes in the markets expectation of the magnitude of future variations in interest
rates will adversely affect the fair value of net assets and ultimately adversely affect GAAP total equity (deficit). Volatility
risk arises from the prepayment risk that is inherent in mortgages or mortgage-related securities. Volatility risk is the risk
that the homeowners prepayment option will gain or lose value as the expected volatility of future interest rates changes.
In general, as expected future interest rate volatility increases, the homeowners prepayment option increases in value, thus
negatively impacting the value of the mortgage security backed by the underlying mortgages. We manage volatility risk
by maintaining a portfolio of callable debt and option-based interest rate derivatives that have relatively long option terms.
We actively manage and monitor our volatility risk exposure over a range of changing interest rate scenarios; however, we
do not eliminate our volatility risk exposure completely.
Basis Risk
Basis risk is the risk that interest rates in different market sectors will not move in tandem and will adversely affect
the fair value of net assets and ultimately adversely affect GAAP total equity (deficit). This risk arises principally because
we generally hedge mortgage-related investments with debt securities. As principally a buy-and-hold investor, we do not
actively manage overall basis risk, also referred to as mortgage-to-debt OAS risk or spread risk, arising from funding
mortgage-related investments with our debt securities. See MD&A FAIR VALUE MEASUREMENTS AND
ANALYSIS Key Components of Changes in Fair Value of Net Assets Changes in Mortgage-To-Debt OAS for
additional information. We also incur basis risk when we use LIBOR- or Treasury-based instruments in our risk
management activities.
Model Risk
Proprietary models, including mortgage prepayment models, interest rate models, and mortgage default models, are
an integral part of our investment framework. As market conditions change rapidly, as they have since 2007, the
assumptions that we use in our models for our sensitivity analyses may not keep pace with these market changes. 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 values of our net assets. We actively manage our model risk by reviewing the performance of
195 Freddie Mac
our models. To improve the accuracy of our models, changes to the underlying assumptions or modeling techniques are
made on a periodic basis. Model development and model testing are reviewed and approved independently by our
Enterprise Risk Management division. Model performance is also reported regularly through a series of internal
management committees. See MD&A RISK MANAGEMENT Operational Risks and RISK FACTORS
Operational Risks We face risks and uncertainties associated with the internal models that we use for financial
accounting and reporting purposes, to make business decisions and to manage risks. Market conditions have raised these
risks and uncertainties for a discussion of the developments and risks associated with our use of models. Given the
importance of models to our investment management practices, model changes undergo a rigorous review process. As a
result, it is common for model changes to take several months to complete. Given the time consuming nature of the model
change review process, it is sometimes necessary for risk management purposes for management to make adjustments to
our interest-rate risk statistics that reflect the expected impact of the pending model change. These adjustments are
included in our PMVS and duration gap disclosures.
Foreign-Currency Risk
Foreign-currency risk is the risk that fluctuations in currency exchange rates (e.g., Euros to the U.S. dollar) will
adversely affect the fair value of net assets and ultimately adversely affect GAAP total equity (deficit). We are exposed to
foreign-currency risk because we have debt denominated in currencies other than the U.S. dollar, our functional currency.
We mitigate virtually all of our foreign-currency risk by entering into swap transactions that effectively convert foreign-
currency denominated obligations into U.S. dollar-denominated obligations.
PMVS Results
The table below provides duration gap, estimated point-in-time and minimum and maximum PMVS-L and PMVS-
YC results, and an average of the daily values and standard deviation for the years ended December 31, 2011 and 2010.
The table below also provides PMVS-L estimates assuming an immediate 100 basis point shift in the LIBOR yield curve.
We do not hedge the entire prepayment risk exposure embedded in our mortgage assets. The interest-rate sensitivity of a
mortgage portfolio varies across a wide range of interest rates. Therefore, the difference between PMVS at 50 basis points
and 100 basis points is non-linear. Our PMVS-L (50 basis points) exposure at the end of December 31, 2011 was
$465 million; approximately half was driven by our duration exposure and the other half was driven by our negative
convexity exposure. The PMVS-L at December 31, 2011 declined compared to December 31, 2010 primarily due to a
decline in our negative convexity exposure as long-term rates significantly declined. On an average basis for the year, our
PMVS-L (50 basis points) was $359 million, which was primarily driven by our negative convexity exposure on our
mortgage assets.
Derivative-Related Risks
Our use of derivatives exposes us to credit risk with respect to our counterparties to derivative transactions. Through
counterparty selection, all derivative transactions are executed in a manner that seeks to control and reduce counterparty
credit exposure. In order to attempt to minimize the potential replacement cost should a derivative counterparty fail, we
utilize derivative counterparty limits. Board-level counterparty limits are approved by the Boards Business and Risk
Committee. Management and Board counterparty limits, which include current exposure and potential exposure in a stress
scenario, are monitored by members of our Enterprise Risk Management division, which is responsible for establishing
and monitoring credit and counterparty risk tolerances for our business activities and reporting to the Business and Risk
Committee as appropriate. See MD&A RISK MANAGEMENT Credit Risk Institutional Credit Risk
Derivative Counterparties for information on derivative counterparty credit risk.
Our use of derivatives also exposes us to derivative market liquidity risk, which is the risk that we may not be able to
enter into or exit out of derivative transactions at a reasonable cost. A lack of sufficient capacity or liquidity in the
derivatives market could limit our risk management activities, increasing our exposure to interest-rate risk. To help
maintain continuous access to derivative markets, we use a variety of products and transact with a number of different
derivative counterparties. In addition to OTC derivatives, we also use exchange-traded derivatives, asset securitization
activities, callable debt, and short-term debt to rebalance our portfolio.
The Dodd-Frank Act will require that, in the future, many types of derivatives be centrally cleared and traded on
exchanges or comparable trading facilities. See MD&A RISK MANAGEMENT Credit Risk Institutional Credit
Risk Derivative Counterparties for additional information on this requirement and our use of a central clearing
platform for interest rate derivatives.
The accompanying notes are an integral part of these consolidated financial statements.
The accompanying notes are an integral part of these consolidated financial statements.
The accompanying notes are an integral part of these consolidated financial statements.
204 Freddie Mac
FREDDIE MAC
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year Ended December 31,
2011 2010 2009
(in millions)
Cash flows from operating activities
Net loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ (5,266) $ (14,026) $ (21,554)
Adjustments to reconcile net loss to net cash provided by operating activities:
Derivative losses (gains) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,721 3,591 (2,046)
Asset related amortization premiums, discounts, and basis adjustments . . . . . . . . . . . . . . . 2,063 326 163
Debt related amortization premiums and discounts on certain debt securities and basis
adjustments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (1,629) 1,127 3,959
Net discounts paid on retirements of other debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (713) (1,959) (4,303)
Net premiums received from issuance of debt securities of consolidated trusts . . . . . . . . . . . . 4,091 3,888
Losses on extinguishment of debt securities of consolidated trusts and other debt . . . . . . . . . 175 383 568
Provision for credit losses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10,702 17,218 29,530
Losses on investment activity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,368 5,542 5,356
(Gains) losses on debt recorded at fair value . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (91) (580) 404
Deferred income tax benefit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (117) (670) (670)
Purchases of held-for-sale mortgage loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (16,550) (10,330) (101,976)
Sales of mortgage loans acquired as held-for-sale . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14,027 6,728 88,094
Repayments of mortgage loans acquired as held-for-sale . . . . . . . . . . . . . . . . . . . . . . . . . . 54 21 3,050
Change in:
Accrued interest receivable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 651 832 (1,193)
Accrued interest payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (1,080) (1,700) (1,324)
Income taxes payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (281) 662 312
Other, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (2,805) (233) 2,918
Net cash provided by operating activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10,320 10,820 1,288
Cash flows from investing activities
Purchases of trading securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (47,977) (55,509) (250,411)
Proceeds from sales of trading securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33,734 17,771 153,093
Proceeds from maturities of trading securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14,545 40,389 69,025
Purchases of available-for-sale securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (12,171) (6,542) (15,346)
Proceeds from sales of available-for-sale securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,643 2,645 22,259
Proceeds from maturities of available-for-sale securities. . . . . . . . . . . . . . . . . . . . . . . . . . . 34,316 44,398 86,702
Purchases of held-for-investment mortgage loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (44,129) (68,180) (23,606)
Repayments of mortgage loans acquired as held-for-investment . . . . . . . . . . . . . . . . . . . . . 369,981 425,298 6,862
(Increase) decrease in restricted cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (19,952) 7,399 426
Net proceeds from (payments of) mortgage insurance and acquisitions and dispositions of real
estate owned . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12,665 13,093 (4,690)
Net decrease (increase) in federal funds sold and securities purchased under agreements to
resell . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34,480 (32,023) 3,150
Derivative premiums and terminations and swap collateral, net . . . . . . . . . . . . . . . . . . . . . . (4,447) (3,075) 99
Purchase of noncontrolling interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (23)
Net cash provided by investing activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 373,688 385,641 47,563
Cash flows from financing activities
Proceeds from issuance of debt securities of consolidated trusts held by third parties . . . . . . . 96,042 96,253
Repayments of debt securities of consolidated trusts held by third parties . . . . . . . . . . . . . . . (436,320) (461,084)
Proceeds from issuance of other debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,024,323 1,115,097 1,333,859
Repayments of other debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (1,078,050) (1,180,935) (1,395,806)
Increase in liquidation preference of senior preferred stock . . . . . . . . . . . . . . . . . . . . . . . . 7,971 12,500 36,900
Repurchase of REIT preferred stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (100)
Payment of cash dividends on senior preferred stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (6,495) (5,749) (4,105)
Excess tax benefits associated with stock-based awards . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 1 1
Payments of low-income housing tax credit partnerships notes payable . . . . . . . . . . . . . . . . (50) (115) (343)
Net cash used in financing activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (392,578) (424,132) (29,494)
Net (decrease) increase in cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (8,570) (27,671) 19,357
Cash and cash equivalents at beginning of year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37,012 64,683 45,326
Cash and cash equivalents at end of year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 28,442 $ 37,012 $ 64,683
Supplemental cash flow information
Cash paid (received) for:
Debt interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ..... $ 84,370 $ 95,468 $ 25,169
Net derivative interest carry . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ..... 4,791 4,305 2,274
Income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ..... (1) (848) (472)
Non-cash investing and financing activities:
Held-for-sale mortgage loans securitized and retained as trading and available-for-sale
securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ..... 1,088
Underlying mortgage loans related to guarantor swap transactions . . . . . . . . . . . . . . . . ..... 280,621 324,004
Debt securities of consolidated trusts held by third parties established for guarantor swap
transactions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ..... 280,621 324,004
Transfers from held-for-investment mortgage loans to held-for-sale mortgage loans . . . . . ..... 196 435
Transfers from held-for-sale mortgage loans to held-for-investment mortgage loans . . . . . ..... 10,336
The accompanying notes are an integral part of these consolidated financial statements.
205 Freddie Mac
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Freddie Mac was chartered by Congress in 1970 to stabilize the nations residential mortgage market and expand
opportunities for home ownership and affordable rental housing. Our statutory mission is to provide liquidity, stability and
affordability to the U.S. housing market. We are a GSE regulated by FHFA, the SEC, HUD, and the Treasury, and are
currently operating under the conservatorship of FHFA. For more information on the roles of FHFA and the Treasury, see
NOTE 2: CONSERVATORSHIP AND RELATED MATTERS.
We are involved in the U.S. housing market by participating in the secondary mortgage market. We do not participate
directly in the primary mortgage market. Our participation in the secondary mortgage market includes providing our credit
guarantee for mortgages originated by mortgage lenders in the primary mortgage market and investing in mortgage loans
and mortgage-related securities.
Our operations consist of three reportable segments, which are based on the type of business activities each
performs Single-family Guarantee, Investments, and Multifamily. Our Single-family Guarantee segment reflects results
from our single-family credit guarantee activities. In our Single-family Guarantee segment, we purchase single-family
mortgage loans originated by our seller/servicers in the primary mortgage market. In most instances, we use the mortgage
securitization process to package the purchased mortgage loans into guaranteed mortgage-related securities. We guarantee
the payment of principal and interest on the mortgage-related securities in exchange for management and guarantee fees.
Our Investments segment reflects results from our investment, funding, and hedging activities. In our Investments
segment, we invest principally in mortgage-related securities and single-family performing mortgage loans, which are
funded by debt issuances and hedged using derivatives. Our Multifamily segment reflects results from our investment
(both purchases and sales), securitization, and guarantee activities in multifamily mortgage loans and securities. In our
Multifamily segment, our primary business strategy is to purchase multifamily mortgage loans for aggregation and then
securitization. See NOTE 14: SEGMENT REPORTING for additional information.
Under conservatorship, we are focused on the following primary business objectives: (a) meeting the needs of the
U.S. residential mortgage market by making home ownership and rental housing more affordable by providing liquidity to
mortgage originators and, indirectly, to mortgage borrowers; (b) working to reduce the number of foreclosures and helping
to keep families in their homes, including through our role in FHFA and other governmental initiatives, such as the
FHFA-directed servicing alignment initiative, HAMP and HARP, as well as our own workout and refinancing initiatives;
(c) minimizing our credit losses; (d) maintaining sound credit quality of the loans we purchase and guarantee; and
(e) strengthening our infrastructure and improving overall efficiency while also focusing on retention of key employees.
We also have a variety of different, and potentially competing, objectives based on our charter, other legislation, public
statements from Treasury and FHFA officials, and other guidance and directives from our Conservator. For information
regarding these objectives, see NOTE 2: CONSERVATORSHIP AND RELATED MATTERS Business Objectives.
Throughout our consolidated financial statements and related notes, we use certain acronyms and terms which are
defined in the GLOSSARY.
Basis of Presentation
The accompanying consolidated financial statements have been prepared in accordance with GAAP and include our
accounts as well as the accounts of other entities in which we have a controlling financial interest. All intercompany
balances and transactions have been eliminated.
Our current accounting policies are described below. 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 the delegation of authority
from FHFA to our Board of Directors and management. Certain amounts in prior periods consolidated financial
statements have been reclassified to conform to the current presentation.
We evaluate the materiality of identified errors in the financial statements using both an income statement, or
rollover, and a balance sheet, or iron-curtain, approach, based on relevant quantitative and qualitative factors. Net loss
includes certain adjustments to correct immaterial errors related to previously reported periods.
We recorded the cumulative effect of certain miscellaneous errors related to previously reported periods as
corrections in the year ended December 31, 2011. We concluded that these errors are not material individually or in the
aggregate to our previously issued consolidated financial statements for any of the periods affected, or to our earnings for
the full year ended December 31, 2011, or to the trend of earnings. The impact to earnings, net of taxes, for the year
ended December 31, 2011 was $0.4 billion.
206 Freddie Mac
Use of Estimates
The preparation of financial statements requires us to make estimates and assumptions that affect: (a) the reported
amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements;
and (b) the reported amounts of revenues and expenses and gains and losses during the reporting period. Management has
made significant estimates in preparing the financial statements, including, but not limited to, establishing the allowance
for loan losses and reserve for guarantee losses, valuing financial instruments and other assets and liabilities, assessing
impairments on investments, and assessing the realizability of net deferred tax assets. Actual results could be different
from these estimates.
PCs
Our PCs are pass-through debt securities that represent undivided beneficial interests in a pool of mortgages held by
a securitization trust. For our fixed-rate PCs, we guarantee the timely payment of interest and principal. For our ARM
PCs, we guarantee the timely payment of the weighted average coupon interest rate for the underlying mortgage loans. We
do not guarantee the timely payment of principal for ARM PCs; however, we do guarantee the full and final payment of
principal.
Various types of fixed income investors purchase our PCs, including pension funds, insurance companies, securities
dealers, money managers, commercial banks, and foreign central banks. PCs differ from U.S. Treasury securities and
certain other fixed-income investments in two primary ways. First, they can be prepaid at any time because homeowners
may pay off the underlying mortgages at any time prior to a loans maturity. Because homeowners have the right to
prepay their mortgage, the securities implicitly have a call option that significantly reduces the average life of the security
as compared to the contractual maturity of the underlying loans. Consequently, mortgage-related securities generally
provide a higher nominal yield than certain other fixed-income products. Second, PCs are not backed by the full faith and
credit of the United States, as are U.S. Treasury securities. However, we guarantee the payment of interest and principal
on all of our PCs, as discussed above.
In return for providing our guarantee of the payment of principal and interest, we earn a management and guarantee
fee that is paid to us over the life of an issued PC, representing a portion of the interest collected on the underlying loans.
PC Trusts
Prior to January 1, 2010, our PC trusts met the definition of QSPEs and were not consolidated. Effective January 1,
2010, the concept of a QSPE was removed from GAAP and entities previously considered QSPEs were required to be
evaluated for consolidation. Based on our evaluation, we determined that we are the primary beneficiary of trusts that
issue our single-family PCs. Therefore, effective January 1, 2010, we consolidated on our balance sheet the assets and
liabilities of these trusts at their UPB, with accrued interest, allowance for credit losses or other-than-temporary
impairments recognized as appropriate, using the practical expedient permitted upon adoption since we determined that
calculation of carrying values was not practical. Other assets and liabilities that were consolidated effective January 1,
2010 that either did not have a UPB or were required to be carried at fair value were measured at fair value. As a result
of this consolidation, we have recognized on our consolidated balance sheets the mortgage loans underlying our issued
single-family PCs as mortgage loans held-for-investment by consolidated trusts, at amortized cost. We also recognized the
corresponding single-family PCs held by third parties on our consolidated balance sheets as debt securities of consolidated
trusts held by third parties. After January 1, 2010, the assets and liabilities of trusts that we consolidate are recorded at
either their: (a) carrying value if the underlying assets are contributed by us to the trust; or (b) fair value for those
securitization trusts established for our guarantor swap program. Refer to Mortgage Loans and Debt Securities Issued
below for further information on the subsequent accounting treatment of these assets and liabilities, respectively.
Mortgage Loans
Upon acquisition, we classify a loan as either held-for-sale or held-for-investment. Mortgage loans that we have the
ability and intent to hold for the foreseeable future are classified as held-for-investment. Historically, we classified
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mortgage loans that we purchased to use as collateral for future PC and other mortgage-related security issuances as held-
for-sale because we intended to securitize the loans in transactions that qualified for derecognition from our consolidated
financial statements and did not have the intent to hold these loans for the foreseeable future. Effective January 1, 2010
we were required to consolidate our single-family PC trusts and certain Other Guarantee Transactions, and, therefore,
recognized the loans underlying these securities on our consolidated balance sheets. These consolidated entities do not
have the ability to sell mortgage loans and generally are only permitted to hold such loans for the settlement of the
corresponding obligations of these entities. As such, loans we acquire and which we intend to securitize using an entity
we will consolidate will generally be classified as held-for-investment both prior to and subsequent to their securitization,
in accordance with our intent and ability to hold such loans for the foreseeable future.
Held-for-investment mortgage loans are reported in our consolidated balance sheets at their outstanding UPB, net of
deferred fees and other cost basis adjustments (including unamortized premiums and discounts, delivery fees and other
pricing adjustments). These deferred items are amortized into interest income over the contractual lives of the loans using
the effective interest method. We recognize interest income on an accrual basis except when we believe the collection of
principal or interest is not probable. If the collection of principal and interest is not probable, we cease the accrual of
interest income.
Mortgage loans not classified as held-for-investment are classified as held-for-sale. Held-for-sale loans are reported at
lower-of-cost-or-fair-value on our consolidated balance sheets. Any excess of a held-for-sale loans cost over its fair value
is recognized as a valuation allowance in other income on our consolidated statement of income and comprehensive
income, with changes in this valuation allowance also being recorded in other income. Premiums, discounts, and other
cost basis adjustments recognized upon acquisition on single-family loans classified as held-for-sale are deferred and not
amortized. We have elected the fair value option for multifamily mortgage loans held for sale that we intend to securitize
and sell to investors. See NOTE 17: FAIR VALUE DISCLOSURES Fair Value Election Multifamily Held-For-Sale
Mortgage Loans with Fair Value Option Elected. Thus, these multifamily mortgage loans are measured at fair value on a
recurring basis, with subsequent gains or losses related to sales or changes in fair value reported in other income in our
consolidated statements of income and comprehensive income.
Cash flows related to mortgage loans held by our consolidated trusts are classified as either investing activities (e.g.,
principal repayments) or operating activities (e.g., interest payments received from borrowers included within net income
(loss)). In addition, cash flows related to purchases of mortgage loans held-for-sale are classified in operating activities.
When mortgage loans held-for-sale are sold or securitized, proceeds from the sale or securitization and any related gain or
loss are classified in operating activities.
Multifamily Loans
For multifamily loans identified as impaired, we individually determine the specific loan loss reserves. Refer to
Impaired Loans below for further discussion on individually impaired multifamily loans. Multifamily loans evaluated
collectively for impairment are aggregated into book year vintages and measured by benchmarking published historical
commercial mortgage data to those vintages based upon available economic data related to multifamily real estate,
including apartment vacancy and rental rates.
Non-Performing Loans
Non-performing loans consist of single-family and multifamily loans that have undergone a TDR, single-family
seriously delinquent loans, multifamily loans that are three or more payments past due or in the process of foreclosure,
and multifamily loans that are deemed impaired based upon management judgment. We place mortgage loans on non-
accrual status when we believe collectability of interest and principal is not reasonably assured, which generally occurs
when a loan is three monthly payments past due, unless the loan is well secured and in the process of collection based
upon an individual loan assessment. A loan is considered past due if a full payment of principal and interest is not
received within one month of its due date. When a loan is placed on non-accrual status, any interest income accrued but
uncollected is reversed. Thereafter, interest income is recognized only upon receipt of cash payments.
A non-accrual mortgage loan may be returned to accrual status when the collectability of principal and interest is
reasonably assured. For single-family loans, we determine that collectability is reasonably assured when we have received
payment of principal and interest such that the loan becomes less than three monthly payments past due. For multifamily
loans, the collectability of principal and interest is considered reasonably assured based on a quantitative and qualitative
analysis of the factors specific to the loan being assessed. Upon a loans return to accrual status, all previously reversed
interest income is recognized and amortization of any basis adjustments into interest income is resumed.
Impaired Loans
We consider a loan to be impaired when it is probable, based on current information, that we will not receive all
amounts due (including both principal and interest) in accordance with the contractual terms of the original loan
agreement. This assessment is made taking into consideration any more than insignificant delays in the timing of our
expected receipt of these amounts.
Single-Family
Individually impaired single-family loans include loans that have undergone a TDR. Impairment and interest income
recognition are discussed separately in the paragraphs that follow. All other single-family loans are aggregated and
measured collectively for impairment based on similar risk characteristics. Collective impairment is measured as described
above in the Allowance for Loan Losses and Reserve for Guarantee Losses Single-Family Loans section of this note.
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If we determine that foreclosure on the underlying collateral is probable, we measure impairment based upon the fair
value of the collateral, as reduced by estimated disposition costs and adjusted for estimated proceeds from insurance and
similar sources.
Multifamily
Multifamily impaired loans include TDRs, loans three monthly payments or more past due, and loans that are
deemed impaired based on management judgment. Factors considered by management in determining whether a loan is
impaired include, but are not limited to, the underlying propertys operating performance as represented by its current
DSCR, available credit enhancements, current LTV ratio, management of the underlying property, and the propertys
geographic location. Multifamily loans are measured individually for impairment based on the fair value of the underlying
collateral, as reduced by estimated disposition costs, as the repayment of these loans is generally provided from the cash
flows of the underlying collateral and any associated credit-enhancement. Except for cases of fraud and certain other types
of borrower defaults, most multifamily loans are non-recourse to the borrower so generally the cash flows of the
underlying property (including any associated credit enhancements) serve as the source of funds for repayment of the
loan. Interest income recognition on non-TDR multifamily impaired loans is subject to our non-accrual policy as
discussed in Non-Performing Loans.
Investments in Securities
Investments in securities consist primarily of mortgage-related securities. We classify securities as available-for-sale
or trading. We currently do not classify any securities as held-to-maturity, although we may elect to do so in the
future. In addition, we elected the fair value option for certain available-for-sale mortgage-related securities, including
investments in securities that: (a) can contractually be prepaid or otherwise settled in such a way that we may not recover
substantially all of our initial recorded investment; or (b) are not of high credit quality at the acquisition date and are
identified as within the scope of the accounting guidance for investments in beneficial interests in securitized financial
assets. Subsequent to our election, these securities were classified as trading securities. Securities classified as available-
for-sale and trading are reported at fair value with changes in fair value included in AOCI and other gains (losses) on
investment securities, respectively. See NOTE 17: FAIR VALUE DISCLOSURES for more information on how we
determine the fair value of securities.
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We record purchases and sales of securities that are specifically exempt from the requirements of derivatives and
hedge accounting on a trade date basis. Securities underlying forward purchases and sales contracts that are not exempt
from the requirements of derivatives and hedge accounting are recorded on the expected settlement date with a
corresponding commitment recorded on the trade date.
When we purchase REMICs and Other Structured Securities and certain Other Guarantee Transactions that we have
issued, we account for these securities as investments in debt securities, as we are investing in the debt securities of a
non-consolidated entity. We consolidate the trusts that issue these securities when we hold substantially all of the
outstanding beneficial interests issued by the trusts. We recognize interest income on the securities and interest expense on
the debt we issued. See Securitization Activities through Issuances of Freddie Mac Mortgage-Related Securities
Purchases and Sales of Freddie Mac Mortgage-Related Securities for additional information on accounting for purchases
of PCs and beneficial interests issued by resecuritization trusts.
In connection with transfers of financial assets that qualified as sales prior to the adoption of the amendments to the
accounting guidance on transfers of financial assets and the consolidation of VIEs, we may have retained individual
securities not transferred to third parties upon the completion of a securitization transaction. These securities may have
been backed by mortgage-related assets purchased from our customers, PCs, and REMICs and Other Structured Securities.
The securities we acquired in these transactions were classified as available-for-sale or trading and are considered
guaranteed investments. Therefore, the fair values of these securities reflect that they are considered to be of high credit
quality and the securities are not subject to credit-related impairments. They are subject to the credit risk associated with
the underlying collateral. Therefore, our exposure to credit losses on collateral underlying our retained securitization
interests was recorded within our reserve for guarantee losses.
For most of our investments in securities, interest income is recognized using the effective interest method. Deferred
items, including premiums, discounts, and other basis adjustments, are amortized into interest income over the contractual
lives of the securities.
For certain investments in securities, interest income is recognized using the prospective effective interest method.
We specifically apply this accounting to beneficial interests in securitized financial assets that: (a) can contractually be
prepaid or otherwise settled in such a way that we may not recover substantially all of our recorded investment; (b) are
not of high credit quality at the acquisition date; or (c) have been determined to be other-than-temporarily impaired. We
recognize as interest income (over the life of these securities) the excess of all estimated cash flows attributable to these
interests over their book value using the effective interest method. We update our estimates of expected cash flows
periodically and recognize changes in the calculated effective interest rate on a prospective basis.
We recognize impairment losses on available-for-sale securities within our consolidated statements of income and
comprehensive income as net impairment of available-for-sale securities recognized in earnings when we conclude that a
decrease in the fair value of a security is other-than-temporary. On April 1, 2009, we prospectively adopted an amendment
to the accounting guidance for investments in debt and equity securities. This amendment changed the recognition,
measurement, and presentation of other-than-temporary impairment for debt securities.
We conduct quarterly reviews to identify and evaluate each available-for-sale security that has an unrealized loss for
other-than-temporary impairment. An unrealized loss exists when the current fair value of an individual security is less
than its amortized cost basis.
We recognize other-than-temporary impairment in earnings if one of the following conditions exists: (a) we have the
intent to sell the security; (b) it is more likely than not that we will be required to sell the security before recovery of its
unrealized loss; or (c) we do not expect to recover the amortized cost basis of the security. If we do not intend to sell the
security and it is not more likely than not that we will be required to sell the security prior to recovery of its unrealized
loss, we recognize only the credit component of other-than-temporary impairment in earnings and the amounts attributable
to all other factors are recognized, net of tax, in AOCI. The credit component represents the amount by which the present
value of cash flows expected to be collected from the security is less than the amortized cost basis of the security. The
evaluation of whether unrealized losses on available-for-sale securities are other-than-temporary contemplates numerous
factors. We perform an evaluation on a security-by-security basis considering all available information and our analysis is
refined where the current fair value or other characteristics of the security warrant. 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. See NOTE 7: INVESTMENTS IN SECURITIES Impairment Recognition on Investments
in Securities for a discussion of important factors we consider in our evaluation.
For the majority of our available-for-sale securities in an unrealized loss position, we have asserted that we have no
intent to sell and that we believe it is not more likely than not that we will be required to sell the security before recovery
215 Freddie Mac
of its amortized cost basis. Where such an assertion has not been made, the securitys entire decline in fair value is
deemed to be other than temporary and is recorded within our consolidated statements of income and comprehensive
income as net impairment of available-for-sale securities recognized in earnings.
We elected the fair value option for available-for-sale securities identified as within the scope of the accounting
guidance for investments in beneficial interests in securitized financial assets to better reflect the valuation changes that
occur subsequent to impairment write-downs recorded on these instruments. By electing the fair value option for these
instruments, we reflect valuation changes through our consolidated statements of income and comprehensive income in
the period they occur, including increases in value. For additional information on our election of the fair value option, see
NOTE 17: FAIR VALUE DISCLOSURES.
Gains and losses on the sale of securities are included in other gains (losses) on investment securities recognized in
earnings, including those gains (losses) reclassified into earnings from AOCI. We use the specific identification method
for determining the cost basis of a security in computing the gain or loss.
For securities classified as trading or available-for-sale and those securities where we elected the fair value option,
we classify the cash flows as investing activities because we hold these securities for investment purposes. In cases where
the transfer of available-for-sale securities represents a secured borrowing, we classify the related cash flows as financing
activities.
Derivatives
Derivatives are reported at their fair value on our consolidated balance sheets. Derivatives in a net asset position,
including net derivative interest receivable or payable, are reported as derivative assets, net. Similarly, derivatives in a net
liability position, including net derivative interest receivable or payable, are reported as derivative liabilities, net. We offset
fair value amounts recognized for the right to reclaim cash collateral or the obligation to return cash collateral against fair
value amounts recognized for derivative instruments executed with the same counterparty under a master netting
agreement. Changes in fair value and interest accruals on derivatives are recorded as derivative gains (losses) in our
consolidated statements of income and comprehensive income.
We evaluate whether financial instruments that we purchase or issue contain embedded derivatives. In accordance
with an amendment to derivatives and hedging accounting guidance regarding certain hybrid financial instruments, we
elected to measure newly acquired or issued financial instruments that contain embedded derivatives at fair value, with
changes in fair value recorded in our consolidated statements of income and comprehensive income. At December 31,
2011 and 2010, we did not have any embedded derivatives that were bifurcated and accounted for as freestanding
derivatives.
At December 31, 2011 and 2010, we did not have any derivatives in hedge accounting relationships; however, there
are amounts recorded in AOCI related to discontinued cash flow hedges which are recognized in earnings as the originally
forecasted transactions affect earnings. If it becomes probable the originally forecasted transaction will not occur, the
associated deferred gain or loss in AOCI would be reclassified to earnings immediately.
In the consolidated statements of cash flows, cash flows related to the acquisition and termination of derivatives,
other than forward commitments, are generally classified in investing activities. Cash flows related to forward
commitments are classified within the section of the consolidated statements of cash flows in accordance with the cash
flows of the financial instruments to which they relate.
REO
REO is initially recorded at fair value less costs to sell and is subsequently carried at the lower of cost or fair value
less costs to sell. When we acquire REO, losses arise when the carrying basis of the loan (including accrued interest)
exceeds the fair value of the foreclosed property, net of estimated costs to sell and expected recoveries through credit
enhancements. Losses are charged off against the allowance for loan losses at the time of REO acquisition. REO gains
arise and are recognized immediately in earnings when the fair value of the foreclosed property less costs to sell plus
expected recoveries through credit enhancements exceeds the carrying basis of the loan (including all amounts due from
the borrower). Amounts we expect to receive from third-party insurance or other credit enhancements are recorded as
receivables when REO is acquired. The receivable is adjusted when the actual claim is filed and is reported as a
component of other assets on our consolidated balance sheets. Material development and improvement costs relating to
REO are capitalized. Operating expenses specifically identifiable with an REO property are included in REO operations
income (expense); all other expenses are recognized within other administrative expenses in our consolidated statement of
income and comprehensive income. Estimated declines in REO fair value that result from ongoing valuation of the
properties are provided for and charged to REO operations income (expense) when identified. Any gains and losses from
REO dispositions are included in REO operations income (expense).
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Income Taxes
We use the asset and liability method of accounting for income taxes under GAAP. 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 as well
as tax net operating loss and tax credit carryforwards. To the extent tax laws change, deferred tax assets and liabilities are
adjusted, when necessary, in the period that the tax change is enacted. 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 net
deferred tax assets is dependent upon the generation of sufficient taxable income in available carryback years, from
current operations and from unrecognized tax benefits, and 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 assets will be realized. Our management determined that, as of December 31, 2011 and 2010, 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 events and the resulting uncertainties that existed as of December 31,
2011 and 2010. For more information about the evidence that management considers and our determination of the need
for a valuation allowance, see NOTE 13: INCOME TAXES.
Income tax benefit (expense) includes: (a) deferred tax benefit (expense), which represents the net change in the
deferred tax asset or liability balance during the year plus any change in a valuation allowance; and (b) current tax benefit
(expense), which represents the amount of tax currently payable to or receivable from a tax authority including any related
interest and penalties plus amounts accrued for unrecognized tax benefits (also including any related interest and
penalties). Income tax benefit (expense) excludes the tax effects related to adjustments recorded to equity.
Regarding tax positions taken or expected to be taken (and any associated interest and penalties), we recognize a tax
position so long as it is more likely than not that it will be sustained upon examination, including resolution of any related
appeals or litigation processes, based on the technical merits of the position. We measure the tax position at the largest
amount of benefit that is greater than 50% likely of being realized upon ultimate settlement. See NOTE 13: INCOME
TAXES for additional information.
Recently Issued Accounting Guidance, Not Yet Adopted Within These Consolidated Financial Statements
Fair Value Measurement
In May 2011, the FASB issued amendments to the accounting guidance pertaining to fair value measurement and
disclosure. These amendments provide both: (a) clarification about the FASBs intent about the application of existing fair
value measurement and disclosure requirements; and (b) changes to some of the principles or requirements for measuring
fair value or for disclosing information about fair value measurements. These amendments are effective for interim and
annual periods beginning after December 15, 2011 and are to be applied prospectively, with early adoption not permitted
by public companies. We do not expect that the adoption of these amendments will have a material impact on our
consolidated financial statements.
Business Objectives
We continue to operate under the direction of FHFA, as our Conservator. The conservatorship and related matters
have had a wide-ranging impact on us, including our regulatory supervision, management, business, financial condition
and results of operations. Upon its appointment, FHFA, as Conservator, immediately succeeded to all rights, titles, powers
and privileges of Freddie Mac, and of any stockholder, officer or director thereof, with respect to the company and its
assets. The Conservator also succeeded to the title to all books, records, and assets of Freddie Mac held by any other legal
custodian or third party. During the conservatorship, the Conservator has delegated certain authority to the Board of
Directors to oversee, and management to conduct, day-to-day operations so that the company can continue to operate in
the ordinary course of business. The directors serve on behalf of, and exercise authority as directed by, the Conservator.
We are also subject to certain constraints on our business activities by Treasury due to the terms of, and Treasurys
rights under, the Purchase Agreement. Our ability to access funds from Treasury under the Purchase Agreement is critical
to keeping us solvent.
While in conservatorship, we can, and have continued to, enter into and enforce contracts with third parties. The
Conservator continues to direct the efforts of the Board of Directors and management to address and determine the
strategic direction for the company. While the Conservator has delegated certain authority to management to conduct day-
to-day operations, many management decisions are subject to review and approval by FHFA and Treasury. In addition,
management frequently receives directions from FHFA on various matters involving day-to-day operations.
FHFA has stated that it has focused Freddie Mac and Fannie Mae on their existing core business, including
minimizing credit losses, and taking actions necessary to advance the goals of conservatorship, and is not permitting
Freddie Mac and Fannie Mae to offer new products or enter into new lines of business. Our business objectives and
strategies have, in some cases, been altered since we were placed into conservatorship, and may continue to change. These
changes to our business objectives and strategies may not contribute to our profitability. Based on our charter, other
legislation, public statements from Treasury and FHFA officials and other guidance and directives from our Conservator,
we have a variety of different, and potentially competing, objectives, including:
minimizing credit losses;
conserving assets;
providing liquidity, stability and affordability in the mortgage market;
continuing to provide additional assistance to the struggling housing and mortgage markets;
maintaining a positive stockholders equity and reducing the need to draw funds from Treasury pursuant to the
Purchase Agreement; and
protecting the interests of taxpayers.
The Conservator has stated that it is taking actions in support of the objectives of gradual transition to greater private
capital participation in housing finance and greater distribution of risk to participants other than the government. The
Conservator has also stated that it is focusing on retaining value in the business operations of Freddie Mac and Fannie
Mae, overseeing remediation of identified weaknesses in corporate operations and risk management, and ensuring that
sound corporate governance principles are followed.
These objectives create conflicts in strategic and day-to-day decision making that will likely lead to suboptimal
outcomes for one or more, or possibly all, of these objectives. We regularly receive direction from our Conservator on
how to pursue our objectives under conservatorship, including direction to focus our efforts on assisting homeowners in
the housing and mortgage markets. The Conservator and Treasury have also not authorized us to engage in certain
221 Freddie Mac
business activities and transactions, including the purchase or sale of certain assets, which we believe might have had a
beneficial impact on our results of operations or financial condition, if executed. Our inability to execute such transactions
may adversely affect our profitability, and thus contribute to our need to draw additional funds from Treasury. However,
we believe that the support provided by Treasury pursuant to the Purchase Agreement currently enables us to maintain our
access to the debt markets and to have adequate liquidity to conduct our normal business activities, although the costs of
our debt funding could vary.
The Acting Director of FHFA stated that FHFA does not expect we will be a substantial buyer or seller of mortgages
for our mortgage-related investments portfolio. We are also subject to limits on the amount of assets we can sell from our
mortgage-related investments portfolio in any calendar month without review and approval by FHFA and, if FHFA
determines, Treasury.
Given the important role the Administration and our Conservator have placed on Freddie Mac in addressing housing
and mortgage market conditions and our public mission, we may be required to take additional actions that could have a
negative impact on our business, operating results, or financial condition. Certain changes to our business objectives and
strategies are designed to provide support for the mortgage market in a manner that serves our public mission and other
non-financial objectives, but may not contribute to our profitability. Some of these changes increase our expenses, while
others require us to forego revenue opportunities in the near term. In addition, the objectives set forth for us under our
charter and by our Conservator, as well as the restrictions on our business under the Purchase Agreement, have adversely
impacted and may continue to adversely impact our financial results, including our segment results. For example, our
efforts to help struggling homeowners and the mortgage market, in line with our public mission, may help to mitigate our
credit losses, but in some cases may increase our expenses or require us to forgo revenue opportunities in the near term.
There is significant uncertainty as to the ultimate impact that our efforts to aid the housing and mortgage markets,
including our efforts in connection with the MHA Program, will have on our future capital or liquidity needs. We are
allocating significant internal resources to the implementation of the various initiatives under the MHA Program and to
the servicing alignment initiative as directed by FHFA on April 28, 2011, which has increased, and will continue to
increase, our expenses. We cannot currently estimate whether, or the extent to which, costs incurred in the near term from
HAMP or other MHA Program efforts may be offset, if at all, by the prevention or reduction of potential future costs of
serious delinquencies and foreclosures due to these initiatives.
There is significant uncertainty as to whether or when we will emerge from conservatorship, as it has no specified
termination date, and as to what changes may occur to our business structure during or following conservatorship,
including whether we will continue to exist. The Acting Director of FHFA stated on September 19, 2011 that it ought to
be clear to everyone at this point, given [Freddie Mac and Fannie Maes] losses since being placed into conservatorship
and the terms of the Treasurys financial support agreements, that [Freddie Mac and Fannie Mae] will not be able to earn
their way back to a condition that allows them to emerge from conservatorship. The Acting Director of FHFA stated on
November 15, 2011 that the long-term outlook is that neither [Freddie Mac nor Fannie Mae] will continue to exist, at
least in its current form, in the future. We are not aware of any current plans of our Conservator to significantly change
our business model or capital structure in the near-term. Our future structure and role will be determined by the
Administration and Congress, and there are likely to be significant changes beyond the near-term. We have no ability to
predict the outcome of these deliberations.
On February 11, 2011, the Administration delivered a report to Congress that lays out the Administrations plan to
reform the U.S. housing finance market, including options for structuring the governments long-term role in a housing
finance system in which the private sector is the dominant provider of mortgage credit. The report recommends winding
down Freddie Mac and Fannie Mae, and states that the Administration will work with FHFA to determine the best way to
responsibly reduce the role of Freddie Mac and Fannie Mae in the market and ultimately wind down both institutions. The
report states that these efforts must be undertaken at a deliberate pace, which takes into account the impact that these
changes will have on borrowers and the housing market.
The report states that the government is committed to ensuring that Freddie Mac and Fannie Mae have sufficient
capital to perform under any guarantees issued now or in the future and the ability to meet any of their debt obligations,
and further states that the Administration will not pursue policies or reforms in a way that would impair the ability of
Freddie Mac and Fannie Mae to honor their obligations. The report states the Administrations belief that under the
companies senior preferred stock purchase agreements with Treasury, there is sufficient funding to ensure the orderly and
deliberate wind down of Freddie Mac and Fannie Mae, as described in the Administrations plan.
The report identifies a number of policy levers that could be used to wind down Freddie Mac and Fannie Mae, shrink
the governments footprint in housing finance, and help bring private capital back to the mortgage market, including
222 Freddie Mac
increasing guarantee fees, phasing in a 10% down payment requirement, reducing conforming loan limits, and winding
down Freddie Mac and Fannie Maes investment portfolios, consistent with the senior preferred stock purchase
agreements. These recommendations, if implemented, would have a material impact on our business volumes, market
share, results of operations, and financial condition.
The temporary high-cost area limits expired on September 30, 2011. In addition, as discussed below, we have been
directed to increase our guarantee fees. We cannot predict the extent to which the other recommendations in the report
will be implemented or when any actions to implement them may be taken.
On December 23, 2011, President Obama signed into law the Temporary Payroll Tax Cut Continuation Act of 2011.
Among its provisions, this new law directs FHFA to require Freddie Mac and Fannie Mae to increase guarantee fees by
no less than 10 basis points above the average guarantee fees charged in 2011 on single-family mortgage-backed
securities. Under the law, the proceeds from this increase will be remitted to Treasury to fund the payroll tax cut, rather
than retained by the companies. The law also permits FHFA to determine a schedule for guarantee fee increases over a
two-year period.
On October 24, 2011, FHFA, Freddie Mac, and Fannie Mae announced a series of FHFA-directed changes to HARP
in an effort to attract more eligible borrowers whose monthly payments are current and who can benefit from refinancing
their home mortgages. The revisions to HARP will be available to borrowers with loans that were sold to Freddie Mac
and Fannie Mae on or before May 31, 2009 and who have current LTV ratios above 80%.
In November 2011, Freddie Mac and Fannie Mae issued guidance with operational details about the HARP changes
to mortgage lenders and servicers after receiving information from FHFA about the fees that we may charge associated
with the refinancing program. Because industry participation in HARP is not mandatory, we anticipate that
implementation schedules will vary as individual lenders, mortgage insurers and other market participants modify their
processes. It is too early to estimate how many eligible borrowers are likely to refinance under the revised program.
Purchase Agreement
Overview
The Conservator, acting on our behalf, entered into the Purchase Agreement on September 7, 2008. The Purchase
Agreement was subsequently amended and restated on September 26, 2008, and further amended on May 6, 2009 and
December 24, 2009. Under the December 2009 amendment to the Purchase Agreement, the $200 billion maximum
amount of the commitment from Treasury will increase as necessary to accommodate any cumulative reduction in our net
worth during 2010, 2011 and 2012. If we do not have a capital surplus (i.e., positive net worth) at the end of 2012, then
the amount of funding available after 2012 will be $149.3 billion ($200 billion funding commitment reduced by
cumulative draws for net worth deficits through December 31, 2009). In the event we have a capital surplus at the end of
2012, then the amount of funding available after 2012 will depend on the size of that surplus relative to cumulative draws
needed for deficits during 2010 to 2012, as follows:
If the year-end 2012 surplus is lower than the cumulative draws needed for 2010 to 2012, then the amount of
available funding is $149.3 billion less the surplus.
If the year-end 2012 surplus exceeds the cumulative draws for 2010 to 2012, then the amount of available funding
is $149.3 billion less the amount of those draws.
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 these funds from Treasury. In exchange for Treasurys funding commitment, we issued to Treasury, as
an aggregate initial commitment fee: (a) 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 (b) 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 for issuing the senior preferred stock or the warrant.
Under the terms of the Purchase Agreement, Treasury is entitled to a dividend of 10% per year, paid on a quarterly
basis (which increases to 12% per year if not paid timely and in cash) on the aggregate liquidation preference of the
senior preferred stock, consisting of the initial liquidation preference of $1 billion plus funds we receive from Treasury
and any dividends and commitment fees not paid in cash. To the extent we draw on Treasurys funding commitment, the
223 Freddie Mac
liquidation preference of the senior preferred stock is increased by the amount of funds we receive. The senior preferred
stock is senior in liquidation preference to our common stock and all other series of preferred stock.
In addition to the issuance of the senior preferred stock and warrant, we are required under the Purchase Agreement
to pay a quarterly commitment fee to Treasury. Under the Purchase Agreement, the fee is to be determined in an amount
mutually agreed to by us and Treasury with reference to the market value of Treasurys funding commitment as then in
effect, and reset every five years. 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. 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. The fee was originally
scheduled to begin accruing on January 1, 2010 (with the first fee payable on March 31, 2010), but was delayed until
January 1, 2011 (with the first fee payable on March 31, 2011) pursuant to an amendment to the Purchase Agreement.
Treasury waived the fee for all quarters of 2011 and the first quarter of 2012, but has indicated that it remains committed
to protecting taxpayers and ensuring that our future positive earnings are returned to taxpayers as compensation for their
investment. Treasury stated that it would reevaluate whether the quarterly commitment fee should be set in the second
quarter of 2012. Absent Treasury waiving the commitment fee in the second quarter of 2012, this quarterly commitment
fee will begin accruing on April 1, 2012 and must be paid each quarter for as long as the Purchase Agreement is in effect.
The amount of the fee has not yet been determined and could be substantial.
Under the Purchase Agreement, our ability to repay the liquidation preference of the senior preferred stock is limited
and we will not be able to do so for the foreseeable future, if at all. The aggregate liquidation preference of the senior
preferred stock and our related dividend obligations will increase further if we receive additional draws under the
Purchase Agreement or if any dividends or quarterly commitment fees payable under the Purchase Agreement are not paid
in cash. The amounts payable for dividends on the senior preferred stock are substantial and will have an adverse impact
on our financial position and net worth.
The payment of dividends on our senior preferred stock in cash reduces our net worth. For periods in which our
earnings and other changes in equity do not result in positive net worth, draws under the Purchase Agreement effectively
fund the cash payment of senior preferred dividends to Treasury. It is unlikely that, over the long-term, we will generate
net income or comprehensive income in excess of our annual dividends payable to Treasury, although we may experience
period-to-period variability in earnings and comprehensive income. As a result, we expect to make additional draws in
future periods.
The Purchase Agreement includes significant restrictions on our ability to manage our business, including limiting
the amount of indebtedness we can incur and capping the size of our mortgage-related investments portfolio. 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 Purchase Agreement has an indefinite term and can terminate only in limited circumstances, which do not
include the end of the conservatorship. The Purchase 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.
Warrant Covenants
The warrant we issued to Treasury includes, among others, the following covenants: (a) 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; (b) 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; (c) we may not take any action that will result in an increase in the par value of our common stock; (d) 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 (e) 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 of the following
circumstances: (a) the completion of our liquidation and fulfillment of Treasurys obligations under its funding
commitment at that time; (b) the payment in full of, or reasonable provision for, all of our liabilities (whether or not
contingent, including mortgage guarantee obligations); and (c) the funding by Treasury of the maximum amount of the
commitment 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 Purchase 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.
Impact of the Purchase Agreement and FHFA Regulation on the Mortgage-Related Investments Portfolio
Under the terms of the Purchase Agreement and FHFA regulation, our mortgage-related investments portfolio is
subject to a cap that decreases by 10% each year until the portfolio reaches $250 billion. As a result, the UPB of our
mortgage-related investments portfolio could not exceed $729 billion as of December 31, 2011 and may not exceed
$656.1 billion as of December 31, 2012. The UPB of our mortgage-related investments portfolio, for purposes of the limit
imposed by the Purchase Agreement and FHFA regulation, was $653.3 billion at December 31, 2011. The annual 10%
reduction in the size of our mortgage-related investments portfolio is calculated based on the maximum allowable size of
the mortgage-related investments portfolio, rather than the actual UPB of the mortgage-related investments portfolio, as of
December 31 of the preceding year. The limitation is determined without giving effect to the January 1, 2010 change in
the accounting guidance related to transfers of financial assets and consolidation of VIEs.
Consolidated VIEs
The table below represents the carrying amounts and classification of the assets and liabilities of consolidated VIEs
on our consolidated balance sheets.
Other
Our involvement with other VIEs includes our investments in LIHTC partnerships, certain other mortgage-related
guarantees, and certain short-term default and other guarantee commitments that we account for as derivatives:
Investments in LIHTC Partnerships: We hold equity investments in various LIHTC partnerships that invest in
lower-tier or project partnerships that are single asset entities. In February 2010, the Acting Director of FHFA, after
consultation with Treasury, informed us that we may not sell or transfer our investments in LIHTC assets and that
he sees no other disposition options. As a result, we wrote down the carrying value of our LIHTC investments to
zero as of December 31, 2009, as we will not be able to realize any value from these investments either through
reductions to our taxable income and related tax liabilities or through a sale to a third party.
Certain other mortgage-related guarantees: We have other guarantee commitments outstanding on multifamily
housing revenue bonds that were issued by third parties. As part of certain other mortgage-related guarantees, we
also provide commitments to advance funds, commonly referred to as liquidity guarantees, which require us to
advance funds to enable third parties to purchase variable-rate multifamily housing revenue bonds, or certificates
backed by such bonds, that cannot be remarketed within five business days after they are tendered by their holders.
Certain short-term default and other guarantee commitments accounted for as derivatives: Our involvement in
these VIEs includes our guarantee of the performance of interest-rate swap contracts in certain circumstances and
credit derivatives we issued to guarantee the payments on multifamily loans or securities.
At December 31, 2011 and 2010, we were the primary beneficiary of one and three, respectively, real estate entities
that invest in credit-enhanced multifamily housing revenue bonds that were not deemed to be material. We were not the
primary beneficiary of the remainder of other VIEs because our involvement in these VIEs is passive in nature and does
not provide us with the power to direct the activities of the VIEs that most significantly impact their economic
performance. See Table 3.2 for the carrying amounts and classification of the assets and liabilities recorded on our
consolidated balance sheets related to our variable interests in non-consolidated VIEs, as well as our maximum exposure
to loss as a result of our involvement with these VIEs. Also see NOTE 9: FINANCIAL GUARANTEES for additional
information about our involvement with the VIEs related to mortgage-related guarantees and short-term default and other
guarantee commitments discussed above.
(1) Based on UPB and excluding mortgage loans traded, but not yet settled.
(2) Consists of fair value adjustments associated with mortgage loans for which we have made a fair value election.
During 2011 and 2010, we purchased $316.3 billion and $380.7 billion, respectively, in UPB of single-family
mortgage loans and $2.7 billion and $3.2 billion, respectively, in UPB of multifamily loans that were classified as held-
for-investment at purchase. Our sales of multifamily mortgage loans occur primarily through the issuance of multifamily
Other Guarantee Transactions. See NOTE 9: FINANCIAL GUARANTEES for more information. We did not sell a
significant amount of held-for-investment loans during 2011. We did not have significant reclassifications of mortgage
loans into held-for-sale in 2011.
(1) The current LTV ratios are management estimates, which are updated on a monthly basis. Current market values are estimated by adjusting the value
of the property at origination based on changes in the market value of homes in the same geographical area since that time. The value of a property
at origination is based on the sales price for purchase mortgages and third-party appraisal for refinance mortgages. Changes in market value are
derived from our internal index which measures price changes for repeat sales and refinancing activity on the same properties using Freddie Mac
and Fannie Mae single-family mortgage acquisitions, including foreclosure sales. Estimates of the current LTV ratio include the credit-enhanced
portion of the loan and exclude any secondary financing by third parties. The existence of a second lien reduces the borrowers equity in the
property and, therefore, can increase the risk of default.
(2) The serious delinquency rate for the total of single-family mortgage loans with estimated current LTV ratios in excess of 100% was 12.8% and
14.9% as of December 31, 2011 and December 31, 2010, respectively.
(3) The majority of our loan modifications result in new terms that include fixed interest rates after modification. However, our HAMP loan
modifications result in an initial interest rate that subsequently adjusts to a new rate that is fixed for the remaining life of the loan. We have
classified these loans as fixed-rate for presentation even though they have a rate adjustment provision, because the change in rate is determined at
the time of the modification rather than at a future date.
(4) Includes balloon/reset mortgage loans and excludes option ARMs.
(5) We discontinued purchases of Alt-A loans on March 1, 2009 (or later, as customers contracts permitted), and interest-only loans effective
September 1, 2010, and have not purchased option ARM loans since 2007. Modified loans within the Alt-A category remain as such, even though
the borrower may have provided full documentation of assets and income to complete the modification. Modified loans within the option ARM
category remain as such even though the modified loan no longer provides for optional payment provisions.
For information about the payment status of single-family and multifamily mortgage loans, including the amount of
such loans we deem impaired, see NOTE 5: INDIVIDUALLY IMPAIRED AND NON-PERFORMING LOANS. For a
discussion of certain indicators of credit quality for the multifamily loans on our consolidated balance sheets, see
NOTE 16: CONCENTRATION OF CREDIT AND OTHER RISKS Multifamily Mortgage Portfolio.
Allowance for Loan Losses and Reserve for Guarantee Losses, or Loan Loss Reserve
We maintain an allowance for loan losses on mortgage loans that we classify as held-for-investment on our
consolidated balance sheets. Our reserve for guarantee losses is associated with Freddie Mac mortgage-related securities
backed by multifamily loans, certain single-family Other Guarantee Transactions, and other guarantee commitments, for
which we have incremental credit risk.
A significant number of unsecuritized single-family mortgage loans on our consolidated balance sheets are
individually evaluated for impairment and substantially all single-family mortgage loans held by our consolidated trusts
are collectively evaluated for impairment. The ending balance of the allowance for loan losses associated with our held-
for-investment unsecuritized mortgage loans represented approximately 13.0% and 12.7% of the recorded investment in
such loans at December 31, 2011 and 2010, respectively. The ending balance of the allowance for loan losses associated
with mortgage loans held by our consolidated trusts represented approximately 0.5% and 0.7% of the recorded investment
in such loans as of December 31, 2011 and 2010, respectively.
(1) Includes the credit protection associated with unsecuritized mortgage loans, loans held by our consolidated trusts as well as our non-consolidated
mortgage guarantees and excludes FHA/VA and other governmental loans. Except for subordination coverage, these amounts exclude credit
protection associated with $16.6 billion and $19.8 billion in UPB of single-family loans underlying Other Guarantee Transactions as of
December 31, 2011 and December 31, 2010, respectively, for which the information was not available.
(2) Except for subordination, this represents the remaining amount of loss recovery that is available subject to terms of counterparty agreements.
(3) Maximum coverage amounts presented have been limited to the remaining UPB at period end. Prior period amounts have been revised to conform to
current period presentation. Excludes approximately $13.5 billion and $19.7 billion in UPB at December 31, 2011 and 2010, respectively, where the
related loans are also covered by primary mortgage insurance.
(4) Represents the amount of potential reimbursement of losses on securities we have guaranteed that are backed by state and local HFA bonds, under
which Treasury bears initial losses on these securities up to 35% of those issued under the HFA initiative on a combined basis. Treasury will also
bear losses of unpaid interest.
(5) Represents Freddie Mac issued mortgage-related securities with subordination protection, excluding those backed by HFA bonds. Excludes
mortgage-related securities where subordination coverage was exhausted or maximum coverage amounts were limited to the remaining UPB at that
date. Prior period amounts have been revised to conform to current period presentation.
(1) Individually impaired loans with no specific related valuation allowance primarily represent mortgage loans purchased out of PC pools and
accounted for in accordance with the accounting guidance for loans and debt securities acquired with deteriorated credit quality that have not
experienced further deterioration.
(2) See endnote (3) of Table 4.2 Recorded Investment of Held-for-Investment Mortgage Loans, by LTV Ratio.
(3) Includes balloon/reset mortgage loans and excludes option ARMs.
(4) See endnote (5) of Table 4.2 Recorded Investment of Held-for-Investment Mortgage Loans, by LTV Ratio.
(5) Consists primarily of mortgage loans classified as TDRs.
(6) As of December 31, 2011 and 2010, includes $57.4 billion and $32.9 billion, respectively, of UPB associated with loans for which we have recorded
a specific allowance, and $9.1 billion and $11.1 billion, respectively, of UPB associated with loans that have no specific allowance recorded. See
endnote (1) for additional information.
(7) Individually impaired multifamily loans with no specific related valuation allowance primarily represent those loans for which the collateral value is
sufficiently in excess of the loan balance to result in recovery of the entire recorded investment if the property were foreclosed upon or otherwise
subject to disposition.
The average recorded investment in individually impaired loans for the year ended December 31 2009, was
approximately $10.7 billion.
We recognized interest income on individually impaired loans of $0.8 billion for the year ended December 31, 2009.
Interest income foregone on individually impaired loans was approximately $1.6 billion, $0.8 billion, and $0.3 billion for
the years ended December 31, 2011, 2010, and 2009, respectively.
(1) Based on recorded investment in the loan. Mortgage loans whose contractual terms have been modified under agreement with the borrower are not
counted as past due as long as the borrower is current under the modified terms. The payment status of a loan may be affected by temporary timing
differences, or lags, in the reporting of this information to us by our servicers.
(2) See endnote (3) of Table 4.2 Recorded Investment of Held-for-Investment Mortgage Loans, by LTV Ratio.
(3) Includes balloon/reset mortgage loans and excludes option ARMs.
(4) See endnote (5) of Table 4.2 Recorded Investment of Held-for-Investment Mortgage Loans, by LTV Ratio.
We have the option under our PC agreements to remove mortgage loans from the loan pools that underlie our PCs
under certain circumstances to resolve an existing or impending delinquency or default. Since the first quarter of 2010,
our practice generally has been to remove loans from PC trusts when the loans have been delinquent for 120 days or
more. As of December 31, 2011, there were $3.0 billion in UPB of loans underlying our PCs that were 120 days or more
delinquent, and that met our criteria for removing the loan from the consolidated trust. Generally, we remove these
delinquent loans from the PC trust, and thereby extinguish the related PC debt, at the next scheduled PC payment date,
unless the loans proceed to foreclosure transfer, complete a foreclosure alternative or are paid in full by the borrower
before such date.
When we remove mortgage loans from consolidated trusts, we reclassify the loans from mortgage loans held-for-
investment by consolidated trusts to unsecuritized mortgage loans held-for-investment and record an extinguishment of the
corresponding portion of the debt securities of the consolidated trusts. We removed $44.1 billion and $127.5 billion in
UPB of loans from PC trusts or associated with other guarantee commitments during the years ended December 31, 2011
and 2010, respectively.
Single-family:
Non-credit-enhanced portfolio:
Serious delinquency rate . . . . . . . . . . . . . . . . . . . . . . . . ............................ 2.80% 2.97%
Total number of seriously delinquent loans . . . . . . . . . . . ............................ 273,184 296,397
Credit-enhanced portfolio:
Serious delinquency rate . . . . . . . . . . . . . . . . . . . . . . . . ............................ 7.56% 7.83%
Total number of seriously delinquent loans . . . . . . . . . . . ............................ 120,622 144,116
Total portfolio, excluding Other Guarantee Transactions
Serious delinquency rate . . . . . . . . . . . . . . . . . . . . ............................ 3.46% 3.73%
Total number of seriously delinquent loans . . . . . . . . ............................ 393,806 440,513
Other Guarantee Transactions:(2)
Serious delinquency rate . . . . . . . . . . . . . . . . . . . . . . . . ............................ 10.54% 9.86%
Total number of seriously delinquent loans . . . . . . . . . . . ............................ 20,328 21,926
Total single-family:
Serious delinquency rate . . . . . . . . . . . . . . . . . . . . . . . . . ............................ 3.58% 3.84%
Total number of seriously delinquent loans . . . . . . . . . . . . . ............................ 414,134 462,439
Multifamily:(3)
Non-credit-enhanced portfolio:
Delinquency rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ............................ 0.11% 0.12%
UPB of delinquent loans (in millions) . . . . . . . . . . . . . . . ............................ $ 93 $ 106
Credit-enhanced portfolio:
Delinquency rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ............................ 0.52% 0.85%
UPB of delinquent loans (in millions) . . . . . . . . . . . . . . . ............................ $ 166 $ 182
Total Multifamily:
Delinquency rate. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ............................ 0.22% 0.26%
UPB of delinquent loans (in millions) . . . . . . . . . . . . . . . . ............................ $ 259 $ 288
(1) Single-family mortgage loans whose contractual terms have been modified under agreement with the borrower are not counted as seriously
delinquent if the borrower is less than three monthly payments past due under the modified terms. Serious delinquencies on single-family mortgage
loans underlying certain REMICs and Other Structured Securities, Other Guarantee Transactions, and other guarantee commitments may be reported
on a different schedule due to variances in industry practice.
(2) Other Guarantee Transactions generally have underlying mortgage loans with higher risk characteristics, but some Other Guarantee Transactions may
provide inherent credit protections from losses due to underlying subordination, excess interest, overcollateralization and other features.
(3) Multifamily delinquency performance is based on UPB of mortgage loans that are two monthly payments or more past due or those in the process of
foreclosure and includes multifamily Other Guarantee Transactions. Excludes mortgage loans whose contractual terms have been modified under an
agreement with the borrower as long as the borrower is less than two monthly payments past due under the modified contractual terms.
We continue to implement a number of initiatives to modify and restructure loans, including the MHA Program. Our
implementation of the MHA Program, for our loans, includes the following: (a) an initiative to allow mortgages currently
owned or guaranteed by us to be refinanced without obtaining additional credit enhancement beyond that already in place
for the loan (our relief refinance mortgage, which is our implementation of HARP); (b) an initiative to modify mortgages
for both homeowners who are in default and those who are at risk of imminent default (HAMP); and (c) an initiative
designed to permit borrowers who meet basic HAMP eligibility requirements to sell their homes in short sales or to
complete a deed in lieu of foreclosure transaction (HAFA). As part of accomplishing certain of these initiatives, we pay
various incentives to servicers and borrowers. We bear the full costs associated with these loan workout and foreclosure
alternatives on mortgages that we own or guarantee and do not receive a reimbursement for any component from
Treasury. These initiatives slowed the rate of growth in single-family REO assets on our consolidated balance sheets
during 2011 and 2010; however, the number and amount of individually impaired loans increased due to higher volumes
of TDRs. We cannot currently estimate whether, or the extent to which, costs incurred in the near term from HAMP or
other MHA Program efforts may be offset, if at all, by the prevention or reduction of potential future costs of serious
delinquencies and foreclosures due to these initiatives. As discussed below, we recently introduced a new non-HAMP
standard loan modification process that replaced our previous non-HAMP modification initiative.
On July 1, 2011, we adopted an amendment to the accounting guidance for receivables, which clarifies the guidance
regarding a creditors evaluation of when a restructuring is considered a TDR. While our adoption of this amendment did
not have an impact on how we account for TDRs, it did have a significant impact on the population of loans that we
account for as TDRs. See NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Recently Adopted
Accounting Guidance for further information on our implementation of this guidance.
240 Freddie Mac
Single-Family TDRs
We rely on our single-family servicers to contact borrowers who are in default and to identify a loan workout, or
other alternative to foreclosure, in accordance with our requirements. We establish guidelines for our servicers to follow
and provide them default management tools to use, in part, in determining which type of loan workout would be expected
to provide the best opportunity for minimizing our credit losses. We require our single-family servicers to first evaluate
problem loans for a repayment or forbearance plan before considering modification. If a borrower is not eligible for a
modification, our seller/servicers pursue other workout options before considering foreclosure. We receive information
related to loan workouts, such as modifications and loans in a modification trial period, and other alternatives to
foreclosure from our servicers at the loan level on at least a monthly basis. For loans in a modification trial period under
HAMP, we do not receive the terms of the expected completed modification until the modification is completed. For these
loans, we only receive notification that they are in a modification trial period under HAMP. See NOTE 1: SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES Allowance for Loan Losses and Reserve for Guarantee Losses for
more detail.
Repayment plans are agreements with the borrower that give the borrower a defined period of time to reinstate the
mortgage by paying regular payments plus an additional agreed upon amount in repayment of the past due amount. These
agreements are considered TDRs if they result in a delay in payment that is considered to be more than insignificant.
Forbearance agreements are agreements between the servicer and the borrower where reduced payments or no
payments are required during a defined period. These agreements are considered TDRs if they result in a delay in
payment that is considered to be more than insignificant.
In the case of borrowers considered for modifications, our servicers obtain information on income, assets, and other
borrower obligations to determine modified loan terms. Under HAMP, the goal of a single-family loan modification is to
reduce the borrowers monthly mortgage payments to 31% of the borrowers gross monthly income, which may be
achieved through a combination of methods, including: (a) interest rate reductions; (b) term extensions; and (c) principal
forbearance. Principal forbearance is when a portion of the principal is non-interest-bearing, but this does not represent
principal forgiveness. Although HAMP contemplates that some servicers will also make use of principal forgiveness to
achieve reduced payments for borrowers, we have only used forbearance of principal and have not used principal
forgiveness in modifying our loans.
HAMP requires that each borrower complete a trial period during which the borrower will make monthly payments
based on the estimated amount of the modification payments. Trial periods are required for at least three months. After
the final trial-period payment is received by our servicer, the borrower and servicer enter into the modification. With the
adoption of the new accounting guidance for TDRs in the third quarter of 2011, we began to consider restructurings under
HAMP as TDRs at the inception of the trial period if the expected modification will result in a change in our expectation
to collect all amounts due at the original contract rate.
Our HAMP and non-HAMP modification initiatives are available for borrowers experiencing what is generally
expected to be a longer-term financial hardship. Historically, for our non-HAMP modifications, our single-family servicers
have generally taken an approach to modifying the loans terms in the following order of priority until the borrowers
monthly payment amount is reduced to a sustainable level given the borrowers individual circumstances: (a) extend the
term of the loan; and (b) reduce the interest rate of the loan. As discussed below, this non-HAMP modification initiative
has been replaced by the standard modification effective January 1, 2012.
In April 2011, FHFA announced a new set of aligned standards for servicing non-performing loans owned or
guaranteed by Freddie Mac and Fannie Mae. As part of the servicing alignment initiative, we implemented a new non-
HAMP standard loan modification initiative. This new standard modification replaced our previous non-HAMP
modification initiative beginning January 1, 2012. The new standard modification requires a three month trial period.
Servicers began offering standard modification trial period plans with effective dates on or after October 1, 2011. We
consider restructurings under this initiative as TDRs at the inception of the trial period if the expected modification will
result in a change in our expectation to collect all amounts due at the original contract rate.
(1) Under this modification type, past due amounts are added to the principal balance and reamortized based on the original contractual loan terms.
(2) Represents only those agreements or plans that result in more than an insignificant delay, which is generally considered by us as more than three
monthly payments under the original terms.
(3) Represents loans that entered into a trial period for modification. Beginning in the third quarter of 2011, we began to classify loans as TDRs when
they entered a trial period rather than at the time the trial period is completed. As of December 31, 2011, 15,368 of these loans had completed the
trial period and received a modification, 2,389 of these loans terminated the trial period without successful modification, and 7,756 loans remained
in a trial period.
(4) As of December 31, 2011, there were 6,615 loans that completed a forbearance agreement or began the modification process, 9,705 loans that had
experienced a loss event or returned to a delinquent payment status, and 5,780 loans that remained in forbearance.
(5) As of December 31, 2011, there were 3,220 loans that completed a repayment plan or began the modification process, 5,012 loans that experienced a
loss event or terminated their plan and remained delinquent, and 2,555 loans where the borrowers were continuing their repayment plan (actively
repaying past due amounts under the plan).
For information on how we determine our allowance for loan losses, including how payment defaults are considered
in this determination, see NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES.
The table above presents completed loan modification activity based on the following types of modification:
No change in terms: This involves the addition of past due amounts, including delinquent monthly principal and
interest payments, to the remaining principal balance and allows for amortization of such past due amounts over
the loans remaining original contractual life with no other change in terms. These modifications are considered
TDRs if they result in a delay in payment that is considered to be more than insignificant.
Extension of term: This involves resetting the contractual life of the loan to a longer term, and the longer
amortization period generally results in a reduced monthly payment compared to the pre-modified terms. These
modifications are considered TDRs if they result in a delay in payment that is considered to be more than
insignificant.
Reduction of contractual interest rate: These modifications are considered TDRs as they result in a concession
being granted to the borrower as we do not expect to collect all amounts due, including accrued interest at the
original contractual interest rate.
Principal forbearance: This involves the separation of a portion of the principal balance, which is not amortized nor
used in determining the amount of monthly interest. No interest accrues on this portion of the principal and
repayment is delayed until either the final payoff of the mortgage, the maturity date, or the transfer of the property.
Accordingly, this reduces the monthly payment amount compared to the pre-modified terms. These modifications
are considered TDRs as they result in a concession being granted to the borrower as we do not expect to collect all
amounts due, including accrued interest at the original contractual interest rate.
During the year ended December 31, 2011, the average term extension was 96 months and the average interest rate
reduction was 2.7% on completed modifications classified as TDRs.
Multifamily TDRs
The assessment as to whether a multifamily loan restructuring is considered a TDR contemplates the unique facts and
circumstances of each loan. This assessment considers qualitative factors such as whether the borrowers modified interest
242 Freddie Mac
rate is consistent with that of a borrower having a similar credit profile at the time of modification. In certain cases, for
maturing loans we may provide short-term loan extensions of up to 12 months with no changes to the effective borrowing
rate. In other cases we may make more significant modifications of terms for borrowers experiencing financial difficulty,
such as reducing the interest rate or extending the maturity for longer than 12 months. In cases where we do modify the
contractual terms of the loan, the changes in terms may be similar to those of single-family loans, such as an extension of
the term, reduction of contractual rate, principal forbearance, or some combination of these features.
The aggregate recorded investment of single-family loans classified as TDRs during 2011 was higher post-
modification (as shown in the table above) than the aggregate recorded investment of the pre-modified loans (as shown in
Table 5.4 Single-Family TDRs, by Type) since past due amounts are added to the principal balance at the time of
restructuring.
The measurement of impairment for TDRs is based on the excess of our recorded investment in the loans over the
present value of the loans expected future cash flows. Generally, restructurings that are TDRs have a higher allowance for
loan losses than restructurings that are not considered TDRs because TDRs involve a concession being granted to the
borrower. Our process for determining the appropriate allowance for loan losses for both single-family and multifamily
loans considers the impact that our loss mitigation activities, such as loan restructurings, have on probabilities of default.
For single-family loans evaluated individually and collectively for impairment that have been modified, the probability of
default is adversely impacted by the incidence of redefault that we have experienced on similar loans that have completed
a modification. For multifamily loans, the incidence of redefault on loans that have been modified does not directly
impact the allowance for loan losses as our multifamily loans are generally evaluated individually for impairment which is
based on the fair value of the underlying collateral and contemplates the unique facts and circumstances of the loan. The
process for determining the appropriate allowance for loan losses for multifamily loans evaluated collectively for
impairment considers the incidence of redefault on loans that have completed a modification.
The table below presents the performance of our TDR modifications based on the original category of the loan
before restructuring. Modified loans within the Alt-A category continue to remain in that category, even though the
borrower may have provided full documentation of assets and income before completing the modification. Modified loans
within the option ARM category continue to remain in that category even though the modified loan no longer provides for
optional payment provisions. Substantially all of our completed single-family loan modifications classified as a TDR
during 2011 resulted in a modified loan with a fixed interest rate or one that is fixed below market for five years and then
gradually adjusts to a market rate (determined at the time of modification) and remains fixed at that new rate for the
243 Freddie Mac
remaining term. The table below reflects only performance of completed modifications and excludes loans subject to other
loss mitigation activity that were classified as TDRs.
(1) Represents TDR loans that experienced a payment default during the period and had completed a modification event in the twelve months prior to
the payment default. A payment default occurs when a borrower either: (a) became two or more months delinquent; or (b) completed a loss event,
such as a short sale or foreclosure. We only include payment defaults for a single loan once during each quarterly period; however, a single loan will
be reflected more than once if the borrower experienced another payment default in a subsequent quarter.
(2) Represents the recorded investment at the end of the period in which the loan was modified and does not represent the recorded investment as of
December 31, 2011.
During 2011, there were 2,163 loans with other loss mitigation activities (i.e., repayment plan, forbearance
agreement, or trial period modifications) initially classified as TDRs, with a post-TDR recorded investment of
$371 million, that returned to a current payment status, and then subsequently became two months delinquent. In addition,
during 2011, there were 3,109 loans with other loss mitigation activities initially classified as TDRs, with a post-TDR
recorded investment of $520 million that subsequently experienced a loss event, such as a short sale or a foreclosure
transfer.
(1) Adjustment to the beginning balance related to the adoption of new accounting guidance for transfers of financial assets and consolidation of VIEs.
See NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES for further information.
The REO balance, net at December 31, 2011 and December 31, 2010 associated with single-family properties was
$5.5 billion and $7.0 billion, respectively, and the balance associated with multifamily properties was $133 million and
$107 million, respectively. The West region represented approximately 30% and 29% of our single-family REO additions
during the years ended December 31, 2011 and 2010, respectively, based on the number of properties, and the North
Central region represented approximately 27% and 23% of our single-family REO additions during these periods. Our
single-family REO inventory consisted of 60,535 properties and 72,079 properties at December 31, 2011 and
December 31, 2010, respectively. The pace of our REO acquisitions slowed beginning in the fourth quarter of 2010 due to
delays in the foreclosure process. These delays in foreclosures continued in 2011, particularly in states that require a
judicial foreclosure process. See NOTE 16: CONCENTRATION OF CREDIT AND OTHER RISKS Seller/Servicers
for information about regional concentration of our portfolio as well as further details about delays in the single-family
foreclosure process.
Our REO operations expenses includes REO property expenses, net losses incurred on disposition of REO properties,
adjustments to the holding period allowance associated with REO properties to record them at the lower of their carrying
amount or fair value less the estimated costs to sell, and recoveries from insurance and other credit enhancements. An
allowance for estimated declines in the REO fair value during the period properties are held reduces the carrying value of
REO property. Excluding holding period valuation adjustments, we recognized losses of $165 million and $93 million on
REO dispositions during 2011 and 2010, respectively. We increased our valuation allowance for properties in our REO
inventory by $304 million and $498 million in 2011 and 2010, respectively.
REO property acquisitions that result from extinguishment of our mortgage loans held on our consolidated balance
sheets are treated as non-cash transfers. The amount of non-cash acquisitions of REO properties during the years ended
December 31, 2011, 2010, and 2009 was $8.7 billion, $12.3 billion, and $0.9 billion, respectively.
Available-for-sale securities:
Freddie Mac . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 80,742 $ 5,142 $ (195) $ 85,689
Subprime . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 47,916 1 (14,056) 33,861
CMBS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 58,455 1,551 (1,919) 58,087
Option ARM . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10,726 16 (3,853) 6,889
Alt-A and other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15,561 58 (2,451) 13,168
Fannie Mae . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23,025 1,348 (3) 24,370
Obligations of states and political subdivisions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9,885 31 (539) 9,377
Manufactured housing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 945 13 (61) 897
Ginnie Mae . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 268 28 296
Total available-for-sale securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $247,523 $ 8,188 $(23,077) $232,634
(1) Represents the gross unrealized losses for securities for which we have previously recognized other-than-temporary impairments in earnings.
(2) Represents the gross unrealized losses for securities for which we have not previously recognized other-than-temporary impairments in earnings.
At December 31, 2011, total gross unrealized losses on available-for-sale securities were $20.1 billion. The gross
unrealized losses relate to 1,625 individual lots representing 1,556 separate securities, including securities with non-credit-
related other-than-temporary impairments recognized in AOCI. We purchase multiple lots of individual securities at
different times and at different costs. We determine gross unrealized gains and gross unrealized losses by specifically
evaluating investment positions at the lot level; therefore, some of the lots we hold for a single security may be in an
unrealized gain position while other lots for that security may be in an unrealized loss position, depending upon the
amortized cost of the specific lot.
Non-Agency Mortgage-Related Securities Backed by Subprime, Option ARM, Alt-A and Other Loans
We believe the unrealized losses on the non-agency mortgage-related securities we hold are a result of poor
underlying collateral performance, limited liquidity, and large risk premiums. We consider securities to be other-than-
temporarily impaired when future credit losses are deemed likely.
Our review of the securities backed by subprime, option ARM, and Alt-A and other loans includes loan level default
modeling and analyses of the individual securities based on underlying collateral performance, including the collectability
of amounts from bond insurers. In the case of bond insurers, we also consider factors such as the availability of capital,
generation of new business, pending regulatory action, credit ratings, security prices, and credit default swap levels traded
on the insurers. We consider loan level information including estimated current LTV ratios, FICO scores, and other loan
level characteristics. We also consider the differences between the loan level characteristics of the performing and non-
performing loan populations. For additional information regarding bond insurers, see NOTE 16: CONCENTRATION OF
CREDIT AND OTHER RISKS Bond Insurers.
248 Freddie Mac
The table below presents the modeled default rates and severities, without regard to subordination, that are used to
determine whether our senior interests in certain available-for-sale non-agency mortgage-related securities will experience
a cash shortfall. Our proprietary default model incorporates assumptions about future home prices, as defaults and
severities are modeled at the loan level and then aggregated. The model uses projections of future home prices at the state
level. Assumptions about voluntary prepayment rates are also an input to the model and are discussed below.
Table 7.3 Significant Modeled Attributes for Certain Available-For-Sale Non-Agency Mortgage-Related
Securities
December 31, 2011
Alt-A(1)
Subprime First Lien(2) Option ARM Fixed Rate Variable Rate Hybrid Rate
(dollars in millions)
Issuance Date
2004 and prior:
UPB . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 1,218 $ 117 $ 867 $ 512 $2,195
Weighted average collateral defaults(3) . . . . . . . . . . . . . . . . 36% 33% 8% 43% 24%
Weighted average collateral severities(4) . . . . . . . . . . . . . . . 56% 55% 47% 52% 41%
Weighted average voluntary prepayment rates(5) . . . . . . . . . . 6% 7% 19% 7% 8%
Average credit enhancement(6) . . . . . . . . . . . . . . . . . . . . . 43% 15% 14% 18% 15%
2005:
UPB . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 6,293 $ 2,882 $1,206 $ 840 $3,944
Weighted average collateral defaults(3) . . . . . . . . . . . . . . . . 55% 51% 24% 53% 38%
Weighted average collateral severities(4) . . . . . . . . . . . . . . . 67% 63% 55% 59% 50%
Weighted average voluntary prepayment rates(5) . . . . . . . . . . 4% 6% 14% 7% 8%
Average credit enhancement(6) . . . . . . . . . . . . . . . . . . . . . 52% 12% 3% 26% 5%
2006:
UPB . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $19,823 $ 6,661 $ 549 $1,127 $1,183
Weighted average collateral defaults(3) . . . . . . . . . . . . . . . . 65% 63% 37% 61% 50%
Weighted average collateral severities(4) . . . . . . . . . . . . . . . 72% 69% 61% 68% 57%
Weighted average voluntary prepayment rates(5) . . . . . . . . . . 7% 6% 13% 9% 8%
Average credit enhancement(6) . . . . . . . . . . . . . . . . . . . . . 15% 3% 7% (1)% 1%
2007:
UPB . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $21,310 $ 4,289 $ 159 $1,354 $ 324
Weighted average collateral defaults(3) . . . . . . . . . . . . . . . . 62% 58% 53% 60% 60%
Weighted average collateral severities(4) . . . . . . . . . . . . . . . 73% 69% 69% 67% 67%
Weighted average voluntary prepayment rates(5) . . . . . . . . . . 7% 7% 11% 9% 8%
Average credit enhancement(6) . . . . . . . . . . . . . . . . . . . . . 17% 11% 11% (7)% %
Total:
UPB . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $48,644 $13,949 $2,781 $3,833 $7,646
Weighted average collateral defaults(3) . . . . . . . . . . . . . . . . 61% 59% 24% 56% 37%
Weighted average collateral severities(4) . . . . . . . . . . . . . . . 72% 68% 58% 64% 51%
Weighted average voluntary prepayment rates(5) . . . . . . . . . . 6% 6% 15% 8% 8%
Average credit enhancement(6) . . . . . . . . . . . . . . . . . . . . . 21% 7% 8% 5% 7%
(1) Excludes non-agency mortgage-related securities backed by other loans, which are primarily comprised of securities backed by home equity lines of
credit.
(2) Excludes non-agency mortgage-related securities backed exclusively by subprime second liens. Certain securities identified as subprime first lien
may be backed in part by subprime second lien loans, as the underlying loans of these securities were permitted to include a small percentage of
subprime second lien loans.
(3) The expected cumulative default rate expressed as a percentage of the current collateral UPB.
(4) The expected average loss given default calculated as the ratio of cumulative loss over cumulative default for each security.
(5) The securitys voluntary prepayment rate represents the average of the monthly voluntary prepayment rate weighted by the securitys outstanding
UPB.
(6) Reflects the ratio of the current principal amount of the securities issued by a trust that will absorb losses in the trust before any losses are allocated
to securities that we own. Percentage generally calculated based on: (a) the total UPB of securities subordinate to the securities we own, divided by
(b) the total UPB of all of the securities issued by the trust (excluding notional balances). Only includes credit enhancement provided by
subordinated securities; excludes credit enhancement provided by bond insurance, overcollateralization and other forms of credit enhancement.
Negative values are shown when collateral losses that have yet to be applied to the tranches exceed the remaining credit enhancement, if any.
In evaluating the non-agency mortgage-related securities backed by subprime, option ARM, and Alt-A and other
loans for other-than-temporary impairment, we noted that the percentage of securities that were AAA-rated and the
percentage that were investment grade declined significantly since acquisition. While these ratings have declined, the
ratings themselves are not determinative that a loss is more or less likely. 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 collectability of
contractual amounts due to us. As such, we have 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, including changes since December 31,
2011.
249 Freddie Mac
Our analysis is subject to change as new information regarding delinquencies, severities, loss timing, prepayments,
and other factors becomes available. While it is reasonably possible that, under certain conditions, collateral losses on our
remaining available-for-sale securities for which we have not recorded an impairment charge could exceed our credit
enhancement levels and a principal or interest loss could occur, we do not believe that those conditions were likely as of
December 31, 2011.
Bond Insurance
We rely on bond insurance, including secondary coverage, to provide credit protection on some of our non-agency
mortgage-related securities. Circumstances in which it is likely a principal and interest shortfall will occur and there is
substantial uncertainty surrounding a bond insurers ability to pay all future claims can give rise to recognition of other-
than-temporary impairment recognized in earnings. See NOTE 16: CONCENTRATION OF CREDIT AND OTHER
RISKS Bond Insurers for additional information.
(1) As a result of the adoption of an amendment to the accounting guidance for investments in debt and equity securities on April 1, 2009, net
impairment of available-for-sale securities recognized in earnings for the nine months ended December 31, 2009 (which is included in the year
ended December 31, 2009) and the years ended December 31, 2011 and 2010 includes credit-related other-than-temporary impairments and other-
than-temporary impairments on securities which we intend to sell or it is more likely than not that we will be required to sell. In contrast, net
impairment of available-for-sale securities recognized in earnings for the three months ended March 31, 2009 (which is included in the year ended
December 31, 2009) includes both credit-related and non-credit-related other-than-temporary impairments as well as other-than-temporary
impairments on securities for which we could not assert the positive intent and ability to hold until recovery of the unrealized losses.
(2) Includes $181 million of other-than-temporary impairments recognized in earnings for the year ended December 31, 2011, as we have the intent to
sell the related securities before recovery of its amortized cost basis.
The table below presents the changes in the unrealized credit-related other-than-temporary impairment component of
the amortized cost related to available-for-sale securities: (a) that we have written down for other-than-temporary
impairment; and (b) for which the credit component of the loss is recognized in earnings. The credit-related other-than-
temporary impairment component of the amortized cost represents the difference between the present value of expected
future cash flows, including the estimated proceeds from bond insurance, and the amortized cost basis of the security prior
to considering credit losses. The beginning balance represents the other-than-temporary impairment credit loss component
related to available-for-sale securities for which other-than-temporary impairment occurred prior to January 1, 2011, but
will not be realized until the securities are sold, written off, or mature. Net impairment of available-for-sale securities
recognized in earnings is presented as additions in two components based upon whether the current period is: (a) the first
time the debt security was credit-impaired; or (b) not the first time the debt security was credit-impaired. The credit loss
component is reduced if we sell, intend to sell or believe we will be required to sell previously credit-impaired available-
for-sale securities. Additionally, the credit loss component is reduced by the amortization resulting from significant
increases in cash flows expected to be collected that are recognized over the remaining life of the security.
(1) Excludes other-than-temporary impairments on securities that we intend to sell or it is more likely than not that we will be required to sell before
recovery of the unrealized losses.
Table 7.6 Gross Realized Gains and Gross Realized Losses on Sales of Available-For-Sale Securities
Year Ended December 31,
2011 2010 2009
(in millions)
Gross realized gains
Mortgage-related securities:
Freddie Mac . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 77 $27 $ 879
Fannie Mae . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14 54 2
CMBS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37
Obligations of states and political subdivisions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11 3 2
Total mortgage-related securities gross realized gains . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 139 84 883
Non-mortgage-related securities:
Asset-backed securities . . . . . . . . . . . . . . . . . . . . . . . . . ..................................... 10 313
Total non-mortgage-related securities gross realized gains ..................................... 10 313
Gross realized gains . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ..................................... 139 94 1,196
Gross realized losses
Mortgage related securities:(1)
Freddie Mac . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (1) (113)
CMBS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (81)
Option ARM . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (6)
Total mortgage-related securities gross realized losses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (81) (7) (113)
Gross realized losses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (81) (7) (113)
Net realized gains (losses) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 58 $87 $1,083
(1) These individual sales do not change our conclusion that we do not intend to sell the majority of our remaining mortgage-related securities and it is
not more likely than not that we will be required to sell such securities before a recovery of the unrealized losses.
(1) Maturity information provided is based on contractual maturities, which may not represent expected life as obligations underlying these securities
may be prepaid at any time without penalty.
(2) The weighted average yield is calculated based on a yield for each individual lot held at December 31, 2011 excluding any fully taxable-equivalent
adjustments related to tax exempt sources of interest income. The numerator for the individual lot yield consists of the sum of: (a) the year-end
interest coupon rate multiplied by the year-end UPB; and (b) the annualized amortization income or expense calculated for December 2011
(excluding the accretion of non-credit-related other-than-temporary impairments and any adjustments recorded for changes in the effective rate). The
denominator for the individual lot yield consists of the year-end amortized cost of the lot excluding effects of other-than-temporary impairments on
the UPB of impaired lots.
(1) Net of tax benefit of $1.4 billion for the year ended December 31, 2010.
(2) Net of tax benefit of $5.3 billion for the year ended December 31, 2009.
(3) Net of tax expense of $1.1 billion, $5.9 billion and $6.1 billion for the years ended December 31, 2011, 2010 and 2009, respectively.
(4) Net of tax benefit of $785 million, $1.5 billion, and $3.5 billion for the years ended December 31, 2011, 2010, and 2009, respectively.
(5) Includes the reversal of previously recorded unrealized losses that have been recognized on our consolidated statements of income and
comprehensive income as impairment losses on available-for-sale securities of $1.5 billion, $2.8 billion, and $7.3 billion, net of taxes, for the years
ended December 31, 2011, 2010, and 2009, respectively.
Trading securities mainly include Treasury securities, agency fixed-rate and variable-rate pass-through mortgage-
related securities, and agency REMICs, including inverse floating rate, interest-only and principal-only securities. With the
exception of principal-only securities, our agency securities, classified as trading, were at a net premium (i.e., have higher
net fair value than UPB) as of December 31, 2011.
For the years ended December 31, 2011, 2010, and 2009, we recorded net unrealized gains (losses) on trading
securities held at those dates of $(1.0) billion, $(1.4) billion, and $4.3 billion, respectively.
Total trading securities include $1.9 billion and $2.5 billion, respectively, of hybrid financial assets as defined by the
derivative and hedging accounting guidance regarding certain hybrid financial instruments as of December 31, 2011 and
2010. Gains (losses) on trading securities on our consolidated statements of income and comprehensive income include
$(109) million and $(53) million, respectively, related to these hybrid financial securities for the years ended
December 31, 2011 and 2010.
Collateral Pledged
Collateral Pledged to Freddie Mac
Our counterparties are required to pledge collateral for securities purchased under agreements to resell transactions,
and most derivative instruments are subject to collateral posting thresholds generally related to a counterpartys credit
rating. We consider the types of securities being pledged to us as collateral when determining how much we lend related
to securities purchased under agreements to resell transactions. Additionally, we subsequently and regularly review the
market values of these securities compared to amounts loaned in an effort to minimize our exposure to losses. We had
cash and cash equivalents pledged to us related to derivative instruments of $3.2 billion and $2.2 billion at December 31,
2011 and 2010, respectively. 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 instruments. At December 31, 2011 and 2010, we
did not have collateral in the form of securities pledged to and held by us under these master agreements. Also at
December 31, 2011 and 2010, we did not have securities pledged to us for securities purchased under agreements to resell
transactions that we had the right to repledge. From time to time we may obtain pledges of collateral from certain seller/
servicers as additional security for their obligations to us, including their obligations to repurchase mortgages sold to us in
breach of representations and warranties. This collateral may take the form of cash, cash equivalents, or agency securities.
In addition, we hold cash and cash equivalents as collateral in connection with certain of our multifamily guarantees
and mortgage loans as credit enhancements. The cash and cash equivalents held as collateral related to these transactions
at December 31, 2011 and 2010 was $246 million and $550 million, respectively.
(1) Represents PCs held by us in our Investments segment mortgage investments portfolio and pledged as collateral which are recorded as a reduction to
debt securities of consolidated trusts held by third parties on our consolidated balance sheets.
(1) Represents par value, net of associated discounts, premiums, and hedge-related basis adjustments, with $0.2 billion and $0.9 billion, respectively, of
other short-term debt, and $2.8 billion and $3.6 billion, respectively, of other long-term debt that represents the fair value of debt securities with the
fair value option elected at December 31, 2011 and 2010.
During 2011, 2010, and 2009, we recognized fair value gains (losses) of $91 million, $581 million, and
$(405) million, respectively, on our foreign-currency denominated debt, of which $40 million, $461 million, and
$(209) million, respectively, are gains (losses) related to our net foreign-currency translation.
(1) Debt securities of consolidated trusts held by third parties are prepayable without penalty.
(2) Based on the contractual maturity and interest rate of debt securities of our consolidated trusts held by third parties.
(3) Represents par value, net of associated discounts, premiums, and other basis adjustments.
(4) Includes interest-only securities and interest-only mortgage loans that allow the borrowers to pay only interest for a fixed period of time before the
loans begin to amortize.
(5) The effective rate for debt securities of consolidated trusts held by third parties was 4.22% and 4.57% as of December 31, 2011 and 2010,
respectively.
The table below summarizes the contractual maturities of other long-term debt securities and debt securities of
consolidated trusts held by third parties at December 31, 2011.
Table 8.5 Contractual Maturity of Other Long-Term Debt and Debt Securities of Consolidated Trusts Held by
Third Parties
Annual Maturities Par Value(1)(2)
(in millions)
Other debt:
2012 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 127,798
2013 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 142,943
2014 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 87,453
2015 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33,897
2016 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45,526
Thereafter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 75,254
Debt securities of consolidated trusts held by third parties(3) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,452,476
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,965,347
Net discounts, premiums, hedge-related and other basis adjustments(4) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5,237
Total debt securities of consolidated trusts held by third parties and other long-term debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . $1,970,584
(1) Represents par value of long-term debt securities and subordinated borrowings and UPB of debt securities of our consolidated trusts held by third
parties.
(2) For other debt denominated in a currency other than the U.S. dollar, the par value is based on the exchange rate at December 31, 2011.
(3) Contractual maturities of debt securities of consolidated trusts held by third parties may not represent expected maturity as they are prepayable at
any time without penalty.
(4) Other basis adjustments primarily represent changes in fair value attributable to instrument-specific credit risk and interest-rate risk related to other
foreign-currency denominated debt.
Lines of Credit
At both December 31, 2011 and 2010, we had one secured, uncommitted intraday line of credit with a third party
totaling $10 billion. We use this line of credit regularly to provide us with additional liquidity to fund our intraday
payment activities through the Fedwire system in connection with the Federal Reserves payments system risk policy,
which restricts or eliminates daylight overdrafts by the GSEs. No amounts were drawn on this line of credit at
December 31, 2011 or 2010. We expect to continue to use the current facility to satisfy our intraday financing needs;
however, as the line is uncommitted, we may not be able to draw on it if and when needed.
Derivative Instruments
Derivative instruments include written options, written swaptions, interest-rate swap guarantees, and short-term
default guarantee commitments accounted for as credit derivatives. See NOTE 11: DERIVATIVES for further discussion
of these derivative guarantees.
We guarantee the performance of interest-rate swap contracts in two circumstances. First, we guarantee that a
borrower will perform under an interest-rate swap contract linked to a borrowers ARM. And second, in connection with
our issuance of certain REMICs and Other Structured Securities, which are backed by tax-exempt bonds, we guarantee
that the sponsor of the transaction will perform under the interest-rate swap contract linked to the senior variable-rate
certificates that we issued.
We also have issued REMICs and Other Structured Securities with stated final maturities that are shorter than the
stated maturity of the underlying mortgage loans. If the underlying mortgage loans to these securities have not been
purchased by a third party or fully matured as of the stated final maturity date of such securities, we will sponsor an
auction of the underlying assets. To the extent that purchase or auction proceeds are insufficient to cover unpaid principal
amounts due to investors in such REMICs and Other Structured Securities, we are obligated to fund such principal. Our
maximum exposure on these guarantees represents the outstanding UPB of the REMICs and Other Structured Securities
subject to stated final maturities.
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. Our assessment is that the risk of any material loss from such a claim for indemnification
is remote and there are no significant probable and estimable losses associated with these contracts. In addition, we
provided indemnification for litigation defense costs to certain former officers who are subject to ongoing litigation. See
NOTE 18: LEGAL CONTINGENCIES for further information on ongoing litigation. The recognized liabilities on our
consolidated balance sheets related to indemnifications were not significant at December 31, 2011 and 2010.
As part of the guarantee arrangements pertaining to multifamily housing revenue bonds, we provided commitments to
advance funds, commonly referred to as liquidity guarantees. These guarantees require us to advance funds to enable
others to repurchase any tendered tax-exempt and related taxable bonds that are unable to be remarketed. Any such
advances are treated as loans and are secured by a pledge to us of the repurchased securities until the securities are
260 Freddie Mac
remarketed. We hold cash and cash equivalents on our consolidated balance sheets for the amount of these commitments.
No advances under these liquidity guarantees were outstanding at December 31, 2011 and 2010.
Securitization Trusts
We established securitization trusts for the administration of cash remittances received on the underlying assets of our
PCs and REMICs and Other Structured Securities. As described in NOTE 1: SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES, we recognize the cash held by our consolidated single-family PC trusts and certain Other
Guarantee Transactions as restricted cash and cash equivalents on our consolidated balance sheets. We receive fees as
master servicer, issuer, trustee and administrator for our consolidated PCs and REMICs and Other Structured Securities.
Such amounts are recorded within net interest income. These fees are derived from interest earned on principal and
interest cash flows held in restricted cash and cash equivalents between the time funds are remitted to the trust by
servicers and the date of distribution to our PCs and REMICs and Other Structured Securities holders. These fees are
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 recognized net trust management income (expense) of $0 million during 2011 and 2010 (on
our non-consolidated trusts), and $(761) million during 2009 (on all trusts), on our consolidated statements of income and
comprehensive income.
Use of Derivatives
We use derivatives primarily to:
hedge forecasted issuances of debt;
synthetically create callable and non-callable funding;
regularly adjust or rebalance our funding mix in response to changes in the interest-rate characteristics of our
mortgage-related assets; and
hedge foreign-currency exposure.
Foreign-Currency Exposure
We use foreign-currency swaps to eliminate virtually all of our exposure to fluctuations in exchange rates related to
our foreign-currency denominated debt by entering into swap transactions that effectively convert foreign-currency
denominated obligations into U.S. dollar-denominated obligations.
Types of Derivatives
We principally use the following types of derivatives:
LIBOR- and Euribor-based interest-rate swaps;
LIBOR- and Treasury-based options (including swaptions);
LIBOR- and Treasury-based exchange-traded futures; and
Foreign-currency swaps.
In addition to swaps, futures and purchased options, our derivative positions include the following:
Commitments
We routinely enter into commitments that include: (a) our commitments to purchase and sell investments in
securities; (b) our commitments to purchase mortgage loans; and (c) our commitments to purchase and extinguish or issue
debt securities of our consolidated trusts. Most of these commitments are considered derivatives and therefore are subject
to the accounting guidance for derivatives and hedging.
Credit Derivatives
We entered into credit-risk sharing agreements for certain credit enhanced multifamily housing revenue bonds held
by third parties in exchange for a monthly fee. In addition, we have purchased mortgage loans containing debt
cancellation contracts, which provide for 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.
For a discussion of our significant accounting policies related to derivatives, please see NOTE 1: SUMMARY OF
SIGNIFICANT ACCOUNTING POLICIES Derivatives.
263 Freddie Mac
Derivative Assets and Liabilities at Fair Value
The table below presents the location and fair value of derivatives reported in our consolidated balance sheets.
(1) The value of derivatives on our consolidated balance sheets is reported as derivative assets, net and derivative liabilities, net.
(2) See Use of Derivatives for additional information about the purpose of entering into derivatives not designated as hedging instruments and our
overall risk management strategies.
(3) Primarily includes purchased interest-rate caps and floors.
(4) Commitments include: (a) our commitments to purchase and sell investments in securities; (b) our commitments to purchase mortgage loans; and
(c) our commitments to purchase and extinguish or issue debt securities of our consolidated trusts.
(5) Represents counterparty netting, cash collateral netting, net trade/settle receivable or payable, and net derivative interest receivable or payable. The
net cash collateral posted and net trade/settle receivable were $9.4 billion and $1 million, respectively, at December 31, 2011. The net cash collateral
posted and net trade/settle receivable were $6.3 billion and $1 million, respectively, at December 31, 2010. The net interest receivable (payable) of
derivative assets and derivative liabilities was approximately $(1.1) billion and $(0.8) billion at December 31, 2011 and 2010, respectively, which
was mainly related to interest-rate swaps that we have entered into.
The carrying value of our derivatives on our consolidated balance sheets is equal to their fair value, including net
derivative interest receivable or payable and 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 at December 31, 2011
and 2010 was $3.2 billion and $2.2 billion, respectively. Cash collateral we posted to counterparties to derivative contracts
that has been offset against derivative liabilities at December 31, 2011 and 2010 was $12.6 billion and $8.5 billion,
respectively. We are subject to collateral posting thresholds based on the credit rating of our long-term senior unsecured
debt securities from S&P or Moodys. The lowering or withdrawal of our credit rating by S&P or Moodys may increase
our obligation to post collateral, depending on the amount of the counterpartys exposure to Freddie Mac with respect to
the derivative transactions. As a result of S&Ps downgrade of Freddie Macs credit rating of our long-term senior
unsecured debt from AAA to AA+ on August 8, 2011, we posted additional collateral to certain derivative counterparties
in accordance with the terms of the derivative agreements.
The aggregate fair value of all derivative instruments with credit-risk-related contingent features that were in a
liability position on December 31, 2011, was $12.7 billion for which we posted collateral of $12.6 billion in the normal
course of business. If the credit-risk-related contingent features underlying these agreements had been triggered on
December 31, 2011, we would have been required to post an additional $0.1 billion of collateral to our counterparties.
264 Freddie Mac
At December 31, 2011 and 2010, there were no amounts of cash collateral that were not offset against derivative
assets, net or derivative liabilities, net, as applicable. See NOTE 16: CONCENTRATION OF CREDIT AND OTHER
RISKS for further information related to our derivative counterparties.
(1) Derivatives that meet specific criteria may be accounted for as cash flow hedges. 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 until the related forecasted transaction affects earnings or is
determined to be probable of not occurring.
(2) No amounts of gains or (losses) were recognized in AOCI on derivatives (effective portion) and in other income (ineffective portion and amount
excluded from effectiveness testing).
(3) Amounts reported in AOCI related to changes in the fair value of commitments to purchase securities that were designated as cash flow hedges are
recognized as basis adjustments to the related assets, which are amortized in earnings as interest income. Amounts linked to interest payments on
long-term debt are recorded in other debt interest expense and amounts not linked to interest payments on long-term debt are recorded in expense
related to derivatives.
(4) Gains (losses) are reported as derivative gains (losses) on our consolidated statements of income and comprehensive income.
(5) See Use of Derivatives for additional information about the purpose of entering into derivatives not designated as hedging instruments and our
overall risk management strategies.
(6) Primarily includes purchased interest-rate caps and floors.
(7) 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.
(8) Commitments include: (a) our commitments to purchase and sell investments in securities; (b) our commitments to purchase mortgage loans; and
(c) our commitments to purchase and extinguish or issue debt securities of our consolidated trusts.
(9) Related to the bankruptcy of Lehman Brothers Holdings, Inc., or Lehman.
(10) 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 and comprehensive income.
(11) Includes imputed interest on zero-coupon swaps.
(1) Represents net deferred gains and losses on closed (i.e., terminated or redesignated) cash flow hedges.
(2) Represents adjustment to initially apply the accounting guidance for accounting for transfers of financial assets and consolidation of VIEs, as well as
a change in the amortization method for certain related deferred items. Net of tax benefit of $4 million for the year ended December 31, 2010.
(3) Net of tax benefit of $249 million, $337 million, and $392 million for the years ended December 31, 2011, 2010, and 2009, respectively.
We received $500 million in March 2011, $1.5 billion in September 2011, and $6.0 billion in December 2011
pursuant to draw requests that FHFA submitted to Treasury on our behalf to address the deficits in our net worth as of
December 31, 2010, June 30, 2011, and September 30, 2011, respectively. In addition, we had a deficit in net worth of
$146 million as of December 31, 2011. See NOTE 2: CONSERVATORSHIP AND RELATED MATTERS
Government Support for our Business for additional information regarding the draw request that FHFA, as Conservator,
will submit on our behalf to Treasury to address our deficit in net worth. The aggregate liquidation preference on the
senior preferred stock owned by Treasury was $72.2 billion and $64.2 billion as of December 31, 2011 and December 31,
2010, respectively. See NOTE 15: REGULATORY CAPITAL for additional information.
267 Freddie Mac
Common Stock Warrant
Pursuant to the Purchase Agreement described in NOTE 2: CONSERVATORSHIP AND RELATED MATTERS, 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 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.
We account for the warrant in permanent equity. At issuance on September 7, 2008, we recognized the warrant at fair
value, and we do not recognize subsequent changes in fair value while the warrant remains classified in equity. We
recorded an aggregate fair value of $2.3 billion for the warrant as a component of additional paid-in-capital. We derived
the fair value of the warrant using a modified Black-Scholes model. If the warrant is exercised, the stated value of the
common stock issued will be reclassified to common stock in our consolidated balance sheets. The warrant was
determined to be in-substance non-voting common stock, because the warrants exercise price of $0.00001 per share is
considered non-substantive (compared to the market price of our common stock). As a result, the warrant is included in
the computation of basic and diluted earnings (loss) per share. The weighted average shares of common stock outstanding
for the years ended December 31, 2011, 2010, and 2009, respectively, included shares of common stock that would be
issuable upon full exercise of the warrant issued to Treasury.
Preferred Stock
The table below provides a summary of our preferred stock outstanding at December 31, 2011. We have the option
to redeem our preferred stock on specified dates, at their redemption price plus dividends accrued through the redemption
date. However, without the consent of Treasury, we are restricted from making payments to purchase or redeem preferred
stock as well as paying any preferred dividends, other than dividends on the senior preferred stock. In addition, all 24
classes of preferred stock are perpetual and non-cumulative, and carry no significant voting rights or rights to purchase
additional Freddie Mac stock or securities. Costs incurred in connection with the issuance of preferred stock are charged
to additional paid-in capital.
Stock-Based Compensation
Following the implementation of the conservatorship in September 2008, we suspended the operation of our ESPP,
and are no longer making grants under our 2004 Employee Plan or our Directors Plan. We collectively refer to the 2004
Employee Plan and the 1995 Employee Plan as the Employee Plans. 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.
We did not repurchase or issue any of our common shares or non-cumulative preferred stock during 2011 and 2010,
except for issuances of treasury stock as reported on our consolidated statements of equity (deficit) relating to stock-based
compensation granted prior to conservatorship. Common stock delivered under these stock-based compensation plans
consists of treasury stock or shares acquired in market transactions on behalf of the participants. During 2011, restrictions
lapsed on 851,131 restricted stock units and 37,630 restricted stock units were forfeited. At December 31, 2011, 491,363
restricted stock units remained outstanding. In addition, there were 41,160 shares of restricted stock outstanding at both
December 31, 2011 and 2010. During 2011, no stock options were exercised and 1,160,820 stock options were forfeited
or expired. At December 31, 2011, 2,021,632 stock options were outstanding.
For purposes of the earnings-per-share calculation, antidilutive potential common shares excluded from the
computation of dilutive potential common shares were 3,383,185, 5,290,347, and 7,541,077 at December 31, 2011, 2010,
and 2009, respectively.
269 Freddie Mac
Dividends Declared During 2011
No common dividends were declared in 2011. During 2011, we paid dividends of $6.5 billion in cash on the senior
preferred stock at the direction of our Conservator. We did not declare or pay dividends on any other series of Freddie
Mac preferred stock outstanding during 2011.
On March 30, 2010, our REIT subsidiaries paid preferred stock dividends for one quarter, consistent with approval
from Treasury and direction from FHFA. During 2010, each of our two REIT subsidiaries was eliminated via a merger
transaction and no other preferred or common stock dividends were paid by the REITs during the year ended
December 31, 2010.
(1) Does not reflect: (a) the deferred tax effects of unrealized (gains) losses on available-for-sale securities, the tax effects of net (gains) losses related to
the effective portion of derivatives designated in cash flow hedge relationships, and the tax effects of certain changes in our defined benefit plans
which are reported as part of AOCI; (b) certain stock-based compensation tax effects reported as part of additional paid-in capital; and (c) the tax
effect of the cumulative effect of change in accounting principles.
A reconciliation between our federal statutory income tax rate and our effective tax rate for 2011, 2010, and 2009 is
presented in the table below.
In 2011, 2010, and 2009, our effective tax rate differs from the statutory tax rate of 35% primarily due to the
establishment of a valuation allowance against a portion of our net deferred tax assets. Our income tax benefits recognized
in 2011, 2010, and 2009 represent amounts related to the amortization of net deferred losses on pre-2008 closed cash flow
hedges, as well as the current tax benefits associated with our ability to carry back net operating tax losses generated in
2008 and 2009.
270 Freddie Mac
Deferred Tax Assets, Net
The sources and tax effects of temporary differences that give rise to significant deferred tax assets and liabilities for
the years ended December 31, 2011 and 2010 are presented in the table below.
(1) The deferred tax liability balance for basis differences related to assets held for investment includes a basis adjustment on seriously delinquent loans.
This deferred tax liability offsets a portion of the deferred tax asset for credit related items and allowance for loan losses.
(2) The valuation allowance as of December 31, 2010 includes $3.1 billion related to the adoption of the accounting guidance for transfers of financial
assets and consolidation of VIEs.
We use the asset and liability method to account for income taxes in accordance with the accounting guidance 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 in available carryback years from current operations and unrecognized
tax benefits, and upon our intent and ability to hold available-for-sale debt securities until the recovery of any temporary
unrealized losses.
After evaluating all available evidence, including our losses, the events and developments related to our
conservatorship, volatility in the economy, and related difficulty in forecasting future profit levels, we continue to record a
valuation allowance on a portion of our net deferred tax assets as of December 31, 2011 and 2010. Our valuation
allowance increased by $2.3 billion during 2011 to $35.7 billion, primarily attributable to an increase in temporary
differences during the period. As of December 31, 2011, after consideration of the valuation allowance, we had a net
deferred tax asset of $3.5 billion, primarily representing the tax effect of unrealized losses on our available-for-sale
securities. We believe the deferred tax asset related to these unrealized losses is more likely than not to be realized
because of our assertion that we have the intent and ability to hold our available-for-sale securities until any temporary
unrealized losses are recovered.
As of December 31, 2011, we had a net operating loss carryforward of $51.6 billion and a LIHTC carryforward of
$2.9 billion that will expire over multiple years beginning in 2030 and 2027, respectively. Our AMT credit carryforward
of $4 million will not expire.
At December 31, 2011, we had total unrecognized tax benefits, exclusive of interest, of $1.4 billion. This amount
relates to tax positions for which ultimate deductibility is highly certain, but for which there is uncertainty as to the
271 Freddie Mac
timing of such deductibility. If favorably resolved, $1.2 billion of unrecognized tax benefits would have a positive impact
on the effective tax rate due to the reversal of the valuation allowance established against deferred tax assets created by
the uncertain tax positions. This favorable impact would be offset by a $201 million tax expense related to the
establishment of a valuation allowance against credits that have been carried forward. A valuation allowance has not been
recorded against this amount because a portion of the unrecognized tax benefits was used as a source of taxable income in
our realization assessment of our net deferred tax assets.
We continue to recognize interest and penalties, if any, in income tax expense. The net accrued interest receivable
was approximately $254 million at December 31, 2011, a $9 million change from December 31, 2010. 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 the settlement for tax years 1985 to 1997; and (d) the impact of payments made to the IRS in
prior years in anticipation of potential tax deficiencies. Included in the $254 million of net accrued interest receivable as
of December 31, 2011 and $245 million as of December 31, 2010, is interest payable of approximately $266 million and
$248 million, respectively, which is allocable to unrecognized tax benefits. We have accrued no amounts for penalties
during 2011, 2010, or 2009.
The period for assessment under the statute of limitations for federal income tax purposes is open on corporate
income tax returns filed for tax years 1998 to 2010. We received Statutory Notices from the IRS assessing $3.0 billion of
additional income taxes and penalties for the 1998 to 2007 tax years, principally related to questions of timing and
potential penalties regarding our tax accounting method for certain hedging transactions. We filed a petition with the
U.S. Tax Court on October 22, 2010 in response to the Statutory Notices for tax years 1998 to 2005. The IRS responded
to our petition with the U.S. Tax Court on December 21, 2010. On July 6, 2011, the U.S. Tax Court issued a Notice
Setting Case for Trial and a Standing Pretrial Order. The trial date set forth in the Notice was December 12, 2011. On
September 7, 2011, a joint motion for continuance was filed with the U.S. Tax Court. The joint motion was granted and
on October 11, 2011 the parties submitted a status report and the court set a revised trial date of November 5, 2012. We
paid the tax assessed in the Statutory Notice received in December 2011 for the years 2006 to 2007 of $36 million and
will seek a refund through the administrative process, which could include filing suit in Federal District Court.
We believe appropriate reserves have been provided for settlement on reasonable terms. However, changes could
occur in the gross balance of unrecognized tax benefits that could have a material impact on income tax expense in the
period the issue is resolved if the outcome reached is not in our favor and the assessment is in excess of the amount
currently reserved. In light of the revised trial date, the fact that no settlement discussions have occurred for an extended
period of time, and the information currently available, we do not believe it is reasonably possible that the issue will be
resolved within the next 12 months.
For a discussion of our significant accounting policies related to income taxes, please see NOTE 1: SUMMARY OF
SIGNIFICANT ACCOUNTING POLICIES Income Taxes.
Segments
Our operations consist of three reportable segments, which are based on the type of business activities each
performs Investments, Single-family Guarantee, and Multifamily. The chart below provides a summary of our three
reportable segments and the All Other category. As reflected in the chart, certain activities that are not part of a reportable
segment are included in the All Other category. The All Other category consists of material corporate level expenses that
are: (a) infrequent in nature; and (b) based on management decisions outside the control of the management of our
reportable segments. By recording these types of activities to the All Other category, we believe the financial results of
our three reportable segments reflect the decisions and strategies that are executed within the reportable segments and
provide greater comparability across time periods. Items included in the All Other category consist of: (a) the deferred tax
asset valuation allowance associated with previously recognized income tax credits carried forward; and (b) in 2009, the
write-down of our LIHTC investments. Other items previously recorded in the All Other category prior to the revision to
our method for presenting Segment Earnings on January 1, 2010, as discussed below, have been allocated to our three
reportable segments.
Segment Adjustments
In presenting Segment Earnings net interest income and management and guarantee income, we make adjustments to
better reflect how management measures and assesses the performance of each segment and the company as a whole.
These adjustments relate to amounts that, effective January 1, 2010, are no longer reflected in net income (loss) as
determined in accordance with GAAP as a result of the adoption of accounting guidance for the transfers of financial
assets and the consolidation of VIEs. These adjustments are reversed through the segment adjustments line item within
Segment Earnings, so that Segment Earnings (loss) for each segment equals GAAP net income (loss) attributable to
Freddie Mac for each segment. Segment adjustments consist of the following:
We adjust our Segment Earnings net interest income for the Investments segment to include the amortization of
cash premiums and discounts and buy-up and buy-down fees on the consolidated Freddie Mac mortgage-related
securities we purchase as investments. As of December 31, 2011, the unamortized balance of such premiums and
discounts and buy-up and buy-down fees was $1.6 billion. These adjustments are necessary to reflect the economic
yield realized on investments in consolidated Freddie Mac mortgage-related securities purchased at a premium or
discount or with buy-up or buy-down fees.
We adjust our Segment Earnings management and guarantee income for the Single-family Guarantee segment to
include the amortization of delivery fees recorded in periods prior to the January 1, 2010 adoption of accounting
guidance for the transfers of financial assets and the consolidation of VIEs. As of December 31, 2011, the
unamortized balance of such fees was $2.2 billion. We consider such fees to be part of the effective rate of the
guarantee fee on guaranteed mortgage loans. This adjustment is necessary in order to better reflect the realization
of revenue associated with guarantee contracts over the life of the underlying loans.
276 Freddie Mac
Segment Allocations
The results of each reportable segment include directly attributable revenues and expenses. Administrative expenses
that are not directly attributable to a segment are allocated to our segments using various methodologies, depending on the
nature of the expense (i.e., semi-direct versus indirect). Net interest income for each segment includes allocated debt
funding costs related to certain assets of each segment. These allocations, however, do not include the effects of dividends
paid on our senior preferred stock. The tax credits generated by the LIHTC partnerships and any valuation allowance on
these tax credits are allocated to the Multifamily segment. The deferred tax asset valuation allowance associated with
previously recognized income tax credits carried forward is allocated to the All Other category. All remaining taxes are
calculated based on a 35% federal statutory rate as applied to pre-tax Segment Earnings.
The table below presents Segment Earnings by segment.
Table 14.1 Summary of Segment Earnings and Total Comprehensive Income (Loss)(1)
Year Ended December 31,
2011 2010 2009
(in millions)
Segment Earnings (loss), net of taxes:
Investments . . . . . . . . . . . . . . . . . . . . . . . . . . . ............ . . . . . . . . . . . . . . . . . . . . . . . . . $ 3,366 $ 1,251 $ 6,476
Single-family Guarantee . . . . . . . . . . . . . . . . . . . ............ . . . . . . . . . . . . . . . . . . . . . . . . . (10,000) (16,256) (27,143)
Multifamily . . . . . . . . . . . . . . . . . . . . . . . . . . . ............ . . . . . . . . . . . . . . . . . . . . . . . . . 1,319 965 (511)
All Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ............ . . . . . . . . . . . . . . . . . . . . . . . . . 49 15 (4,240)
Total Segment Earnings (loss), net of taxes . . . . . . . . ............ . . . . . . . . . . . . . . . . . . . . . . . . . (5,266) (14,025) (25,418)
Reconciliation to GAAP net income (loss) attributable to Freddie Mac:
Credit guarantee-related adjustments(2) . . . . . . . . . ............ . . . . . . . . . . . . . . . . . . . . . . . . . 5,948
Tax-related adjustments . . . . . . . . . . . . . . . . . . . ............ . . . . . . . . . . . . . . . . . . . . . . . . . (2,083)
Total reconciling items, net of taxes . . . . . . . . . ............ . . . . . . . . . . . . . . . . . . . . . . . . . 3,865
Net income (loss) attributable to Freddie Mac . . . . . . ............ . . . . . . . . . . . . . . . . . . . . . . . . . $ (5,266) $(14,025) $(21,553)
Total comprehensive income (loss) of segments:
Investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 6,473 $ 11,477 $ 17,805
Single-family Guarantee . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (9,970) (16,250) (27,124)
Multifamily . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,218 5,040 6,781
All Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 49 15 (4,240)
Total comprehensive income (loss) of segments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (1,230) 282 (6,778)
Reconciliation to GAAP net income (loss) attributable to Freddie Mac:
Credit guarantee-related adjustments(2) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5,948
Tax-related adjustments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (2,083)
Total reconciling items, net of taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,865
Total comprehensive income (loss) attributable to Freddie Mac . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ (1,230) $ 282 $ (2,913)
(1) Beginning January 1, 2010, the sum of Segment Earnings for each segment and the All Other category equals GAAP net income (loss) attributable
to Freddie Mac. Likewise, the sum of total comprehensive income (loss) for each segment and the All Other category equals GAAP total
comprehensive income (loss) attributable to Freddie Mac.
(2) Consists primarily of amortization and valuation adjustments related to the guarantee asset and guarantee obligation which are excluded from
Segment Earnings and cash compensation exchanged at the time of securitization, excluding buy-up and buy-down fees, which is amortized into
earnings. These reconciling items exist in periods prior to 2010 as the amendment to the accounting guidance for transfers of financial assets and
consolidation of VIEs was applied prospectively on January 1, 2010.
(1) See Segment Earnings Investment Activity-Related Reclassifications and Credit Guarantee Activity-Related Reclassifications for
information regarding these reclassifications.
(2) See Segment Earnings Segment Adjustments for additional information regarding these adjustments.
(3) Management and guarantee income total per consolidated statements of income and comprehensive income is included in other income on our
GAAP consolidated statements of income and comprehensive income.
(4) Consists primarily of amortization and valuation adjustments pertaining to the guarantee asset and guarantee obligation which are excluded from
Segment Earnings and cash compensation exchanged at the time of securitization, excluding buy-up and buy-down fees, which is amortized into
earnings. These reconciling items exist in periods prior to 2010 as the amendment to the accounting guidance for transfers of financial assets and
consolidation of VIEs was applied prospectively on January 1, 2010.
(1) Beginning January 1, 2010, the sum of total comprehensive income (loss) for each segment and the All Other category equals GAAP total
comprehensive income (loss) attributable to Freddie Mac.
Minimum Capital
The minimum capital standard required us to hold an amount of core capital that was generally equal to the sum of
2.50% of aggregate on-balance sheet assets and approximately 0.45% of the sum of our PCs held by third parties and
other aggregate off-balance sheet obligations.
Critical Capital
The critical capital standard required us to hold an amount of core capital that was generally equal to the sum of
1.25% of aggregate on-balance sheet assets and approximately 0.25% of the sum of our PCs held by third parties and
other aggregate off-balance sheet obligations.
(1) Net worth (deficit) represents the difference between our assets and liabilities under GAAP.
(2) Core capital and minimum capital figures for December 31, 2011 are estimates. FHFA is the authoritative source for our regulatory capital.
(3) Core capital excludes certain components of GAAP total equity (deficit) (i.e., AOCI, liquidation preference of the senior preferred stock) as these
items do not meet the statutory definition of core capital.
Following our entry into conservatorship, we have focused our risk and capital management, consistent with the
objectives of conservatorship, on, among other things, maintaining a positive balance of GAAP equity in order to reduce
the likelihood that we will need to make additional draws 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.
281 Freddie Mac
Under the GSE Act, FHFA must place us into receivership if FHFA determines in writing that our assets are and
have been less than our obligations for a period of 60 days. FHFA has notified us that the measurement period for any
mandatory receivership determination with respect to our assets and obligations would commence no earlier than the SEC
public filing deadline for our quarterly or annual financial statements and would continue for 60 calendar days after that
date. FHFA has advised us that, if, during that 60-day period, we receive funds from Treasury in an amount at least equal
to the deficiency amount under the Purchase Agreement, the Director of FHFA will not make a mandatory receivership
determination. If funding has been requested under the Purchase Agreement to address a deficit in our net worth, and
Treasury is unable to provide us with such funding within the 60-day period specified by FHFA, FHFA would be required
to place us into receivership if our assets remain less than our obligations during that 60-day period.
To address our net worth deficit of $146 million at December 31, 2011, FHFA will submit a draw request on our
behalf to Treasury under the Purchase Agreement in the amount of $146 million, and will request that we receive these
funds by March 31, 2012. Our draw request represents our net worth deficit at quarter-end rounded up to the nearest
$1 million. Upon funding of this draw request, our aggregate funding received from Treasury under the Purchase
Agreement will increase to $71.3 billion. This aggregate funding amount does not include the initial $1.0 billion
liquidation preference of senior preferred stock that we issued to Treasury in September 2008 as an initial commitment
fee and for which no cash was received. As a result of the additional $146 million draw request, the aggregate liquidation
preference on the senior preferred stock owned by Treasury will increase from $72.2 billion at December 31, 2011 to
$72.3 billion. We paid a quarterly dividend of $1.6 billion, $1.6 billion, $1.6 billion, and $1.7 billion on the senior
preferred stock in cash on March 31, 2011, June 30, 2011, September 30, 2011, and December 30, 2011, respectively, at
the direction of the Conservator. Following funding of the draw request related to our net worth deficit at December 31,
2011, our annual cash dividend obligation to Treasury on the senior preferred stock will increase from $7.22 billion to
$7.23 billion, which exceeds our annual historical earnings in all but one period.
Year of Origination
2011 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14% 0.1% N/A N/A N/A
2010 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19 0.3 18% 0.1% 1%
2009 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18 0.5 21 0.3 1 1%
2008 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7 5.7 9 4.9 8 7
2007 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10 11.6 11 11.6 36 34
2006 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7 10.8 9 10.5 28 30
2005 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8 6.5 10 6.0 18 20
2004 and prior . . . . . . . . . . . . . . . . . . . . . . . . . . . 17 2.8 22 2.5 9 9
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 100% 3.6% 100% 3.8% 100% 100%
Region(4)
West . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28% 3.6% 27% 4.7% 53% 48%
Northeast . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25 3.4 25 3.2 7 8
North Central . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18 2.9 18 3.1 16 15
Southeast . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17 5.5 18 5.6 20 25
Southwest. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12 1.8 12 2.1 4 4
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 100% 3.6% 100% 3.8% 100% 100%
State(5)
California . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16% 3.4% 16% 4.9% 29% 26%
Florida . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6 10.9 6 10.5 13 19
Illinois . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5 4.7 5 4.6 5 5
Georgia . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 3.3 3 4.1 4 3
Michigan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 2.3 3 3.0 4 5
Arizona . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 4.3 3 6.1 11 11
Nevada . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 9.8 1 11.9 7 6
All other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 64 2.8 63 2.8 27 25
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 100% 3.6% 100% 3.8% 100% 100%
(1) Credit losses consist of the aggregate amount of charge-offs, net of recoveries, and REO operations expense in each of the respective periods and
exclude foregone interest on non-performing loans and other market-based losses recognized on our consolidated statements of income and
comprehensive income.
(2) Based on the UPB of our single-family credit guarantee portfolio, which includes unsecuritized single-family mortgage loans held by us on our
consolidated balance sheets and those underlying Freddie Mac mortgage-related securities, or covered by our other guarantee commitments.
(3) Serious delinquencies on mortgage loans underlying certain REMICs and Other Structured Securities, Other Guarantee Transactions, and other
guarantee commitments may be reported on a different schedule due to variances in industry practice.
(4) 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).
(5) States presented based on those with the highest percentage of credit losses during the year ended December 31, 2011. Our top seven states based on
the highest percentage of UPB as of December 31, 2011 are: California (16%), Florida (6%), Illinois (5%), New York (5%), Texas (4%), New Jersey
(4%), and Virginia (4%), and comprised 44% of our single-family credit guarantee portfolio as of December 31, 2011.
Table 16.2 Certain Higher-Risk Categories in the Single-Family Credit Guarantee Portfolio(1)
Percentage of Portfolio(1) Serious Delinquency Rate
December 31, 2011 December 31, 2010 December 31, 2011 December 31, 2010
One indicator of risk for mortgage loans in our multifamily mortgage portfolio is the amount of a borrowers equity
in the underlying property. A borrowers equity in a property decreases as the LTV ratio increases. Higher LTV ratios
negatively affect a borrowers ability to refinance or sell a property for an amount at or above the balance of the
outstanding mortgage. The DSCR is another indicator of future credit performance. The DSCR estimates a multifamily
borrowers ability to service its mortgage obligation using the secured propertys cash flow, after deducting non-mortgage
expenses from income. The higher the DSCR, the more likely a multifamily borrower will be able to continue servicing
its mortgage obligation.
Our multifamily mortgage portfolio includes certain loans for which we have credit enhancement. Credit
enhancement significantly reduces our exposure to a potential credit loss. As of December 31, 2011, more than one-half
of the multifamily loans that were two monthly payments or more past due, measured both in terms of number of loans
and on a UPB basis, had credit enhancements that we currently believe will mitigate our expected losses on those loans.
See NOTE 4: MORTGAGE LOANS AND LOAN LOSS RESERVES for additional information about credit
enhancements on multifamily loans.
We estimate that the percentage of loans in our multifamily mortgage portfolio with a current LTV ratio of greater
than 100% was approximately 5% and 8% at December 31, 2011 and December 31, 2010, respectively, and our estimate
of the current average DSCR for these loans was 1.1 at both December 31, 2011 and December 31, 2010. We estimate
that the percentage of loans in our multifamily mortgage portfolio with a current DSCR less than 1.0 was 5% and 7% at
December 31, 2011 and December 31, 2010, respectively, and the average current LTV ratio of these loans was 107% and
108%, respectively. Our estimates of current DSCRs are based on the latest available income information for these
properties and our assessments of market conditions. Our estimates of the current LTV ratios for multifamily loans are
based on values we receive from a third-party service provider as well as our internal estimates of property value, for
which we may use changes in tax assessments, market vacancy rates, rent growth and comparable property sales in local
areas as well as third-party appraisals for a portion of the portfolio. We periodically perform our own valuations or obtain
third-party appraisals in cases where a significant deterioration in a borrowers financial condition has occurred, the
borrower has applied for refinancing, or in certain other circumstances where we deem it appropriate to reassess the
property value. Although we use the most recently available results of our multifamily borrowers to estimate a propertys
value, there may be a significant lag in reporting, which could be six months or more, as they complete their results in the
normal course of business. Our internal estimates of property valuation are derived using techniques that include income
capitalization, discounted cash flows, sales comparables, or replacement costs.
285 Freddie Mac
Seller/Servicers
We acquire a significant portion of our single-family mortgage purchase volume from several large seller/servicers
with whom we have entered into mortgage purchase volume commitments that provide for the lenders to deliver us up to
a certain volume of mortgages during a specified period of time. Our top 10 single-family seller/servicers provided
approximately 82% of our single-family purchase volume during the year ended December 31, 2011. Wells Fargo Bank,
N.A. and JPMorgan Chase Bank, N.A., accounted for 28%, and 13%, respectively, of our single-family mortgage purchase
volume and were the only single-family seller/servicers that comprised 10% or more of our purchase volume during the
year ended December 31, 2011. 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 are exposed to institutional credit risk arising from the potential insolvency or non-performance by our seller/
servicers of their obligations to repurchase mortgages or (at our option) indemnify us in the event of: (a) breaches of the
representations and warranties they made when they sold the mortgages to us; or (b) failure to comply with our servicing
requirements. Our contracts require that a seller/servicer repurchase a mortgage after we issue a repurchase request, unless
the seller/servicer avails itself of an appeals process provided for in our contracts. As of December 31, 2011 and 2010, the
UPB of loans subject to our repurchase requests issued to our single-family seller/servicers was approximately $2.7 billion
and $3.8 billion, and approximately 39% and 34% of these requests, respectively, were outstanding for more than four
months since issuance of our initial repurchase request as measured by the UPB of the loans subject to the requests (these
figures included repurchase requests for which appeals were pending). As of December 31, 2011, two of our largest seller/
servicers had aggregate repurchase requests outstanding, based on UPB, of $1.4 billion, and approximately 48% of these
requests were outstanding for four months or more since issuance of the initial request. During 2011 and 2010, we
recovered amounts that covered losses with respect to $4.4 billion and $6.4 billion, respectively, of UPB on loans subject
to our repurchase requests.
GMAC Mortgage, LLC and Residential Funding Company, LLC (collectively GMAC), indirect subsidiaries of Ally
Financial Inc. (formerly, GMAC Inc.), are seller/servicers that together serviced and subserviced for an affiliated entity
approximately 4% of the single-family loans in our single-family credit guarantee portfolio as of December 31, 2011. In
March 2010, we entered into an agreement with GMAC, under which they made a one-time payment to us for the partial
release of repurchase obligations relating to loans sold to us prior to January 1, 2009. The partial release does not affect
any of GMACs potential repurchase obligations for loans sold to us by GMAC after January 1, 2009, nor does it affect
the ability to recover amounts associated with failure to comply with our servicing requirements. The agreement did not
have a material impact on our 2011 or 2010 consolidated statements of income and comprehensive income.
On December 31, 2010, we entered into an agreement with Bank of America, N.A., and two of its affiliates, BAC
Home Loans Servicing, LP and Countrywide Home Loans, Inc., to resolve our currently outstanding and future claims for
repurchases arising from the breach of representations and warranties on certain loans purchased by us from Countrywide
Home Loans, Inc. and Countrywide Bank FSB. Under the terms of the agreement, we received a $1.28 billion cash
payment in consideration for releasing Bank of America and its two affiliates from current and future repurchase requests
arising from loans sold to us by the Countrywide entities for which the first regularly scheduled monthly payments were
due on or before December 31, 2008. The UPB of the loans in this portfolio, as of December 31, 2010, was
approximately $114 billion. The agreement applies only to certain claims for repurchase based on breaches of
representations and warranties and the agreement contains specified limitations and does not cover loans sold to us or
serviced for us by other Bank of America entities. This agreement did not have a material impact on our 2011 or 2010
consolidated statements of income and comprehensive income.
On August 24, 2009, one of our single-family seller/servicers, Taylor, Bean & Whitaker Mortgage Corp., or TBW,
filed for bankruptcy and announced its plan to wind down its operations. We had exposure to TBW with respect to its
loan repurchase obligations. We also had exposure with respect to certain borrower funds that TBW held for the benefit of
Freddie Mac. TBW received and processed such funds in its capacity as a servicer of loans owned or guaranteed by
Freddie Mac. TBW maintained certain bank accounts, primarily at Colonial Bank, to deposit such borrower funds and to
provide remittance to Freddie Mac. Colonial Bank was placed into receivership by the FDIC in August 2009.
With the approval of FHFA, as Conservator, we entered into a settlement with TBW and the creditors committee
appointed in the TBW bankruptcy proceeding to represent the interests of the unsecured trade creditors of TBW. The
settlement was filed with the bankruptcy court on June 22, 2011. The court approved the settlement and confirmed TBWs
proposed plan of liquidation on July 21, 2011, which became effective on August 10, 2011. See NOTE 18: LEGAL
CONTINGENCIES for additional information on the settlement, our claims arising from TBWs bankruptcy, and
potential claims by Ocala Funding, LLC, which is a wholly-owned subsidiary of TBW, or Ocalas creditors.
286 Freddie Mac
As previously disclosed, we joined an investor group that delivered a notice of non-performance in 2010 to The Bank
of New York Mellon, as Trustee, and Countrywide Home Loans Servicing LP (now known as BAC Home Loans
Servicing, LP), related to the possibility that certain mortgage pools backing certain mortgage-related securities issued by
Countrywide Financial Corporation and related entities include mortgages that may have been ineligible for inclusion in
the pools due to breaches of representations or warranties.
On June 29, 2011, Bank of America Corporation announced that it, BAC Home Loans Servicing, LP, Countrywide
Financial Corporation and Countrywide Home Loans, Inc. entered into a settlement agreement with The Bank of New
York Mellon, as trustee, to resolve all outstanding and potential claims related to alleged breaches of representations and
warranties (including repurchase claims), substantially all historical loan servicing claims and certain other historical
claims with respect to 530 Countrywide first-lien and second-lien residential mortgage-related securitization trusts. Bank
of America indicated that the settlement is subject to final court approval and certain other conditions, including the
receipt of a private letter ruling from the IRS. There can be no assurance that final court approval of the settlement will
be obtained or that all conditions will be satisfied. Bank of America noted that, given the number of investors and the
complexity of the settlement, it is not possible to predict the timing or ultimate outcome of the court approval process,
which could take a substantial period of time. We have investments in certain of these Countrywide securitization trusts
and would expect to benefit from this settlement, if final court approval is obtained.
In connection with the settlement, Bank of America Corporation entered into an agreement with the investor group.
Under this agreement, the investor group agreed, among other things, to use reasonable best efforts and to cooperate in
good faith to effectuate the settlement, including to obtain final court approval. Freddie Mac was not a party to this
agreement, but agreed to retract any previously delivered notices of non-performance upon final court approval of the
settlement.
The Bank of New York Mellon, as trustee, filed the settlement in state court in New York and planned to seek
approval at a hearing, which approval would bind all investors in the related trusts. The court directed that any objections
to the settlement be filed no later than August 30, 2011. On August 30, 2011, FHFA announced that, in its capacity as
conservator, it had filed an appearance and conditional objection regarding the settlement, in order to obtain any
additional pertinent information developed in the matter. In the announcement, FHFA, as conservator, stated that it is
aware of no basis upon which it would raise a substantive objection to the settlement at this time, but that it believes it
prudent not only to receive additional information as it continues its due diligence of the settlement, but also to reserve its
capability to voice a substantive objection in the unlikely event that necessity should arise.
On August 26, 2011, the case was removed to Federal court. The trustee filed a motion to remand the case back to
state court. On October 19, 2011, the Federal court denied the trustees motion to remand. The trustee appealed this
decision. On February 27, 2012, the federal appellate court reversed the district court and ordered the case to be remanded
back to state court.
On September 2, 2011, FHFA announced that, as Conservator for Freddie Mac and Fannie Mae, it had filed lawsuits
against 17 financial institutions and related defendants alleging: (a) violations of federal securities laws; and (b) in certain
lawsuits, common law fraud in the sale of residential non-agency mortgage-related securities to Freddie Mac and Fannie
Mae. FHFA, as Conservator, filed a similar lawsuit against UBS Americas, Inc. and related defendants on July 27, 2011.
FHFA seeks to recover losses and damages sustained by Freddie Mac and Fannie Mae as a result of their investments in
certain residential non-agency mortgage-related securities issued by these financial institutions.
The ultimate amounts of recovery payments we receive from seller/servicers may be significantly less than the
amount of our estimates of potential exposure to losses related to their obligations. Our estimate of probable incurred
losses for exposure to seller/servicers for their repurchase obligations is considered in our allowance for loan losses as of
December 31, 2011 and 2010. See NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Allowance
for Loan Losses and Reserve for Guarantee Losses for further information. We believe we have appropriately provided
for these exposures, based upon our estimates of incurred losses, in our loan loss reserves at December 31, 2011 and
2010; however, our actual losses may exceed our estimates.
We also are exposed to the risk that seller/servicers might fail to service mortgages in accordance with our
contractual requirements, resulting in increased credit losses. For example, our seller/servicers have an active role in our
loss mitigation efforts, including under the servicing alignment initiative and the MHA Program, and therefore, we have
exposure to them to the extent a decline in their performance results in a failure to realize the anticipated benefits of our
loss mitigation plans.
A significant portion of our single-family mortgage loans are serviced by several large seller/servicers. Our top three
single-family loan servicers, Wells Fargo Bank N.A., JPMorgan Chase Bank, N.A., and Bank of America N.A., together
287 Freddie Mac
serviced approximately 49% of our single-family mortgage loans as of December 31, 2011. Wells Fargo Bank N.A.,
JPMorgan Chase Bank, N.A., and Bank of America N.A. serviced approximately 26%, 12%, and 11%, respectively, of our
single-family mortgage loans, as of December 31, 2011. Since we do not have our own servicing operation, if our
servicers lack appropriate process controls, experience a failure in their controls, or experience an operating disruption in
their ability to service mortgage loans, it could have an adverse impact on our business and financial results.
During the second half of 2010, a number of our seller/servicers, including several of our largest ones, temporarily
suspended foreclosure proceedings in some or all states in which they do business. These seller/servicers announced these
suspensions were necessary while they evaluated and addressed issues relating to the improper preparation and execution
of certain documents used in foreclosure proceedings, including affidavits. While these servicers generally resumed
foreclosure proceedings in the first quarter of 2011, the rate at which they are effecting foreclosures has been slower than
prior to the suspensions. See NOTE 6: REAL ESTATE OWNED for additional information.
As of December 31, 2011 our top three multifamily servicers, Berkadia Commercial Mortgage LLC, CBRE Capital
Markets, Inc., and Wells Fargo Bank, N.A., each serviced more than 10% of our multifamily mortgage portfolio and
together serviced approximately 40% of our multifamily mortgage portfolio.
In our multifamily business, we are exposed to the risk that multifamily seller/servicers could come under financial
pressure, which could potentially cause degradation in the quality of the servicing they provide us, including their
monitoring of each propertys financial performance and physical condition. This could also, in certain cases, reduce the
likelihood that we could recover losses through lender repurchases, recourse agreements, or other credit enhancements,
where applicable. This risk primarily relates to multifamily loans that we hold on our consolidated balance sheets where
we retain all of the related credit risk. We monitor the status of all our multifamily seller/servicers in accordance with our
counterparty credit risk management framework.
Mortgage Insurers
We have institutional credit risk relating to the potential insolvency of or non-performance by mortgage insurers that
insure single-family mortgages we purchase or guarantee. We evaluate the recovery and collectability from insurance
policies for mortgage loans that we hold for investment as well as loans underlying our non-consolidated Freddie Mac
mortgage-related securities or covered by other guarantee commitments as part of the estimate of our loan loss reserves.
See NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Allowance for Loan Losses and Reserve
for Guarantee Losses for additional information. As of December 31, 2011, these insurers provided coverage, with
maximum loss limits of $50.6 billion, for $238.3 billion of UPB, in connection with our single-family credit guarantee
portfolio. Our top five mortgage insurer counterparties, Mortgage Guaranty Insurance Corporation (or MGIC), Radian
Guaranty Inc., Genworth Mortgage Insurance Corporation, United Guaranty Residential Insurance Co., and PMI Mortgage
Insurance Co. (or PMI) each accounted for more than 10% and collectively represented approximately 84% of our overall
mortgage insurance coverage at December 31, 2011. All our mortgage insurance counterparties are rated BBB or below as
of February 27, 2012, based on the lower of the S&P or Moodys rating scales and stated in terms of the S&P equivalent.
We received proceeds of $2.5 billion and $1.8 billion during 2011 and 2010, respectively, from our primary and pool
mortgage insurance policies for recovery of losses on our single-family loans. We had outstanding receivables from
mortgage insurers of $1.8 billion and $2.3 billion as of December 31, 2011 and 2010, respectively. The balance of our
outstanding accounts receivable from mortgage insurers, net of associated reserves, was approximately $1.0 billion and
$1.5 billion as of December 31, 2011 and 2010, respectively.
In August 2011, we suspended RMIC and its affiliates, and PMI and its affiliates, as approved mortgage insurers for
Freddie Mac loans, making loans insured by either company ineligible for sale to Freddie Mac. Both of these companies
ceased writing new business during the third quarter of 2011, and have been put under state supervision. PMI instituted a
partial claim payment plan in October 2011, under which claim payments will be made 50% in cash, with the remaining
amount deferred as a policyholder claim. RMIC instituted a partial claim payment plan in January 2012, under which
claim payments will be made 50% in cash and 50% in deferred payment obligations for an initial period not to exceed
one year. We and FHFA are in discussions with the state regulators of PMI and RMIC concerning future payments of our
claims. It is not yet clear how the state regulators of PMI and RMIC will administer their respective deferred payment
plans. In the future, our mortgage insurance exposure will likely be concentrated among a smaller number of mortgage
insurer counterparties.
Triad Guaranty Insurance Corp., or Triad, is continuing to pay claims 60% in cash and 40% in deferred payment
obligations under orders of its state regulator. To date, the state regulator has not allowed Triad to begin paying its
deferred payment obligations and it is uncertain when or if Triad will be permitted to do so.
288 Freddie Mac
Bond Insurers
Bond insurance, which may be either primary or secondary policies, is a credit enhancement covering some of the
non-agency mortgage-related securities we hold. Primary policies are acquired by the securitization trust issuing the
securities we purchase, while secondary policies are acquired by us. At December 31, 2011, we had coverage, including
secondary policies, on non-agency mortgage-related securities totaling $9.7 billion of UPB. At December 31, 2011, our
top five bond insurers, Ambac Assurance Corporation (or Ambac), Financial Guaranty Insurance Company (or FGIC),
MBIA Insurance Corp., Assured Guaranty Municipal Corp., and National Public Finance Guarantee Corp., each accounted
for more than 10% of our overall bond insurance coverage and collectively represented approximately 99% of our total
coverage.
We evaluate the expected recovery from primary bond insurance policies as part of our impairment analysis for our
investments in securities. FGIC and Ambac are currently not paying any claims. In addition, if a bond insurer fails to
meet its obligations on our investments in securities, then the fair values of our securities may further decline, which
could have a material adverse effect on our results and financial condition. We recognized other-than-temporary
impairment losses during 2011 and 2010 related to investments in mortgage-related securities covered by bond insurance
as a result of our uncertainty over whether or not certain insurers will meet our future claims in the event of a loss on the
securities. See NOTE 7: INVESTMENTS IN SECURITIES for further information on our evaluation of impairment on
securities covered by bond insurance.
Derivative Portfolio
Derivative Counterparties
Our use of OTC derivatives and exchange-traded derivatives exposes us to institutional credit risk. The requirement
that we post initial and maintenance margin with our clearing firm in connection with exchange-traded derivatives such as
futures contracts exposes us to institutional credit risk in the event that our clearing firm or the exchanges clearinghouse
fail to meet their obligations. However, the use of exchange-traded derivatives lessens our institutional credit risk exposure
to individual counterparties, because a central counterparty is substituted for individual counterparties and changes in the
value of open exchange-traded contracts are settled daily via payments through the financial clearinghouse established by
each exchange. OTC derivatives, however, expose us to institutional credit risk to individual counterparties because
transactions are executed and settled between us and each counterparty, exposing us to potential losses if a counterparty
fails to meet its contractual obligations.
Our use of OTC interest-rate swaps, option-based derivatives, and foreign-currency swaps is subject to rigorous
internal credit and legal reviews. All of our OTC derivatives counterparties are major financial institutions and are
experienced participants in the OTC derivatives market.
On an ongoing basis, we review the credit fundamentals of all of our OTC 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 certain events affecting an individual counterparty occur.
289 Freddie Mac
Master Netting and Collateral Agreements
We use master netting and collateral agreements to reduce our credit risk exposure to our active OTC derivative
counterparties for interest-rate swaps, option-based derivatives, and foreign-currency swaps. Master netting agreements
provide for the netting of amounts receivable and payable from an individual counterparty, which reduces our exposure to
a single counterparty in the event of default. On a daily basis, the market value of each counterpartys derivatives
outstanding is calculated to determine the amount of our net credit exposure, which is equal to derivatives in a net gain
position by counterparty after giving consideration to collateral posted. Our collateral agreements require most
counterparties to post collateral for the amount of our net exposure to them above the applicable threshold. Bilateral
collateral agreements are in place for all of our active OTC derivative counterparties. Collateral posting thresholds are tied
to a counterpartys credit rating. Derivative exposures and collateral amounts are monitored on a daily basis using both
internal pricing models and dealer price quotes. Collateral is typically transferred within one business day based on the
values of the related derivatives. This time lag in posting collateral can affect our net uncollateralized exposure to
derivative counterparties.
Collateral posted by a derivative counterparty is typically in the form of cash, although U.S. Treasury securities,
Freddie Mac mortgage-related securities, or our debt securities may also be posted. In the event a counterparty defaults on
its obligations under the derivatives agreement and the default is not remedied in the manner prescribed in the agreement,
we have the right under the agreement to direct the custodian bank to transfer the collateral to us or, in the case of non-
cash collateral, to sell the collateral and transfer the proceeds to us.
Our uncollateralized exposure to counterparties for OTC interest-rate swaps, option-based derivatives, foreign-
currency swaps, and purchased interest-rate caps, after applying netting agreements and collateral, was $71 million and
$32 million at December 31, 2011 and 2010, respectively. In the event that all of our counterparties for these derivatives
were to have defaulted simultaneously on December 31, 2011, our maximum loss for accounting purposes would have
been approximately $71 million. Three counterparties each accounted for greater than 10% and collectively accounted for
97% of our net uncollateralized exposure to derivative counterparties, excluding commitments, at December 31, 2011.
These counterparties were HSBC Bank USA, Royal Bank of Scotland, and UBS AG, all of which were rated A or
above by S&P as of February 27, 2012.
The total exposure on our OTC forward purchase and sale commitments, which are treated as derivatives, was
$38 million and $103 million at December 31, 2011 and 2010, respectively. These commitments are 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.
Table 17.1 Assets and Liabilities Measured at Fair Value on a Recurring Basis
Fair Value at December 31, 2011
Quoted Prices in
Active Markets for Significant Other Significant
Identical Assets Observable Inputs Unobservable Inputs Netting
(Level 1) (Level 2) (Level 3) Adjustment(1) Total
(in millions)
Assets:
Investments in securities:
Available-for-sale, at fair value:
Mortgage-related securities:
Freddie Mac . . . . . . . . . . . . . . . . . . . . . . . . $ $ 79,044 $ 2,048 $ $ 81,092
Subprime . . . . . . . . . . . . . . . . . . . . . . . . . . . 27,999 27,999
CMBS . . . . . . . . . . . . . . . . . . . . . . . . . . . . 51,907 3,756 55,663
Option ARM . . . . . . . . . . . . . . . . . . . . . . . . 5,865 5,865
Alt-A and other . . . . . . . . . . . . . . . . . . . . . . 11 10,868 10,879
Fannie Mae . . . . . . . . . . . . . . . . . . . . . . . . . 20,150 172 20,322
Obligations of states and political
subdivisions . . . . . . . . . . . . . . . . . . . . . . . 7,824 7,824
Manufactured housing . . . . . . . . . . . . . . . . . . 766 766
Ginnie Mae . . . . . . . . . . . . . . . . . . . . . . . . . 237 12 249
Total available-for-sale securities, at fair
value . . . . . . . . . . . . . . . . . . . . . . . . . . 151,349 59,310 210,659
Trading, at fair value:
Mortgage-related securities:
Freddie Mac . . . . . . . . . . . . . . . . . . . . . . . . 14,181 1,866 16,047
Fannie Mae . . . . . . . . . . . . . . . . . . . . . . . . . 14,627 538 15,165
Ginnie Mae . . . . . . . . . . . . . . . . . . . . . . . . . 134 22 156
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 74 90 164
Total mortgage-related securities . . . . . . . . . 29,016 2,516 31,532
Non-mortgage-related securities:
Asset-backed securities . . . . . . . . . . . . . . . . . 302 302
Treasury bills . . . . . . . . . . . . . . . . . . . . . . . . 100 100
Treasury notes . . . . . . . . . . . . . . . . . . . . . . . 24,712 24,712
FDIC-guaranteed corporate medium-term
notes . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,184 2,184
Total non-mortgage-related securities . . . . . . 24,812 2,486 27,298
Total trading securities, at fair value . . . . . 24,812 31,502 2,516 58,830
Total investments in securities . . . . . . . . 24,812 182,851 61,826 269,489
Mortgage loans:
Held-for-sale, at fair value . . . . . . . . . . . . . . . . . . 9,710 9,710
Derivative assets, net:
Interest-rate swaps . . . . . . . . . . . . . . . . . . . . . . . . 12,976 46 13,022
Option-based derivatives . . . . . . . . . . . . . . . . . . . . 1 15,868 15,869
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5 110 35 150
Subtotal, before netting adjustments . . . . . . . . . . 6 28,954 81 29,041
Netting adjustments(1) . . . . . . . . . . . . . . . . . . . . . (28,923) (28,923)
Total derivative assets, net . . . . . . . . . . . . . . . . . 6 28,954 81 (28,923) 118
Other assets:
Guarantee asset, at fair value . . . . . . . . . . . . . . . . . 752 752
All other, at fair value . . . . . . . . . . . . . . . . . . . . . 151 151
Total other assets . . . . . . . . . . . . . . . . . . . . . . . 903 903
Total assets carried at fair value on a recurring
basis . . . . . . . . . . . . . . . . . . . . . . . . . . . . $24,818 $211,805 $72,520 $(28,923) $280,220
Liabilities:
Debt securities recorded at fair value . . . . . . . . ..... $ $ 3,015 $ $ $ 3,015
Derivative liabilities, net:
Interest-rate swaps . . . . . . . . . . . . . . . . . . . . . . . . 34,601 21 34,622
Option-based derivatives . . . . . . . . . . . . . . . . . . . . 1 2,934 1 2,936
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 103 42 145
Subtotal, before netting adjustments . . . . . . . . . . 1 37,638 64 37,703
Netting adjustments(1) . . . . . . . . . . . . . . . . . . . . . (37,268) (37,268)
Total derivative liabilities, net . . . . . . . . . . . . . . 1 37,638 64 (37,268) 435
Total liabilities carried at fair value on a
recurring basis . . . . . . . . . . . . . . . . ..... $ 1 $ 40,653 $ 64 $(37,268) $ 3,450
(1) Represents counterparty netting, cash collateral netting, net trade/settle receivable or payable and net derivative interest receivable or payable. The
net cash collateral posted and net trade/settle receivable were $9.4 billion and $1 million, respectively, at December 31, 2011. The net cash collateral
posted and net trade/settle receivable were $6.3 billion and $1 million, respectively, at December 31, 2010. The net interest receivable (payable) of
derivative assets and derivative liabilities was approximately $(1.1) billion and $(0.8) billion at December 31, 2011 and 2010, respectively, which
was mainly related to interest rate swaps that we have entered into.
294
Mortgage loans:
Held-for-sale, at fair value . . . . . . . . . . . . . . .. 6,413 828 828 16,550 (14,027) (54) 9,710 214
Net derivatives(8) . . . . . . . . . . . . . . . . . . . . . . .. (691) 907 907 (46) (155) 2 17 165
Other assets:
Guarantee asset(9) . . . . . . . . . . . . . . . . . . . . .. 541 (25) (25) 288 (52) 752 (25)
All other . . . . . . . . . . . . . . . . . . . . . . . . . . .. 235 (84) (84) 151 (84)
Total other assets . . . . . . . . . . . . . . . . . . . .. 776 (109) (109) 288 (52) 903 (109)
Freddie Mac
For The Year Ended December 31, 2010
Cumulative
effect Realized and unrealized gains (losses) Purchases,
of change Included in issuances, Net transfers Unrealized
Balance, in accounting Balance, Included in comprehensive sales, and in and/or out Balance, gains (losses)
December 31, 2009 principle(10) January 1, 2010 earnings(1)(2)(3)(4) income(1) Total settlements, net(5) of Level 3(6) December 31, 2010 still held(7)
(in millions)
Investments in securities:
Available-for-sale, at fair value:
Mortgage-related securities:
Freddie Mac . . . . . . . . . . . . . . . . $ 20,807 $(18,775) $ 2,032 $ $ 5 $ 5 $ $ $ 2,037 $
Subprime . . . . . . . . . . . . . . . . . . 35,721 35,721 (1,769) 7,046 5,277 (7,137) 33,861 (1,769)
CMBS . . . . . . . . . . . . . . . . . . . . 54,019 54,019 369 369 (51,273) 3,115
Option ARM . . . . . . . . . . . . . . . . 7,236 7,236 (1,402) 2,611 1,209 (1,556) 6,889 (1,395)
Alt-A and other . . . . . . . . . . . . . . 13,391 13,391 (1,020) 3,128 2,108 (2,344) 13,155 (1,020)
Fannie Mae . . . . . . . . . . . . . . . . . 338 338 (139) 13 212
Obligations of states and political
subdivisions . . . . . . . . . . . . . .. 11,477 11,477 4 (123) (119) (1,981) 9,377
Manufactured housing . . . . . . . . .. 911 911 (27) 126 99 (113) 897 (27)
Ginnie Mae . . . . . . . . . . . . . . . .. 4 4 (1) (1) (5) 18 16
Total available-for-sale
mortgage-related securities . . .. 143,904 (18,775) 125,129 (4,214) 13,161 8,947 (13,275) (51,242) 69,559 (4,211)
Trading, at fair value:
Mortgage-related securities:
Freddie Mac . . . . . . . . . . . . . . . . 2,805 (5) 2,800 (777) (777) 659 (383) 2,299 (799)
Fannie Mae . . . . . . . . . . . . . . . . . 1,343 1,343 (449) (449) (38) (2) 854 (449)
Ginnie Mae . . . . . . . . . . . . . . . . . 27 27 1 1 (1) 27 1
Other . . . . . . . . . . . . . . . . . . . . . 28 (1) 27 (1) (1) (4) (2) 20 (1)
Total trading mortgage-related
securities . . . . . . . . . . . . . .. 4,203 (6) 4,197 (1,226) (1,226) 616 (387) 3,200 (1,248)
Mortgage loans:
295
Held-for-sale, at fair value . . . . . . . . .. 2,799 2,799 (1) (1) 3,615 6,413 (308)
Net derivatives(8) . . . . . . . . . . . . . . . . .. (430) (430) (141) (141) (120) (691) (619)
Other assets:
Guarantee asset(9) . . . . . . . . . . . . . . .. 10,444 (10,024) 420 (24) (24) 145 541 (24)
All other . . . . . . . . . . . . . . . . . . . . .. 55 55 180 235 55
Total other assets . . . . . . . . . . . . . .. 10,444 (10,024) 420 31 31 325 776 31
(1) Changes in fair value for available-for-sale investments are recorded in AOCI, while gains and losses from sales are recorded in other gains (losses) on investments on our consolidated statements
of income and comprehensive income. For mortgage-related securities classified as trading, the realized and unrealized gains (losses) are recorded in other gains (losses) on investments on our
consolidated statements of income and comprehensive income.
(2) Changes in fair value of derivatives are recorded in derivative gains (losses) on our consolidated statements of income and comprehensive income for those not designated as accounting hedges.
(3) Changes in fair value of the guarantee asset are recorded in other income on our consolidated statements of income and comprehensive income.
(4) For held-for-sale mortgage loans with fair value option elected, gains (losses) on fair value changes and sale of mortgage loans are recorded in other income on our consolidated statements of
income and comprehensive income.
(5) For non-agency mortgage-related securities, primarily represents principal repayments.
(6) Transfer in and/or out of Level 3 during the period is disclosed as if the transfer occurred at the beginning of the period.
(7) 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
were still held at December 31, 2011 and 2010, respectively. Included in these amounts are credit-related other-than-temporary impairments recorded on available-for-sale securities.
(8) 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.
(9) We estimate that all amounts recorded for unrealized gains and losses on our guarantee asset relate to those amounts still in position. The amounts reflected as included in earnings represent the
periodic fair value changes of our guarantee asset.
(10) Represents adjustment to adopt the amendments to the accounting guidance for transfers of financial assets and consolidation of VIEs.
Freddie Mac
Non-recurring Fair Value Changes
Certain assets are not measured at fair value on an ongoing basis but are subject to fair value adjustments in certain
circumstances. We consider the fair value measurement related to these assets to be non-recurring. These assets include
impaired held-for-investment multifamily mortgage loans and REO, net. These fair value measurements usually result
from the write-down of individual assets to current fair value amounts due to impairments.
The fair value of impaired multifamily held-for-investment mortgage loans is generally based on the value of the
underlying property. Given the relative illiquidity in the markets for these impaired loans, and differences in contractual
terms of each loan, we classified these loans as Level 3 in the fair value hierarchy. See Valuation Methods and
Assumptions Subject to Fair Value Hierarchy Mortgage Loans, Held-for-Investment for additional details.
REO is initially measured at its fair value less costs to sell. In subsequent periods, REO is reported at the lower of its
carrying amount or fair value less costs to sell. Subsequent measurements of fair value less costs to sell are estimated
values based on relevant current and historical factors, which are considered to be unobservable inputs. As a result, REO
is classified as Level 3 under the fair value hierarchy. See Valuation Methods and Assumptions Subject to Fair Value
Hierarchy REO, Net for additional details.
The table below presents assets measured and reported at fair value on a non-recurring basis in our consolidated
balance sheets by level within the fair value hierarchy at December 31, 2011 and 2010, respectively.
(1) Represents carrying value and related write-downs of loans for which adjustments are based on the fair value amounts. These loans include impaired
multifamily mortgage loans that are classified as held-for-investment and have a related valuation allowance.
(2) 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 $3.1 billion, less estimated costs to sell of $221 million (or approximately
$2.9 billion) at December 31, 2011. The carrying amount of REO, net was written down to fair value of $5.6 billion, less estimated costs to sell of
$406 million (or approximately $5.2 billion) at December 31, 2010.
(3) Represents the total net gains (losses) recorded on items measured at fair value on a non-recurring basis as of December 31, 2011 and 2010,
respectively.
Investments in Securities
Agency Securities
Fixed-rate agency securities are valued based on dealer-published quotes for a base TBA security, adjusted to reflect
the measurement date as opposed to a forward settlement date (carry) and pay-ups for specified collateral. The base
TBA price varies based on agency, term, coupon, and settlement month. The carry adjustment converts forward settlement
date prices to spot or same-day settlement date prices such that the fair value is estimated as of the measurement date,
and not as of the forward settlement date. The carry adjustment uses our internal prepayment and interest rate models. A
pay-up is added to the base TBA price for characteristics that are observed to be trading at a premium versus TBAs; this
currently includes seasoning and low-loan balance attributes. Haircuts are applied to a small subset of positions that are
less liquid and are observed to trade at a discount relative to TBAs; this includes securities that are not eligible for
delivery into TBA trades.
Adjustable-rate agency securities are valued based on the median of prices from multiple pricing services. The key
valuation drivers used by the pricing services include the interest rate cap structure, term, agency, remaining term, and
months-to-next coupon reset, coupled with prevailing market conditions, namely interest rates.
Because fixed-rate and adjustable-rate agency securities are generally liquid and contain observable pricing in the
market, they generally are classified as Level 2.
Multiclass structures are valued using a variety of methods, depending on the product type. The predominant
valuation methodology uses the median prices from multiple pricing services. This method is used for structures for which
there is typically significant, relevant market activity. Some of the key valuation drivers used by the pricing services are
the collateral type, tranche type, weighted average life, and coupon, coupled with interest rates. Other tranche types that
are more challenging to price are valued using the median prices from multiple dealers. These include structured interest-
only, structured principal-only, inverse floating-rate, and inverse interest-only structures. Some of the key valuation drivers
used by the dealers are the collateral type, tranche type, weighted average life, and coupon, coupled with interest rates. In
addition, there is a subset of tranches for which there is a lack of relevant market activity that are priced using a proxy
relationship where the position is matched to the closest dealer-priced tranche, then valued by calculating an OAS using
our proprietary prepayment and interest rate models from the dealer-priced tranche. 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. We then determine the fair values for these securities by using the estimated OAS as an input to the
valuation calculation in conjunction with interest-rate and prepayment models to calculate the NPV of the projected cash
flows. These positions typically have smaller balances and are more difficult for dealers to value. There is also a subset of
positions for which prices are published on a daily basis; these include trust interest-only and trust principal-only strips.
These are fairly liquid tranches and are quoted on a regular settlement date basis. In order to align the regular settlement
date price with the balance sheet date, the OAS is calculated based on the published prices. Then the tranche is valued
using that OAS applied to the balance sheet date.
Multiclass agency securities are classified as Level 2 or 3 depending on the significance of the inputs that are not
observable.
Table 17.4 Fair Value of Subprime, Option ARM, and Alt-A and Other Investments by Origination Year
Fair Value at
Year of Origination December 31, 2011 December 31, 2010
(in millions)
2004 and prior . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 4,287 $ 4,998
2005 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10,411 13,126
2006 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16,155 19,333
2007 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13,890 16,461
2008 and beyond . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $44,743 $53,918
Manufactured Housing
Securities backed by loans on manufactured housing properties are dealer-priced and we arrive at the fair value by
taking the median of multiple dealer prices. Some of the key valuation drivers include the collaterals performance and
vintage. These securities are classified as Level 3 in the fair value hierarchy because key inputs are unobservable in the
market due to low levels of liquidity.
(1) Fair value is categorized based on the period from December 31, 2011 and 2010, respectively, until the contractual maturity of the derivatives.
(2) Represents fair value for each product type, prior to counterparty netting, cash collateral netting, net trade/settle receivable or payable, and net
derivative interest receivable or payable adjustments.
(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 thirteen years.
(5) Primarily includes purchased interest rate caps and floors.
Other Derivatives
Other derivatives mainly consist of exchange-traded futures, foreign-currency swaps, certain forward purchase and
sale commitments, and credit derivatives. The fair value of exchange-traded futures is based on end-of-day observed
closing prices obtained from third-party pricing services; therefore, they are classified as Level 1 under the fair value
hierarchy. The fair value of foreign-currency swaps is determined by using the appropriate yield curves to calculate and
discount the expected cash flows for the swap contracts; therefore, they are classified as Level 2 under the fair value
hierarchy since the fair values are determined through models that use observable inputs from active markets.
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
a security or loan. Such valuation techniques are further discussed in the Investments in Securities section above and
Valuation Methods and Assumptions Not Subject to Fair Value Hierarchy Mortgage Loans.
301 Freddie Mac
Credit derivatives primarily include purchased credit default swaps and certain short-term default guarantee
commitments, which are valued using prices from the respective counterparty and verified using third-party dealer credit
default spreads at the measurement date. We classify credit derivatives as Level 3 under the fair value hierarchy due to the
inactive market and significant divergence among prices obtained from the dealers.
REO, Net
REO is carried at the lower of its carrying amount or fair value less costs to sell. The fair value of REO is calculated
using an internal model that considers state and collateral level data to produce an estimate of fair value based on REO
dispositions in the most recent three months. We use the actual disposition prices on REO and the current loan UPB to
estimate the current fair value of REO. Certain adjustments, such as state specific adjustments, are made to the estimated
fair value, as applicable. Due to the use of unobservable inputs, REO is classified as Level 3 under the fair value
hierarchy.
(1) Equals the amount reported 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 as of the dates presented. 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, nor do they
include any estimation of intangible or goodwill values. 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.
The fair value of certain financial instruments is based on our assumed current principal exit market as of the dates
presented. As new markets are developed, our assumed principal exit market may change. The use of different
assumptions and methodologies to determine the fair values of certain financial instruments, including the use of different
principal exit markets, could have a material impact on the fair value of net assets attributable to stockholders presented
on our consolidated fair value balance sheets.
We report certain assets and liabilities that are not financial instruments (such as property and equipment and REO),
as well as certain financial instruments that are not covered by the disclosure requirements in the accounting guidance for
financial instruments, 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 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.
Mortgage Loans
Single-family mortgage loans are not subject to the fair value hierarchy since they are classified as held-for-
investment and recorded at amortized cost. Certain multifamily mortgage loans are subject to the fair value hierarchy
since these are either recorded at fair value with the fair value option elected or they are held for investment and recorded
at fair value upon impairment, which is based upon the fair value of the collateral as multifamily loans are collateral-
dependent.
Single-Family Loans
We determine the fair value of single-family mortgage loans as an estimate of the price we would receive if we were
to securitize those loans, as we believe this represents the principal market for such loans. This principal market
assumption applies to both loans held by consolidated trusts and unsecuritized loans and excludes single-family loans for
which a contractual modification has been completed. Our estimate of fair value is based on comparisons to actively
traded mortgage-related securities with similar characteristics. We adjust to reflect the excess coupon (implied
management and guarantee fee) and credit obligation related to performing our guarantee.
To calculate the fair value, we begin with a security price derived from benchmark security pricing for similar
actively traded mortgage-related securities, adjusted for yield, credit, and liquidity differences. This security pricing
process is consistent with our approach for valuing similar securities retained in our investment portfolio or issued to third
parties. See Valuation Methods and Assumptions Subject to Fair Value Hierarchy Investments in Securities.
We estimate the present value of the additional cash flows, which consist of the implied management and guarantee
fees in excess of the coupon on the mortgage-related securities. Our approach for estimating the fair value of the implied
management and guarantee fees at December 31, 2011 used third-party market data as practicable. The valuation approach
for the majority of implied management and guarantee fees relates to fixed-rate loan products with coupons at or near
current market rates and involves obtaining dealer quotes on hypothetical securities constructed with collateral
characteristics from our single-family credit guarantee portfolio. The remaining portion of the implied management and
guarantee fees relates to underlying loan products for which comparable market prices were not readily available. These
relate specifically to ARM products, highly seasoned loans, and fixed-rate loans with coupons that are not consistent with
current market rates. For this portion of the single-family credit guarantee portfolio, the implied management and
guarantee fees are valued using an expected cash flow approach, leveraging the market information received on the more
liquid portion of the population and including only those cash flows expected to result from our contractual right to
receive management and guarantee fees.
The implied management and guarantee fee for single-family mortgage loans is also net of the related credit and
other costs (such as general and administrative expense) and benefits (such as credit enhancements) inherent in our
guarantee obligation. We use delivery and guarantee fees charged by us as a market benchmark for all guaranteed loans
that would qualify for purchase under current underwriting standards (used for the majority of the guaranteed loans, but
accounts for a small share of the overall fair value of the guarantee obligation). For loans that do not qualify for purchase
based on current underwriting standards, we use our internal credit models, which incorporate factors such as loan
characteristics, loan performance status information, expected losses, and risk premiums without further adjustment (used
304 Freddie Mac
for less than a majority of the guaranteed loans, but accounts for the largest share of the overall fair value of the
guarantee obligation).
For single-family mortgage loans for which a contractual modification has been approved, we estimate fair value
based on our estimate of prices we would receive if we were to sell these loans in the whole loan market, as this
represents our current principal market for modified loans. These prices are obtained from multiple dealers who reference
market activity, where available, for modified loans and use internal models and their judgment to determine default rates,
severity rates, and risk premiums.
The fair value of single-family mortgage loans is a fair value measurement with limited market benchmarks and
significant unobservable inputs. In determining the fair value of single-family mortgage loans, valuation outcomes can
vary widely based on management judgments and decisions used in determining: (a) a principal exit market; (b) modeling
assumptions; and (c) inputs used to determine variables including risk premiums, credit costs, security pricing, and
implied management and guarantee fees. Specifically, the valuation of single-family mortgage loans could change
significantly based on changes in our assumptions about the probability of default, severity, home prices, and risk
premium.
Multifamily Loans
For a discussion of the techniques used to determine the fair value of held-for-sale, and both impaired and non-
impaired held-for-investment multifamily loans, see Valuation Methods and Assumptions Subject to Fair Value
Hierarchy Mortgage Loans, Held-for-Investment and Mortgage Loans, Held-for-Sale, respectively.
Other Assets
Most of our other assets are not financial instruments required to be valued at fair value under the accounting
guidance for disclosures about the fair value of financial instruments, such as property and equipment. For most 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.
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 net deferred tax assets on our consolidated fair value balance sheets, calculated
as described above, exceed our net deferred tax assets on our GAAP consolidated balance sheets that have been reduced
by a valuation allowance, our net deferred tax assets on our consolidated fair value balance sheets are limited to the
amount of our net deferred tax assets on our GAAP consolidated balance sheets. If the adjusted deferred taxes are a net
liability, this amount is included in other liabilities.
Accrued interest receivable is one of the components included within other assets on our consolidated fair value
balance sheets. On our GAAP consolidated balance sheets, we reverse accrued but uncollected interest income when a
loan is placed on non-accrual status. There is no such reversal performed for the fair value of accrued interest receivable
disclosed on our consolidated fair value balance sheets. Rather, we include in our fair value disclosure the amount we
deem to be collectible. As a result, there is a difference between the accrued interest receivable GAAP-basis carrying
amount and its fair value disclosed on our consolidated fair value balance sheets.
Other Liabilities
Other liabilities consist of accrued interest payable on debt securities, the guarantee obligation for our other
guarantee commitments and guarantees issued to non-consolidated entities, the reserve for guarantee losses on non-
consolidated trusts, servicer advanced interest payable and certain other servicer liabilities, accounts payable and accrued
expenses, payables related to securities, and other miscellaneous liabilities. We believe the carrying amount of these
liabilities is a reasonable approximation of their fair value, except for the guarantee obligation for our other guarantee
commitments and guarantees issued to non-consolidated entities. The technique for estimating the fair value of our
guarantee obligation related to the credit component of the loans fair value is described in the Mortgage Loans
Single-Family Loans section.
As discussed in Other Assets, other liabilities may include a deferred tax liability adjusted for fair value balance
sheet purposes.
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, many of Lehmans U.S. subsidiaries and affiliates also filed bankruptcy petitions
(collectively, the Lehman Entities). Freddie Mac had numerous relationships with the Lehman Entities which give rise
to several claims. On September 22, 2009, Freddie Mac filed proofs of claim in the Lehman bankruptcies aggregating
approximately $2.1 billion. On April 14, 2010, Lehman filed its chapter 11 plan of liquidation and disclosure statement,
providing for the liquidation of the bankruptcy estates assets over the next three years. The plan and disclosure statement
were subsequently modified several times. Hearings to consider confirmation of the plan were conducted on December 6,
2011 and, on that date, the plan was confirmed by the court. The plan sets aside $1.2 billion to be available for payment
in full of our priority claim relating to losses incurred on short-term lending transactions with certain Lehman Entities if it
is ultimately allowed as a priority claim, but leaves open for subsequent litigation whether our claim of priority status is
proper. In the event that this claim is not ultimately accorded priority status, it will be treated as a senior unsecured claim
under the plan, pursuant to which Freddie Mac would be entitled to receive an estimated distribution of approximately
21% (or approximately $250 million) over the next three years. The plan also provides that general unsecured claims,
such as our claim relating to repurchase obligations of $868 million, will be entitled to a distribution of approximately
19.9% of the allowed amount, if any. The plan does not adjudge or allow our unsecured repurchase obligations claim, but
permits claims allowance proceedings to continue. Finally, the plan entitles Freddie Mac to a distribution of approximately
39% (or about $6.4 million) payable over the next three years on our allowed claim exceeding $16 million relating to
losses on derivative transactions.
Table 19.1 Line Items No Longer Disclosed Separately on Our Consolidated Statements of Income and
Comprehensive Income
For The Year Ended
December 31,
2011 2010 2009
(in millions)
Other income:
Management and guarantee income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 170 $ 143 $ 3,033
Gains (losses) on guarantee asset . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (78) (61) 3,299
Income on guarantee obligation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 153 135 3,479
Gains (losses) on sale of mortgage loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 411 267 745
Lower-of-cost-or-fair-value adjustments on held-for-sale mortgage loans . . . . . . . . . . . . . . . . . . . . . . . . . . . (679)
Gains (losses) on mortgage loans recorded at fair value . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 418 (249) (190)
Recoveries on loans impaired upon purchase . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 473 806 379
Low-income housing tax credit partnerships . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (4,155)
Trust management income (expense) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (761)
All other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 608 819 222
Total other income per consolidated statements of income and comprehensive income . . . . . . . . . . . . . . . . $2,155 $1,860 $ 5,372
Other expenses:
Losses on loans purchased . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 10 $ 25 $ 4,754
All other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 382 637 449
Total other expenses per consolidated statements of income and comprehensive income . . . . . . . . . . . . . . . $ 392 $ 662 $ 5,203
The table below highlights the significant line items that are no longer disclosed separately on our consolidated
balance sheets.
Table 19.2 Line Items No Longer Disclosed Separately on Our Consolidated Balance Sheets
December 31, 2011 December 31, 2010
(in millions)
Other assets:
Guarantee asset . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 752 $ 541
Accounts and other receivables . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8,350 8,734
All other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,411 1,600
Total other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $10,513 $10,875
Other liabilities:
Guarantee obligation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 787 $ 625
Servicer liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,600 4,456
Accounts payable and accrued expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 845 1,760
All other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 814 1,257
Total other liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 6,046 $ 8,098
The table below highlights the significant line items that are no longer disclosed separately on our consolidated
statements of cash flows.
Table 19.3 Line Items No Longer Disclosed Separately on Our Consolidated Statements of Cash Flows
For The Year Ended
December 31,
2011 2010 2009
(in millions)
Adjustments to reconcile net loss to net cash from operating activities:
Low-income housing tax credit partnerships . . . . . . . . . . . . . . . . . ............................. $ $ $ 4,155
Losses on loans purchased . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ............................. 10 25 4,754
Change in:
Due to PCs and REMICs and Other Structured Securities trusts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8 14 250
Guarantee asset, at fair value . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (210) (121) (5,597)
Guarantee obligation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 158 (17) (183)
Other, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (2,771) (134) (461)
Total other, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $(2,805) $(233) $ 2,918
Mitigating Actions Related to the Material Weaknesses in Internal Control Over Financial Reporting
As described under Managements Report on Internal Control Over Financial Reporting, we have two material
weaknesses in internal control over financial reporting as of December 31, 2011.
Given the structural nature of the material weakness related to our inability to update our disclosure controls and
procedures in a manner that adequately ensures the accumulation and communication to management of information
known to FHFA that is needed to meet our disclosure obligations under the federal securities laws, we believe it is likely
that we will not remediate this material weakness while we are under conservatorship. However, both we and FHFA have
continued to engage in activities and employ procedures and practices intended to permit accumulation and
communication to management of information needed to meet our disclosure obligations under the federal securities laws.
These include the following:
FHFA has established the Office of Conservatorship Operations, which is intended to facilitate operation of the
company with the oversight of the Conservator.
We provide drafts of our SEC filings to FHFA personnel for their review and comment prior to filing. We also
provide drafts of external press releases, statements and speeches to FHFA personnel for their review and comment
prior to release.
FHFA personnel, including senior officials, review our SEC filings prior to filing, including this annual report on
Form 10-K, and engage in discussions regarding issues associated with the information contained in those filings.
Prior to filing this annual report on Form 10-K, FHFA provided us with a written acknowledgement that it had
reviewed the annual report on Form 10-K, was not aware of any material misstatements or omissions in the annual
report on Form 10-K, and had no objection to our filing the annual report on Form 10-K.
The Acting Director of FHFA is in frequent communication with our Chief Executive Officer, typically meeting (in
person or by phone) on a weekly basis.
FHFA representatives hold frequent meetings, typically weekly, 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, external communications, and legal matters.
Senior officials within FHFAs accounting group meet frequently, typically weekly, with our senior financial
executives regarding our accounting policies, practices, and procedures.
We have performed the following mitigating actions regarding the material weakness related to our inability to
effectively manage information technology changes and maintain adequate controls over information security monitoring,
resulting from increased levels of employee turnover:
Reviewed potential unauthorized changes to applications supporting our financial statements for proper approvals.
Reviewed and approved user access capabilities for applications supporting our financial reporting processes.
Maintained effective business process controls over financial reporting.
Filled the vacant positions or reassigned responsibilities within the information change management and
information security monitoring groups.
We also intend to take the following remediation actions related to this material weakness:
Take select actions targeted to reduce employee attrition in key control areas.
Assess staffing requirements to ensure appropriate staffing over information security controls and develop cross-
training programs within these areas to mitigate the risk to the internal control environment should we continue to
experience high levels of employee turnover.
Improve automation capabilities for the identification and resolution of potential unauthorized system changes.
317 Freddie Mac
Update our policies and procedures to document control processes.
Provide additional training to IT individuals that execute or manage security controls.
Explore options to enter into various strategic arrangements with outside firms to provide operational capability
and staffing for these functions, if needed.
In view of our mitigating actions related to these material weaknesses, we believe that our consolidated financial
statements for the year ended December 31, 2011 have been prepared in conformity with GAAP.
Changes in Internal Control Over Financial Reporting During the Quarter Ended December 31, 2011
We evaluated the changes in our internal control over financial reporting that occurred during the quarter ended
December 31, 2011 and concluded that the following matters have materially affected, or are reasonably likely to
materially affect, our internal control over financial reporting.
Raymond G. Romano, Executive Vice President Chief Credit Officer and John R. Dye, Senior Vice President
Interim General Counsel & Corporate Secretary, left the company during the fourth quarter of 2011. On October 26, 2011,
FHFA announced that Charles E. Haldeman Jr., Chief Executive Officer, has expressed his desire to step down in 2012,
and that the Board and FHFA will be developing a succession plan.
In addition, a number of senior officers left the company in earlier periods. We maintain succession plans for our
senior management positions, which has enabled us to fill some of our vacant senior management positions quickly.
However, we may not be able to continue to do so in the future. We have eliminated other vacant senior management
positions through reorganizations. In addition, we have experienced elevated levels of voluntary turnover in the fourth
quarter of 2011 and earlier periods, and expect this trend to continue as the public debate regarding the future role of the
GSEs continues. We continue to have concerns about staffing inadequacies, management depth, and employee
engagement. Disruptive levels of turnover at both the executive and employee levels could lead to breakdowns in any of
our operations, affect our execution capabilities, cause delays in the implementation of critical technology and other
projects, and erode our business, modeling, internal audit, risk management, information security, financial reporting,
legal, compliance, and other capabilities.
Based on our assessment as of December 31, 2011, we identified a material weakness related to our inability to
effectively manage information technology changes and maintain adequate controls over information security monitoring,
resulting from increased levels of employee turnover. For additional information related to this material weakness, see
Managements Report on Internal Control Over Financial Reporting.
FHFA also announced on October 26, 2011, that two Board members, John A. Koskinen (Chairman) and Robert R.
Glauber (Chairman, Governance and Nominating Committee), have reached the companys mandatory retirement age and
would be stepping down from the Board. This occurred at the end of their then-current terms in March 2012. In order to
promote a smooth transition, per FHFAs announcement, Christopher Lynch, previously the Chairman of the Audit
Committee, assumed the position of Non-Executive Chairman of the Board effective at the December 2011 Board
meeting. A third Board member, Laurence E. Hirsch, notified the company on October 18, 2011 that he would not seek
re-election to the Board when his term expires. Mr. Hirschs term expired in March 2012. In addition, on March 7, 2012,
Clayton Rose (Chairman of the Audit Committee) notified the company that he will resign from the Board of Directors
effective as of 6:00 pm Eastern Standard Time on March 9, 2012.
Election of Directors
Upon the appointment of FHFA as our Conservator on September 6, 2008, the Conservator immediately succeeded to
all rights, titles, powers and privileges of Freddie Mac, and of any stockholder, officer or director thereof, with respect to
the company and its assets, including, without limitation, the right of holders of our common stock to vote with respect to
the election of directors and any other matter for which stockholder approval is required or deemed advisable.
318 Freddie Mac
On March 6, 2012, the Conservator executed a written consent re-electing each of the then-current directors as
members of our Board of Directors, other than Messrs. Glauber, Hirsch, and Koskinen, effective as of that date. The
individuals elected by the Conservator for another term as directors are listed below.
Linda B. Bammann
Carolyn H. Byrd
Charles E. Haldeman, Jr.
Christopher S. Lynch
Nicolas P. Retsinas
Clayton S. Rose
Eugene B. Shanks, Jr.
Anthony A. Williams
The terms of the directors elected under the March 6, 2012 consent will continue until the date of the next annual
meeting of stockholders or the Conservator next elects directors by written consent, whichever occurs first.
On March 7, 2012, Clayton Rose notified the company that he will resign from the Board of Directors effective as of
6:00 pm Eastern Standard Time on March 9, 2012.
Effect of Termination of Employment. Base Salary ceases upon a Covered Officers termination of employment. The
treatment of Deferred Salary upon the termination of a Covered Officer for any reason other than for cause is as described
below.
Deferred Salary Fixed Portion. The portion earned during 2012 but unpaid as of the date of termination is
reduced by 2% for each full or partial month by which the Covered Officers termination precedes January 31,
2014.
Deferred Salary At-Risk Portion. The portion earned during 2012 but unpaid as of the date of termination is paid
in full, but remains subject to reduction for corporate and individual performance.
319 Freddie Mac
All Deferred Salary paid following a Covered Officers termination of employment will be paid on the same
quarterly schedule as if the Covered Officer had not terminated employment.
Securitization Platform 10% In collaboration with FHFA and the other Enterprise, develop and finalize a plan by December 31, 2012 for the design and build
of a single securitization platform that can serve both Enterprises and a post-conservatorship market with multiple future issuers.
Pooling and Servicing Agreements 5% Propose a model pooling and servicing agreement (PSA), collaborate with other Enterprise and FHFA on a specific proposal, seek
public comment, and produce final recommendations for standard Enterprise trust documentation by December 31, 2012.
Risk Sharing 10% Initiate risk sharing transactions by September 30, 2012.
Execute new risk sharing transactions beyond the traditional charter required mortgage insurance coverage.
Propose timeline for continued growth in risk sharing through 2013.
Pricing 10%
Single-family Guarantee Fee Pricing Increases Develop and begin implementing plan to increase guarantee fee pricing to more closely approximate the private sector.
Set uniform pricing across loan sellers to extent practicable.
Set plan to price for state law effects on mortgage Work with FHFA to develop appropriate risk-based pricing by state. State-level pricing grid to be completed by August 31, 2012.
credit losses given default
Loss Mitigation through continued implementation and 10% Enhance transparency of servicer requirements around foreclosure timelines and compensatory fees and publish applicable
enhancement of Servicer Alignment Initiative announcements by September 30, 2012.
Short Sales Enhance short sales programs that include efforts to identify program obstacles that impact utilization by June 30, 2012.
Applicable lender announcements to foreclosure alternatives by September 30, 2012.
Deeds-in-Lieu and Deeds-for-Lease Design, develop or enhance deed-in-lieu and deed-for-lease programs that include efforts to identify and resolve program
obstacles that impact utilization by September 30, 2012. Applicable lender announcements to foreclosure alternatives by
December 31, 2012.
Real Estate Owned Sales 10% Implement, as needed, loans to facilitate real estate owned (REO) sales program by June 30, 2012.
Expand financing for small investors in REO properties by June 30, 2012.
Initiate disposition pilot, either through financing or bulk sales, by September 30, 2012.
Expand pilot programs and establish ongoing sales program, as agreed to with FHFA, during 2012.
Conservatorship / Board Priorities 20% Work closely with FHFA toward concluding litigation associated with private label securities and whole loan repurchase claims,
as appropriate.
Prioritize and manage Enterprise operations in support of conservatorship goals and board directions.
Adapt to evolving conservatorship requirements.
Collaborate fully with FHFA and, when requested, the other Enterprise.
Actively seek and consider public input on conservatorship-related projects, as requested.
Effectively identify, communicate, and remediate situations that create risk for the conservatorships or avoidable taxpayer losses.
Ensure corporate governance procedures are maintained, including timely reporting to the board and adhering to board mandates
and expectations.
Take steps to mitigate key person dependencies and maintain appropriate internal controls and risk management governance.
Achieve milestones agreed to within the year with regard to accounting alignment.
Background
On September 6, 2008, the Director of FHFA appointed FHFA as our Conservator. Upon its appointment as
Conservator, FHFA immediately succeeded to, among other things, the right of holders of our common stock to vote with
respect to the election of directors. As a result, stockholders no longer have the ability to recommend director nominees or
vote for the election of our directors. Accordingly, we will not solicit proxies, distribute a proxy statement to stockholders,
or hold an annual meeting of stockholders in 2012. Instead, the Conservator has elected directors by a written consent in
lieu of an annual meeting, as it has done in previous years.
Directors
On November 24, 2008, the Conservator reconstituted our Board of Directors and delegated certain powers to the
Board while reserving certain powers of approval to itself. See Authority of the Board and Board Committees. The
Conservator determined that the Board is to have a non-executive Chairman, and is to consist of a minimum of nine and
not more than 13 directors, with the Chief Executive Officer being the only corporate officer serving as a member of the
Board.
On October 26, 2011, FHFA announced that Charles E. Haldeman, Jr. had informed the Board of his desire to step
down from his position as CEO and Director of Freddie Mac in the coming year. The Board is conducting a search for a
new CEO, in consultation with FHFA. An informal committee consisting of Nominating and Governance Committee
members Eugene B. Shanks, Jr. (chair), Nicolas P. Retsinas and Carolyn H. Byrd, along with Non-Executive Chairman
Christopher S. Lynch, is conducting the search on behalf of the Board. The executive search firm SpencerStuart has been
retained to assist in the search.
FHFA also announced on October 26, 2011 that two members of the Freddie Mac Board of Directors, John A.
Koskinen and Robert R. Glauber, have reached the companys mandatory retirement age and will not be eligible for re-
election to the Board at the end of their current term. In anticipation of those retirements and to promote a smooth
transition, Mr. Lynch, who previously served as chairman of the Boards Audit Committee, assumed the position of Non-
Executive Chairman, effective December 2, 2011. A third Board member, Laurence E. Hirsch, notified the company on
October 18, 2011 that he would not seek re-election to the Board when his term expired.
The Conservator executed a written consent, effective March 6, 2012, electing all of the then-current directors other
than Messrs. Glauber, Hirsch and Koskinen to another term as our directors. The terms of those directors will end: (a) on
the date of the next annual meeting of our stockholders; or (b) when the Conservator next elects directors by written
consent, whichever occurs first. Currently, we have eight directors. The Board is conducting a search for individuals
qualified to fill the remaining seats on the Board that are currently vacant.
Our Board seeks candidates for director who have achieved a high level of stature, success, and respect in their
principal occupations. Each of our current directors was selected as a candidate because of his or her character, judgment,
experience, and expertise. The qualifications of candidates also were evaluated in light of the requirement in our charter,
as amended by the Reform Act, that our Board must at all times have at least one individual from the homebuilding,
mortgage lending and real estate industries, and at least one person from an organization representing consumer or
community interests or one person who has demonstrated a career commitment to the provision of housing for low-
income households. Consistent with the examination guidance for corporate governance issued by FHFA, the factors
considered also include the knowledge directors would have, as a group, in the areas of business, finance, accounting, risk
management, public policy, mortgage lending, real estate, low-income housing, homebuilding, regulation of financial
institutions, and any other areas that may be relevant to our safe and sound operation. Additionally, in accordance with the
guidance issued by FHFA, we considered whether a candidates other commitments, including the number of other board
memberships held by the candidate, would permit the candidate to devote sufficient time to the candidates duties and
responsibilities as a director. See CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR
INDEPENDENCE Board Diversity for additional information concerning the Boards consideration of diversity in
identifying director nominees and candidates.
322 Freddie Mac
The following is a brief discussion of: the age and length of Board service of each director; each directors
experience, qualifications, attributes, and/or skills that led to his or her selection as a director; and other biographical
information about our directors, as of March 6, 2012:
Linda B. Bammann joined the Board in December 2008. She is 55 years old. She is an experienced finance
executive with in-depth knowledge of risk management gained from her previous employment and board
memberships. Ms. Bammanns risk management experience enables her to contribute significantly to the Boards
oversight of our enterprise risk management.
Ms. Bammann was Executive Vice President, Deputy Chief Risk Officer for JPMorgan Chase & Co. from July
2004 until her retirement in January 2005. Prior to that, Ms. Bammann held several positions with Bank One
Corporation beginning in 2000, including Executive Vice President and Chief Risk Management Officer from 2001
until Bank Ones acquisition by JPMorgan Chase & Co. in July 2004. Ms. Bammann also was a member of Bank
Ones executive planning group. From 1992 to 2000, Ms. Bammann was a Managing Director with UBS Warburg
LLC and predecessor firms. Ms. Bammann was a board member of the Risk Management Association, and
chairperson of the Loan Syndications and Trading Association. Ms. Bammann currently is a director of Manulife
Financial Corporation, where she is a member of the Risk Committee and the Management Resources and
Compensation Committee, and of The Manufacturers Life Insurance Company, a subsidiary of Manulife Financial
Corporation.
Carolyn H. Byrd joined the Board in December 2008. She is 63 years old. She is an experienced finance executive
who has held a variety of leadership positions. She also has significant public company audit committee
experience. Ms. Byrds internal audit and public company audit committee experience enables her to support the
Boards oversight of our internal control over financial reporting and compliance matters.
Ms. Byrd has been Chairman and Chief Executive Officer of GlobalTech Financial, LLC, a financial services
company she founded, since 2000. From 1997 to 2000, Ms. Byrd was President of Coca-Cola Financial
Corporation. From 1977 to 1997, Ms. Byrd held a variety of domestic and international positions with The
Coca-Cola Company, including Chief of Internal Audits and Director of the Corporate Auditing Department. She is
currently a director of AFC Enterprises, Inc., where she is a member of the Audit Committee and the Corporate
Governance Committee and of Regions Financial Corporation, where she is a member of the Audit Committee and
the Risk Committee. Ms. Byrd is a former member of the board of directors and audit committee member of
Circuit City Stores, Inc. and RARE Hospitality International, Inc., and she also served on the board of directors of
St. Paul Travelers Companies, Inc.
Charles E. Haldeman, Jr. joined the Board in August 2009, upon the commencement of his employment as Chief
Executive Officer of Freddie Mac. He is 63 years old. He is an experienced finance executive and leader of finance
and investment organizations. Mr. Haldemans experience as a leader of financial organizations enables him to
provide valuable business and operating perspectives to the Board.
Prior to joining Freddie Mac, Mr. Haldeman served as Chairman of Putnam Investment Management, LLC, the
investment advisor for the Putnam Funds, from July 2008 through June 2009. He joined Putnam Investments in
2002 as Senior Managing Director and Co-Head of the investment division, was appointed President and Chief
Executive Officer in November 2003, and served in that capacity until June 2008. He was a member of Putnam
Funds Board of Trustees from 2004 until July 2009, and was named President of the Putnam Funds in 2007. He
served as a member of Putnam Investments Board of Trustees from November 2003 until June 2009, where he
served as a member of the audit committee. Prior to joining Putnam, Mr. Haldeman served as Chief Executive
Officer of Delaware Investments from 2000 to 2002, and as chairman from 2001 to 2002. He was the President and
Chief Operating Officer of United Asset Management Corporation from 1998 to 1999. Mr. Haldeman served as
chairman of Dartmouth Colleges Board of Trustees from 2007 until 2010.
Christopher S. Lynch joined the Board in December 2008. He is 54 years old. He is an experienced senior
accounting executive who served as the lead audit signing partner and account executive for several large financial
institutions with mortgage lending businesses. He also has significant public company audit committee experience
and risk management experience. Mr. Lynchs extensive experience in finance, accounting and risk management
enables him to provide valuable guidance to the Board on complex accounting and risk management issues,
including in his roles as Non-Executive Chairman and member of our Audit Committee.
Mr. Lynch has served as Non-Executive Chairman of Freddie Mac since December 2011. Mr. Lynch is an
independent consultant providing a variety of services to financial intermediaries, including risk management,
strategy, governance, financial and regulatory reporting and troubled-asset management. Prior to retiring from
323 Freddie Mac
KPMG LLP in May 2007, Mr. Lynch held a variety of leadership positions at KPMG, including National Partner in
Charge Financial Services, the U.S. firms largest industry division. Mr. Lynch chaired KPMGs Americas
Financial Services Leadership team, was a member of the Global Financial Services Leadership and the
U.S. Industries Leadership teams and led the Banking & Finance practice. Mr. Lynch also served as a partner in
KPMGs Department of Professional Practice and as a Practice Fellow at the Financial Accounting Standards
Board. Mr. Lynch was the lead and audit signing partner for some of KPMGs largest financial services clients.
Mr. Lynch also is a director of American International Group, Inc., where he is the Chair of the Audit Committee
and a member of the Finance and Risk Management Committee. In addition, Mr. Lynch serves on the National
Audit Committee Chair Advisory Council of the National Association of Corporate Directors.
Nicolas P. Retsinas joined the Board in 2007. He is 65 years old. He is an experienced leader in the governmental
and educational sectors, with in-depth knowledge of the mortgage lending and real estate industries. He also has
represented consumer and community interests and has demonstrated a career commitment to the provision of
housing for low-income households. Mr. Retsinas public, private and academic experience, including his service
on the boards of several not-for-profit organizations, enables him to bring to the Board broad knowledge and
understanding of housing and consumer and community issues.
Mr. Retsinas is a senior lecturer in Real Estate at the Harvard Business School and is Director Emeritus of Harvard
Universitys Joint Center for Housing Studies, where he served as Director from 1998 to 2010. He is also a lecturer
in Housing Studies at the Graduate School of Design. Prior to his Harvard appointment, Mr. Retsinas served as
Assistant Secretary for Housing Federal Housing Commissioner at the United States Department of Housing and
Urban Development from 1993 to 1998 and as Director of the Office of Thrift Supervision from 1996 to 1997. He
served on the Board of the Federal Deposit Insurance Corporation from 1996 to 1997, the Federal Housing Finance
Board from 1993 to 1998 and the Neighborhood Reinvestment Corporation from 1993 to 1998. Mr. Retsinas also
formerly served on the Board of Trustees for the National Housing Endowment. Currently, Mr. Retsinas serves on
the Board of Trustees for Enterprise Community Partners, on the Board of Directors of the Center for Responsible
Lending, and as a member of the Bipartisan Policy Centers Housing Commission.
Clayton S. Rose joined the Board in October 2010. He is 53 years old. He is a finance executive with leadership
experience in finance and investment organizations, experience serving on and chairing public company audit
committees, and academic experience focused on financial services and managerial ethics. Mr. Roses leadership,
operating and academic experience enables him to provide the Board with valuable guidance regarding business
execution, corporate finance and capital markets, as well as financial reporting and controls oversight.
Mr. Rose is Professor of Management Practice at the Harvard Business School, and has been a member of its
faculty since July 2007. He was awarded a PhD in sociology (with distinction) from the University of Pennsylvania
in the same year. He was an adjunct professor at the Stern School of Business at New York University from 2002
to 2004, and at the Graduate School of Business at Columbia University from 2002 to 2006. In 2001, Mr. Rose
served as Vice Chairman and Chief Operating Officer of JP Morgan, the investment bank of J.P. Morgan Chase &
Co. Previously, he worked at J.P. Morgan & Co. Incorporated from 1981 to 2000, where, among other positions, he
was head of the Global Investment Banking and the Global Equities Divisions and served as a member of the
firms executive committee. Mr. Rose is a member of the board of directors of XL Group plc, where he is a
member of the Nominating, Governance and External Affairs Committee and the Risk and Finance Committee. He
is a trustee of the Howard Hughes Medical Institute, where he has chaired the audit and compensation committee
since March 2009, and is a director of Public/Private Ventures, where he has chaired the audit committee since
October 2011. From November 2007 to March 2010, he served as Chairman of the board of managers of
Highbridge Capital Management, an alternative investment management firm owned by JPMorgan Chase & Co.
Mr. Rose previously served as a member of the boards of directors of Mercantile Bankshares Corporation from
September 2003 to April 2007, where he served on the audit committee, and of Lexicon Pharmaceuticals, Inc. from
July 2004 through September 2007, where he chaired the audit committee from March 2005 through September
2007. From October 2006 to October 2011, he was a trustee of the National Opinion Research Center at the
University of Chicago, and chaired its audit committee.
Eugene B. Shanks, Jr. joined the Board in December 2008. He is 64 years old. He is an experienced finance
executive with leadership and risk management expertise. Mr. Shanks leadership and risk management experience
enables him to provide the Board with valuable guidance on risk management issues and our strategic direction.
Mr. Shanks is a Trustee of Vanderbilt University, a member of the Advisory Board of the Stanford Institute for
Economic Policy Research, a director of ACE Limited, where he serves as a member of the Risk and Finance
324 Freddie Mac
Committee, a Senior Advisor to Bain and Company, and a founding director at The Posse Foundation. From
November 2007 until August 2008, Mr. Shanks was a senior consultant to Trinsum Group, Incorporated, a strategic
consulting and asset management company. From 1997 until its sale in 2002, Mr. Shanks was President and Chief
Executive Officer of NetRisk, Inc., a risk management software and advisory services company he founded. From
1973 to 1978 and from 1980 to 1995, Mr. Shanks held a variety of positions with Bankers Trust New York
Corporation, including head of Global Markets from 1986 to 1992 and President and Director from 1992 to 1995.
From 1978 to 1980, he was Treasurer of Commerce Union Bank in Nashville, Tennessee.
Anthony A. Williams joined the Board in December 2008. He is 60 years old. He is an experienced leader of state
and local governments, with extensive knowledge concerning real estate and housing for low-income individuals.
He also has significant experience in financial matters and is an experienced academic focusing on public
management issues. Mr. Williams leadership and operating experience in the public sector allows him to provide a
unique perspective on state and local housing issues.
Mr. Williams is a Lecturer in Public Management at Harvards Kennedy School of Government. Since January
2012 he has served as a Senior Fellow of the Government Practice at The Corporate Executive Board Company,
and from January 2010 through December 2011, he served as the Executive Director of the Government Practice.
Since September 2011, Mr. Williams has been affiliated with McKenna, Long & Aldridge, LLP, a law firm. From
May 2009 until September 2011, Mr. Williams was affiliated with the law firm Arent Fox LLP. Prior to this,
Mr. Williams served as the Chief Executive Officer of Primum Public Realty Trust, beginning in January 2007.
Mr. Williams served as the Mayor of Washington, D.C. from 1999 to January 2007, and as its Chief Financial
Officer from 1995 to 1998. In 2005, Mr. Williams served as Vice Chair of the Metropolitan Washington Council of
Governments, and in 2004, Mr. Williams served as President of the National League of Cities. From 1993 to 1995,
Mr. Williams was the first Chief Financial Officer for the U.S. Department of Agriculture. From 1991 to 1993,
Mr. Williams was the Deputy State Comptroller of Connecticut. From 1989 to 1991, Mr. Williams was the
Executive Director of the Community Development Agency of St. Louis, Missouri. From 1988 to 1989,
Mr. Williams was an Assistant Director with the Boston Redevelopment Authority where he led the Department of
Neighborhood Housing and Development, one of the Authoritys four primary divisions. Mr. Williams also
previously served as a director of Meruelo Maddux Properties, Inc., where he was a member of the Audit
Committee and the Nominating and Corporate Governance Committee. Mr. Williams also is a member of the
Board of Trustees of the Calvert Sage Fund and of each fund comprising the Calvert Multiple Funds.
L. Bammann . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . C F F
C. Byrd . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F F
C. Haldeman. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
C. Lynch . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F F C
N. Retsinas . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F F
C. Rose . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . C F F
E. Shanks . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F F C
A. Williams . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F C F
F = Member of the Committee
C = Chairman of the Committee
Charters reflecting the duties of the committees have been adopted by the Board and approved by the Conservator.
All of the charters of the standing committees are available on our website at www.freddiemac.com/governance/
bd committees.html.
Our Board has an independent Non-Executive Chairman, whose responsibilities include presiding over meetings of
the Board, regularly scheduled executive sessions of the non-employee directors, and executive sessions including only the
independent directors that occur at least once annually if any of the non-employee directors are not independent.
Mr. Koskinen was initially appointed to the position of Non-Executive Chairman by the Conservator in September 2008.
Mr. Koskinen served in that role in 2011 until Mr. Lynch was appointed Non-Executive Chairman on December 2, 2011.
Executive Officers
As of March 6, 2012, our executive officers are as follows:
Name Age Year of Affiliation Position
Codes of Conduct
We have separate codes of conduct applicable to all employees and to Board members that outline the principles,
policies, and laws governing their activities. Upon joining us or our Board, all employees and directors, respectively, are
required to sign acknowledgements that they have read the applicable code and agree to abide by it. In addition, all
employees and directors must respond to an annual questionnaire concerning code compliance. The employee code also
serves as the code of ethics for senior executives and financial officers required by the Sarbanes-Oxley Act and SEC
regulations. Copies of our employee and director codes of conduct are available, and any amendments or waivers that
would be required to be disclosed are posted, on our website at www.freddiemac.com.
Executive Summary
Our principal goal under conservatorship has been to keep the company functioning so we can continue to carry out
our housing mission. We are particularly concerned about our ability to fulfill our mission if we are unable to attract and
retain competent and experienced executives a very real concern given the uncertainty surrounding our future business
model, organizational structure, and compensation structure, which is adversely impacting our internal control
environment. We believe these factors are also contributing to increased levels of voluntary employee turnover, including
17% voluntary turnover at our Senior and Executive Vice President levels in 2011. Additionally, the Conservator directed
us to maintain individual salaries and wage rates for all employees at 2010 levels for 2011 and 2012 (except in the case of
promotions or significant changes in responsibilities). In 2011, we made certain significant reorganizations which included
targeted divisional staff reductions in an effort to manage general and administrative expenses. All of these activities
impact our ability to retain our employees and compensate them for their work. Disruptive levels of turnover at both the
executive and employee levels could lead to breakdowns in many of our operations that impact our ability to: (a) serve
our mission and meet our objectives; (b) manage credit and other risks related to our $2.1 trillion total mortgage portfolio
(including interest rate and other market risks related to our $653 billion mortgage-related investment portfolio);
(c) reduce the need to draw funds from Treasury; and (d) issue timely financial statements.
We are finding it difficult to retain and engage critical employees and attract people with the skills and experience
we need. Because we maintain succession plans for our senior management positions, we were able to quickly fill some
of these positions vacated in 2011, or eliminate them through reorganizations. However, such alternatives are limited and
may not be available to address future senior management departures. While we update our succession plans regularly, in
many areas we have already executed these plans and we may need to search outside the company for replacements to fill
these senior positions. We face increased difficulty filling senior positions given the uncertainty around compensation. We
operate in an environment in which business decisions are closely scrutinized and subject to public criticism and review
by various government authorities. Many executives are unwilling to work in such an environment for potentially
significantly less than what they could earn elsewhere. Accordingly, we may not be able to retain or replace executives or
other employees with the requisite institutional knowledge and the technical, operational, risk management, and other key
skills needed to conduct our business effectively. A recovering economy is likely to put additional pressures on turnover
in 2012, as other attractive opportunities may become available to people who we want to retain.
Also contributing to our concerns regarding executive retention risk is the aggregate level of compensation paid to
our Section 16 executive officers, which for 2011 performance was significantly below the 25th percentile of market-
based compensation. Any compensation changes that appear excessive, abrupt or arbitrary are likely to create heightened
levels of operational risk. We anticipate that any significant adverse changes in executive compensation levels will result
in numerous vacancies in senior positions that are important for our sound operation, since the incumbents in these
positions possess significant business and leadership skills that are in demand elsewhere in the market at substantially
higher levels of compensation. Filling vacancies at further reduced compensation levels with equally capable and
experienced individuals is not likely especially given the uncertainty and criticism surrounding the GSEs. In this
environment, increased uncertainty and instability in the top ranks would likely cascade down to other officers and
employees. The resulting loss of talent and institutional knowledge would cause an appreciable increase in the operational
risk of the company.
In evaluating the potential impact of legislation to further reduce the pay of our executives and employees, the
Acting Director of FHFA stated in his testimony to the U.S. Senate Committee on Banking, Housing and Urban Affairs
on November 15, 2011 that:
a sudden and sharp change in pay would certainly risk a substantial exodus of talent, the best leaving first in
many instances. [The GSEs] likely would suffer a rapidly growing vacancy list and replacements with lesser skills
and no experience in their specific jobs. A significant increase in safety and soundness risks and in costly
operational failures would, in my opinion, be highly likely.
As a result of the increasing risk of employee turnover, we are exploring options to enter into various strategic
arrangements with outside firms to provide operational capability and staffing for key functions, if needed. Should we
experience significant turnover in key areas, we may need to exercise these strategic arrangements and significantly
increase the number of outside firms and consultants used in our business operations, limit certain business activities, and/
or increase our operational costs. However, these or other efforts to manage the risks to the enterprise may not be
successful.
330 Freddie Mac
Compensation Discussion and Analysis
This section contains information regarding our compensation programs and policies, as modified by direction we
received from FHFA as Conservator. These programs and policies were applicable to the following individuals, who were
determined to be our Named Executive Officers for the year ended December 31, 2011 under SEC rules.
Charles E. Haldeman, Jr., Chief Executive Officer
Ross J. Kari, Executive Vice President Chief Financial Officer
Anthony N. Renzi, Executive Vice President Single-Family Business, Operations and Technology
Jerry Weiss, Executive Vice President Chief Administrative Officer
Paige H. Wisdom, Executive Vice President Chief Enterprise Risk Officer
Semi-Monthly Base Salary Deferred Base Salary = 1st Installment (50%) 2nd Installment (50%)
Base Salary Semi-Monthly Base Salary
PERFORMANCE-BASED COMPENSATION
FIXED COMPENSATION (All percentages reflect compensation targets)
While the 2012 Comparator Group continues to include 19 companies, the Committee did make two changes to the
composition of the Comparator Group in September 2011, adding Capital One and removing BlackRock. In both cases,
these changes were made after considering several factors, including whether each companys business is in the same or a
similar industry, whether we compete for executive talent and whether the company participates in the compensation
survey we use to benchmark competitive market data for our senior executives.
In the event there is insufficient data from the Comparator Group for any of the Named Executive Officer positions,
or if Meridian believes that additional data sources would strengthen the analysis of competitive market compensation
levels, the Compensation Committee can use alternative survey sources to make these assessments. For 2011 and 2012
compensation, the alternative survey sources used by the Compensation Committee were compensation surveys published
by McLagan and Aon Hewitt. In order to preserve confidentiality and encourage continuing participation, these consulting
firms do not attribute the data in their surveys to the companies that participate in their surveys.
Table 77 2011 Semi-Monthly Base Salary, Deferred Base Salary, Target Opportunity, and Target TDC
2011 Target TDC (Annualized)
Semi-
Monthly Deferred Target Target
Named Executive Officer Title Base Salary Base Salary Opportunity TDC
Table 78 Achievement of Performance Measures for the Performance-Based Portion of Deferred Base Salary
Implementation of a new governance process for technology projects that management believes will significantly
improve the companys ability to deliver critical projects and also resulted in the cancellation or deferral of a
significant number of previously planned projects;
Execution of the Servicing Alignment Initiative, a significant new FHFA directive that aligns GSE loss mitigation
requirements and is intended to bring more consistency to the servicing industry and help more distressed
homeowners avoid foreclosure;
Implementation of the Servicing Success Program, which seeks to improve the companys management of servicer
performance through defined metrics, benchmarks, requirements, financial incentives, and compensatory fees;
Favorable results from a June 2011 survey of Multifamily Production and Asset Management customers (the results
of a similar survey of Single-Family customers were not available in time to be considered by the Compensation
Committee);
Unfavorable impact on the Investments Segments internal return on economic capital of purchases made during
2011 to support the performance of Freddie Mac PCs;
Delay in developing a corporate investigations policy and procedure;
Deficiencies in the companys business continuity strategy in the event of a regional business disruption; and
The adverse effects of significant turnover among the companys senior executives during 2011.
Management then proposed a funding range for the performance-based portion of the Deferred Base Salary that it
believed reflected our performance against the goals, taking into account the additional considerations. After reviewing
and discussing managements final assessment against the performance goals, the Compensation Committee then
discussed the additional considerations and determined that these should also be evaluated in determining the appropriate
funding level for the performance-based portion of Deferred Base Salary. The Compensation Committee then developed a
preliminary recommended funding level for the performance-based portion of Deferred Base Salary, which was then
submitted to FHFA for review.
After the Compensation Committees submission of its initial recommendation to FHFA, FHFA advised the company
that certain mortgages preliminarily included in the companys calculation are not eligible to be counted toward affordable
housing goals compliance. Consequently, we failed to meet the FHFA benchmark level for the single-family affordable
purchase-money goals and subgoals for 2011.
In addition, subsequent to managements assessment of our achievement against the performance measures and the
Compensation Committees submission of its initial recommendation to FHFA, management determined that we did not
maintain effective internal control over financial reporting and identified one new material weakness related to
information technology. See CONTROLS AND PROCEDURES above. The Compensation Committee assessed 2011
performance against this and other performance measures based on the best information available at the time of the
assessment.
Following FHFAs review of our performance, it instructed the Compensation Committee to reduce its recommended
funding level in light of the required revisions to the affordable housing goal counting process, and indicated the
maximum funding level it would approve. In accordance with FHFAs instruction, the Compensation Committee, without
concurring with FHFAs determination, directed management to proceed using a funding level for the performance-based
portion of the Deferred Base Salary of 87%, the maximum funding level that FHFA indicated it would approve.
The following chart compares the target and actual amounts of 2011 Deferred Base Salary for each Named Executive
Officer. The actual amount earned, which is based exclusively on corporate performance and for which there is no
individual differentiation, is scheduled to be paid in equal quarterly installments on the last business day of each calendar
quarter of 2012.
337 Freddie Mac
Table 79 2011 Deferred Base Salary
Target 2011 Deferred Base Salary Actual 2011 Deferred Base Salary
Performance- Total Target Performance- Total Actual
Based Deferred Base Based Deferred Base
Named Executive Officer Fixed Portion Portion Salary Fixed Portion Portion Salary
Table 80 Achievement of Performance Measures for First Installment of 2011 Target Opportunity
Financial Execution 40% The 2011 draw request from Treasury was $7.6 billion, at the
Conserve capital by limiting the 2011 high end of the target range of $0 to $8 billion.
draw from Treasury to no more than
$8 billion.
During its presentation of our achievement against the performance measures, management presented two additional
considerations for the Compensation Committee to take into account when determining an appropriate funding level.
These additional considerations were:
The cancellation of certain key business infrastructure projects resulting from the implementation of the new
governance process for technology projects; and
Execution of the Servicing Alignment Initiative.
Management then proposed a funding range for the first installment of the 2011 TO that it believed reflected our
performance, taking into account the additional considerations.
After reviewing and discussing managements final performance assessment against the specific performance goals,
the Compensation Committee concurred with managements assessment. The Compensation Committee then discussed the
338 Freddie Mac
additional considerations and determined that these should also be included in determining the appropriate funding level
for the first installment of the 2011 TO. The Compensation Committee then developed a preliminary recommended
funding level for the 2011 TO first installment, which was then submitted to FHFA for review.
Following FHFAs review of our achievement against the performance objectives, it instructed the Compensation
Committee to substantially reduce its recommended funding level in light of the following:
The 2011 draw from Treasury was at the high end of the target range established at the beginning of the year; and
As discussed above, required revisions in the affordable housing goal counting process, of which the company
received notice after managements assessment and the Compensation Committees original recommendation,
resulted in our failure to meet the FHFA benchmark level for the single-family affordable purchase-money goals or
subgoals for 2011.
FHFA informed the Compensation Committee of the maximum funding level that it would approve. In accordance
with FHFAs instruction, the Compensation Committee, without concurring, directed management to implement a funding
level for the 2011 TO first installment of 79%, the maximum funding level that FHFA indicated it would approve.
For the second installment of the 2010 TO, management concluded that we would achieve most, but not all, of the
performance objectives. The table below presents the performance measures and managements assessment of our
achievement against those performance measures for the second installment of the 2010 TO.
Table 81 Achievement of Performance Measures for Second Installment of 2010 Target Opportunity
Controls Remediation 20% Many planned remediation activities were completed. Indicators
Strengthen the control environment, of the progress made during 2011 include remediation of all
taking into consideration progress in Significant Deficiencies targeted at the beginning of the
remediating Significant Deficiencies, performance year, and reliance being placed on the work of our
Material Weaknesses, Internal Audit internal audit organization by the Conservator and our external
critical and major issues and FHFA auditors. There also were fewer repeat controls findings.
Matters Requiring Attention scheduled
to be remediated during 2011.
Financial Execution 20% Same as for the new purchase financial execution objective
Same as for the new purchase financial applicable to the performance-based element of Deferred Base
execution objective applicable to the Salary and the Conserve Capital objective applicable to the first
performance-based element of installment of the 2011 TO.
Deferred Base Salary and the
Conserve Capital objective applicable
to the first installment of the 2011 TO.
Business Infrastructure 25% All work was completed as planned for projects involving
Complete the 2011 elements of the multifamily and finance transaction accounting. For single-
business infrastructure plan family, many projects were completed as planned, but some
developed in 2010; and, were either cancelled or were not completed during 2011. The
Maintain normal service and quality high-cost, high-risk Single-Family Master Servicing projects
standards for existing technology were canceled to enable resources to address the Servicing
and operations infrastructure. Alignment Initiative; and,
Performance indicators used to monitor service and quality
standards demonstrate that those standards were met
throughout 2011.
Management presented the same two additional considerations applicable to the first installment of the 2011 TO for
the Compensation Committees consideration when determining an appropriate funding level.
Management then proposed a funding range for the second installment of the 2010 TO that it believed reflected our
performance, taking into account the additional considerations.
After reviewing and discussing managements final performance assessment against the specified performance
measures, the Compensation Committee concurred with managements assessment. The Compensation Committee then
339 Freddie Mac
discussed the additional considerations and determined that these should also be included in determining the appropriate
funding level for the second installment of the 2010 TO. The Compensation Committee then developed a preliminary
recommended funding level for the second installment of the 2010 TO, which was then submitted to FHFA for review.
Following FHFAs review of our performance, it instructed the Compensation Committee to reduce its recommended
funding level in light of revisions to the affordable housing goal counting process discussed above and informed the
Compensation Committee of the maximum funding level that it would approve. In accordance with FHFAs instruction,
the Compensation Committee, without concurring with FHFAs determination, directed management to proceed using a
funding level for the 2010 TO second installment of 84%, the maximum level that FHFA indicated it would approve.
For both TO installments, a portion of the available funds has been allocated to provide a cash award to
approximately 500 employees in either administrative or professional staff roles who do not participate in our annual
short-term incentive program. This decision was made to recognize the contributions of these employees who provide
valuable core services to the company. In addition, these employees are generally in lower-paid roles with limited
advancement opportunities and are thus more adversely impacted by FHFAs continuation of the directive to freeze
salaries and wage rates at 2010 levels. This allocation reduced the funding level available for distribution for the first
2011 TO installment and the second 2010 TO installment to approximately 78% and 83%, respectively.
For both the second 2010 and first 2011 TO installments, the Compensation Committee concurred with the CEOs
recommendations regarding how the remaining available TO funds should be allocated among the Covered Officers under
the Executive Compensation Program, including the Named Executive Officers other than himself. The recommended
allocation was made after considering the factors listed below.
Each officers performance against his/her individual 2011 performance objectives in terms of both business results
and leadership effectiveness;
The relative contributions of each officer in relation to the contributions of the other officers;
Each of the Named Executive Officers either achieved or exceeded his/her 2011 individual performance objectives.
The relatively narrow spread of the individual differentiation between the largest and smallest TO awards
(expressed as a percentage of each Named Executive Officers target) supports our continued emphasis of the need
for highly coordinated, cross-functional collaboration; and
The entire senior officer team accomplished a great deal in an extraordinarily difficult operating environment
during 2011 and these accomplishments are especially significant considering the number of senior management
departures during the year.
Mr. Haldeman informed the Compensation Committee that the companys best interests would be served if he was
not a participant in the February 2012 TO allocation process, which would result in him not receiving payment of either
TO installment. While the Committee felt that Mr. Haldemans performance during 2011 merited payment of the TO
installments, it also accepted his request that it should exclude him from the TO allocation process. After considering
these and other factors, the Compensation Committee determined that Mr. Haldeman should not receive either TO
installment. Mr. Haldeman will forfeit the remaining 2011 TO installment and any 2011 earned but unpaid Deferred Base
Salary upon his planned departure from the company later this year.
The following chart summarizes the TO applicable to performance during 2011 for each of the Named Executive
Officers and the amount that was approved by the Compensation Committee and FHFA and paid on February 16, 2012.
Table 83 2011 Target TDC Compared to the Approved 2011 Actual TDC
Target Opportunity
2011 (2011 1st Installment and
Semi-Monthly 2011 Deferred Base Salary 2010 2nd Installment) Total(1)
Named Executive Officer Base Salary Target Actual Target Actual Target Actual
Mr. Kari:
Maintain effective internal controls over financial reporting Mr. Kari was a stabilizing leadership presence for employees in his division as well as his fellow Management Committee
and complete the remediation of five separate significant members during what was an especially challenging year at the company. He displays an openness for tackling difficult issues and
deficiencies; consistently strives to improve support and partnership with the business units. Under his leadership during 2011, business results
Improve the readability and quality of public disclosures and for the finance organization were above plan and included enhancements to the readability and quality of the companys financial
earnings releases; disclosures, and completing all of the finance-related business infrastructure deliverables not dependent on projects cancelled or
Complete all finance-related business infrastructure delayed as part of implementing the new technology governance model. He also implemented improvements to internal processes,
deliverables included in the 2011 corporate scorecard; and eliminated redundancies that reduced expenses. Accounting efficiency continues to improve and the close and reporting
Identify and implement process improvements to make processes have been streamlined. He demonstrated leadership capabilities by fostering an environment that values teamwork and
company processes more efficient and manage administrative collaboration over individual accomplishment and by implementing initiatives designed to improve employee engagement. While
expenses to achieve G&A expense targets; and, certain controls over financial reporting were strengthened during the year as a result of the remediation of several significant
Improve engagement of finance division employees, with a deficiencies, the company identified one new material weakness as of December 31, 2011.
specific focus on the divisions leadership team.
Mr. Renzi:
Mr. Renzi was promoted to lead the single-family business, Mr. Renzi assumed a broadened role beginning in April 2011, which included being responsible for the single-family business,
operations and technology functions in April 2011. Accordingly, operations and technology organization. He assumed this role just as the FHFA-directed Servicing Alignment Initiative began. His
individual performance objectives for his new role were not leadership skill, mortgage finance industry expertise and focus on execution enabled him to drive the implementation of the policy
established for him prior to the beginning of the year. In addition to and process changes related to that FHFA initiative. He has established a positive and motivating leadership presence within his
his ongoing responsibilities associated with the sourcing and new organization that has facilitated significant progress in the companys production sourcing and loss mitigation efforts. Upon
servicing of our single-family loan portfolio and management of assuming his current role, Mr. Renzi also identified critical changes needed to better support our mission. This led to, among other
our information technology operations and infrastructure, his areas things, a reorganization of our largest division that has resulted in the realignment of groups previously spread across multiple
of focus during 2011 included: organizations to improve business execution, better meet the needs of our customers and establish a clear operating business plan
Making organizational changes to enable us to become an to help guide our business through the next 12 to 36 months. Under Mr. Renzis leadership, a new servicing scorecard was
industry-leading operation; developed to monitor servicer performance and a new framework for managing servicer performance was developed and
Transforming our information technology organization, implemented, both of which were instrumental in developing the Servicing Alignment Initiative. He also led the development of a
including implementing a process to more effectively new technology governance model, under which information technology was centralized and a new structure was established to
manage maintenance of and enhancements to our technology identify, prioritize and develop critical information technology solutions to meet evolving business needs. He worked to reduce
infrastructure; vendor concentration risk by adding two new REO sales vendors to improve marketing efforts, enhance pricing precision, reduce
Improving servicer performance management and loss inventory cycle times and, in turn, loss severity levels.
mitigation activities;
Effectively utilizing foreclosure alternatives to minimize
losses on delinquent mortgages;
Reducing REO vendor concentration risk; and
Establishing a clear operating business plan that guides the
business over the course of the next one to three years.
Mr. Weiss:
Develop a cohesive and efficient Chief Administrative Mr. Weisss knowledge of the company, leadership skills and ability to manage multiple business initiatives led to a further
Officer team that serves as a resource to both internal and increase in the scope of his responsibilities in 2011. He added the financial modeling organization to the other functions he leads,
external stakeholders on a variety of operational and policy which now include MHA-C; human resources; external relations; government and industry relations; and corporate strategy and
issues; mission. Under his leadership during 2011, the strategy, public policy, government relations and communications teams worked
Integrate the Models division and enhance model together effectively to provide expertise, information and data to management, the Board and other parties on a variety of policy
governance; and procedural issues. Under Mr. Weiss leadership, model governance, development, documentation, performance monitoring and
Oversee servicer compliance with the provisions of the prioritization have become more robust. He also successfully led the team responsible for overseeing servicers compliance with
Administrations Home Affordable Modification Program the requirements of HAMP, as a financial agent of the U.S. Treasury. With respect to human resources matters, the company
(HAMP); achieved significant business results, including implementing major changes to our employee benefits programs that will
Make human resources processes more efficient and reduce significantly reduce the future cost of those programs while still providing market-competitive benefits to employees, accelerating
costs where appropriate; the compensation planning process to create efficiencies, and establishing a leadership development program for all mid- and
Enhance talent development by launching a leadership senior-level leaders. Throughout the year, Mr. Weiss successfully guided the companys relationship with FHFA during a very
development program for mid- and senior-level leaders; and challenging period. He served as both a liaison on a variety of sensitive matters that pertain to our unique current operating
Serve as a key liaison to FHFA. environment and a reliable resource on GSE policy and future state issues.
Ms. Wisdom:
Strengthen the companys risk management capabilities; During 2011, Ms. Wisdom successfully led the enterprise risk function during a period of great change and has taken steps to
Lead the rebuilding of the corporate model oversight process significantly strengthen the function. She provides strong leadership and has proven capable at driving change across the
and related model governance capabilities; organization while establishing collaborative relationships with key stakeholders. During 2011, she strengthened our risk
Implement an enhanced new business initiative process; and, management governance by simplifying and streamlining oversight and decision-making. As part of this effort, she integrated the
Improve engagement of enterprise risk management division credit risk management function into the enterprise risk management organization, establishing a unified risk management
employees, with a specific focus on the divisions leadership function. As a result, alignment with business units across the company was substantially improved, and the companys credit risk
team. oversight was strengthened. Ms. Wisdom also successfully led an effort to rebuild the corporate model process and related
governance, a cross-divisional effort involving stakeholders throughout the company. She redesigned and implemented a new
governance structure associated with the execution of corporate new business initiatives that engages executive management earlier
in the process, provides consistent communication, delivers comprehensive enterprise-wide risk assessments, and provides
increased transparency. From an employee engagement perspective, she has provided numerous leadership and skills development
opportunities for all levels of staff in her division and has increased her visibility and thus the visibility of the risk management
function both internally and externally.
Recapture Policy
The Recapture Policy provides that certain compensation paid under the Executive Compensation Program will be
subject to recapture if any of the following events occur subsequent to the date that the Named Executive Officer agreed
to the terms of the Recapture Policy.
Payment Based on Materially Inaccurate Information If the Named Executive Officer obtains a bonus or
incentive payment based on materially inaccurate financial statements or performance metrics.
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Termination for Cause If the Named Executive Officers employment is terminated for cause, as defined in the
Recapture Policy.
Subsequent Determination of Cause If, within two years of the termination of the Named Executive Officers
employment, the Board makes a determination in good faith that circumstances existed at the time of the Named
Executive Officers termination that would have justified a termination for cause and that actions taken by the
Named Executive Officer resulted in material business or reputational harm to us.
The additional event listed below is applicable only to Messrs. Haldeman and Kari.
Accounting Restatement Resulting from the Executives Misconduct If misconduct by the CEO and/or the CFO
necessitates the preparation of an accounting restatement due to material non-compliance with financial reporting
requirements.
If any of these triggering events occur, the Board will determine whether more compensation was paid to the Named
Executive Officer than would otherwise have been paid had we been aware of the triggering event or events at the time
the compensation was paid or awarded. If a determination is made that we paid or awarded a Named Executive Officer
more compensation than he or she otherwise would have received, the following elements of compensation will be subject
to recapture: (a) Deferred Base Salary; (b) Target Opportunity; (c) any equity awards that vest after the adoption of the
Executive Compensation Program; and (d) any termination benefits paid. Only compensation paid up to two years prior to
the triggering event or the date of termination or compensation paid at the time of termination, as applicable, will be
subject to recapture. Additionally, the occurrence of a triggering event may result in cancellation of any future payment
obligations and/or any outstanding equity awards.
The amount of compensation recaptured will be determined by the Board, subject to the guidelines described above.
Additional details are included in the Recapture Policy, which was filed as Exhibit 10.4 to our Current Report on
Form 8-K filed on December 31, 2009. For the triggering event applicable only to Messrs. Haldeman and Kari, the
compensation subject to recapture will be determined in accordance with Section 304 of the Sarbanes-Oxley Act.
(1) The amounts shown represent Semi-Monthly Base Salary under the Executive Compensation Program as described in Compensation Discussion and
Analysis Executive Management Compensation Program.
(2) The amounts shown represent the fixed portion of Deferred Base Salary earned under the terms of the Executive Compensation Program. The fixed
portion of the 2011 Deferred Base Salary earned during each calendar quarter in 2011 will be paid in cash on the last business day of the
corresponding quarter in 2012, provided the Named Executive Officer is employed by us on such payment date or in the event such officer dies,
retires or has a long-term disability in 2012. The remaining portion of the 2011 Deferred Base Salary is reported in Non-Equity Incentive Plan
Compensation because it is performance-based and the amount that is paid is variable.
Amounts shown as 2010 and 2009 Deferred Base Salary were earned during each calendar quarter in 2010 and 2009, respectively, and paid in cash
on the last business day of the corresponding quarter in 2011 and 2010, respectively. The 2009 amount reported in this column for Mr. Haldeman
has been revised to correct an error in the amount previously reported ($1,277,083).
(3) The amounts shown for Mr. Kari represent the portion of the cash sign-on bonus paid in 2010 and 2009, which he received in recognition of the
forfeited annual incentive opportunity and unvested equity at his previous employer. See Compensation Discussion and Analysis Written
Agreements Relating to Employment of CEO and CFO.
(4) The 2011 amounts reported reflect the portion of the 2011 and 2010 Target Opportunities that were earned for 2011 and paid on February 16, 2012
and the performance-based portion of the 2011 Deferred Base Salary earned during each calendar quarter in 2011, which is scheduled to be paid on
the last business day of the corresponding quarter in 2012. See Compensation Discussion and Analysis Executive Management Compensation
Program Performance Measures for the Performance-Based Elements of Compensation.
As discussed further in Compensation Discussion and Analysis Determination of Actual Target Opportunity, Mr. Haldeman will not receive the
TO installments applicable to his performance during 2011.
The 2010 amounts reported reflect the portion of the 2010 and 2009 Target Opportunities that were earned for 2010 and paid on February 18, 2011
and the performance-based portion of the 2010 Deferred Base Salary earned during each calendar quarter in 2010 and paid on the last business day
of the corresponding quarter in 2011.
The 2009 amounts reported reflect the portion of the 2009 Target Opportunity that was earned for 2009 and paid on March 12, 2010.
(5) The amounts reported in this column reflect the actuarial increase in the present value of each Named Executive Officers accrued benefits under our
Pension Plan and the Pension SERP Benefit determined using the time periods and assumptions applied in our consolidated financial statements for
the years ended December 31, 2009, 2010, and 2011, respectively.
With the exception of Mr. Weiss, the values reported include amounts that the Named Executive Officers are not currently entitled to receive because
such amounts are not yet vested. The amounts reported do not include values associated with retiree medical benefits, which are generally available
on the same terms to all employees. Deferred Base Salary under the Executive Compensation Program is not considered compensation eligible for
deferral in accordance with the Executive Deferred Compensation Plan, or EDCP. The Executive Compensation Program does not provide for
interest on Deferred Base Salary.
(6) Amounts reflect (i) matching contributions we made to our tax-qualified Thrift/401(k) Savings Plan; (ii) accruals we made pursuant to the Thrift/
401(k) SERP Benefit; (iii) FlexDollars (described below); and (iv) perquisites and other personal benefits received. These amounts for 2011 are as
follows:
Thrift/401(k) Thrift/401(k)
Savings Plan SERP Benefit Total Flex
Contributions Accruals Dollars Perquisites
Employer contributions to the Thrift/401(k) Savings Plan are available on the same terms to all of our employees. We match up to the first 6% of
eligible compensation at 100% of the employees contributions, with the percentage matched dependent upon the employees length of service.
Employee contributions and our matching contributions are invested in accordance with the employees investment elections and are immediately
Mr. Haldeman . . . . $ $
Mr. Kari . . . . . . .
Mr. Renzi . . . . . .
Mr. Weiss . . . . . . SO 08/09/04 4,970 64.36 8/8/2014
SO 05/06/05 5,640 62.69 5/5/2015
SO 06/05/06 5,980 60.45 06/04/16
RSU 03/07/08 5,726 1,214
Ms. Wisdom . . . . . RSU 03/07/08 8,270 1,753
(1) The rows labeled SO indicate stock options and the rows labeled RSU indicate restricted stock units.
(2) Consistent with the terms of our 2004 Employee Plan, the option exercise price was set at a price equal to the fair market value of our common
stock on the grant date.
(3) Amounts reported in this table for RSUs represent the unvested portion of awards, while amounts reported in this table for options represent the
unexercised portion of awards. The vesting schedules for the option and stock awards reported in this table are as follows:
Stock options granted on August 9, 2004 vested at a rate of 25% beginning on the first anniversary of the grant date, and 25% on April 1, 2006,
April 1, 2007, and April 1, 2008.
Stock options granted on May 6, 2005 and June 5, 2006 vested at a rate of 25% annually beginning on the anniversary of the grant dates.
RSUs granted on March 7, 2008 vest at a rate of 25% annually beginning on the anniversary of the grant date.
(4) Market value is calculated by multiplying the number of RSUs held by each Named Executive Officer on December 31, 2011 by the closing price of
our common stock on December 30, 2011 ($0.212), the last trading day of the year.
For information on alternative settlement provisions of RSU and stock option grants in the event of certain
terminations, see Table 91 Potential Payments Upon Termination of Employment or Change-in-Control as of
December 31, 2011 below.
Mr. Haldeman . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Mr. Kari . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Mr. Renzi . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Mr. Weiss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9,114 4,212
Ms. Wisdom . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9,949 5,002
(1) Amounts reported reflect the number of RSUs that vested during 2011 prior to our withholding of shares to satisfy applicable taxes.
(2) Amounts reported are calculated by multiplying the number of RSUs that vested during 2011 by the fair market value of our common stock on the
date of vesting.
Pension Plan
The Pension Plan is a tax-qualified, defined benefit pension plan that we maintain, covering substantially all
employees who have attained age 21 and completed one year of service with us. Amendments were made to the Pension
Plan, effective January 1, 2012, that limit participation in the Pension Plan to those individuals who were hired (or
rehired) prior to January 1, 2012. Each of the current Named Executive Officers is eligible to participate in the Pension
Plan. Pension Plan benefits are based on an employees years of service and compensation, up to limits imposed by law.
Specifically, the normal retirement benefit under the Pension Plan for service after December 31, 1988 is a monthly
payment commencing at age 65 calculated as follows:
1% of the participants highest average monthly compensation for the 36-consecutive month period during which
the participants compensation was the highest;
multiplied by the participants full and partial years of credited service under the Pension Plan.
For purposes of the Pension Plan, compensation includes the non-deferred base salary paid to each employee (which
includes Semi-Monthly Base Salary under our Executive Compensation Program), as well as overtime pay, shift
differentials, non-deferred bonuses paid under our corporate-wide annual bonus program or pursuant to a functional
incentive plan (excluding the value of any stock options or cash equivalents), commissions and salary reductions under the
Thrift/401(k) Savings Plan and the Flexible Benefits Plan, and qualified transportation benefits under Internal Revenue
Code Section 132(f)(4). Compensation does not include, among other things, supplemental compensation plans providing
temporary pay, deferrals under the Executive Compensation Program, or amounts paid after termination of employment
other than amounts included in a final paycheck.
Notwithstanding the lump sum nature of the disclosure in the preceding table, for 2011 lump sum payments were not
permitted under the Pension Plan if the present value of the accrued benefit would equal or exceed $25,000. The normal
form of benefit under the Pension Plan is an annuity providing monthly payments for the life of the participant (and a
survivor annuity for the participants spouse if applicable). Optional forms of benefit payment are available. A benefit
with an actuarial present value equal to or less than $5,000 may only be paid as a lump sum.
Throughout 2011, participants under the Pension Plan who terminate employment before age 55 with at least five
years of service are considered terminated vested participants. Such participants may commence their benefit under the
Pension Plan as early as age 55. The benefit is equal to the vested portion of the participants accrued benefit, reduced by
1/180th for each of the first 60 months, and by 1/360th for each of the next 60 months, by which the commencement of
such benefits precedes age 65.
An early retirement benefit is available to a participant who terminates employment on or after age 55 with at least
five years of service. For service before January 1, 2011, this early retirement benefit is reduced by 3% for each year
(prorated monthly for partial years) by which the commencement of such benefits precedes the earlier of: (a) the
350 Freddie Mac
participants attainment of age 65; or (b) the participants attainment of age 62 or later with at least 15 years of service.
For service after December 31, 2010, the reduction is 5% for each year (prorated monthly for partial years) by which the
commencement of benefits precedes the participants attainment of age 65. For participants with service prior to
January 1, 2011 and after December 31, 2010, the reductions are separately calculated, and the early retirement benefit is
the sum of the two calculations. Death benefits are available provided the participant completed at least five years of
service prior to death.
Mr. Haldeman
Thrift/401(k) SERP Benefit . . . . . . . . . . . . . . . . . . . . . . $ $47,250 $ 38 $ $ 69,793
Mr. Kari
Thrift/401(k) SERP Benefit . . . . . . . . . . . . . . . . . . . . . . 33,750 4 33,754
Mr. Renzi
Thrift/401(k) SERP Benefit . . . . . . . . . . . . . . . . . . . . . . 18,082 2 18,084
Mr. Weiss
Thrift/401(k) SERP Benefit . . . . . . . . . . . . . . . . . . . . . . 40,500 (13,175) 344,818
Ms. Wisdom
Thrift/401(k) SERP Benefit . . . . . . . . . . . . . . . . . . . . . . 28,688 64 74,717
(1) The SERP does not allow for employee contributions.
(2) Amounts reported reflect our accruals under the Thrift/401(k) SERP Benefit during 2011. These amounts are also reported in the All Other
Compensation column in Table 85 Summary Compensation Table 2011.
(3) Amounts reported represent the total interest and other earnings credited to each Named Executive Officer under the Thrift/401(k) SERP Benefit.
(4) Amounts reported reflect the accumulated balances under the Thrift/401(k) SERP Benefit for each Named Executive Officer. Under the Thrift/401(k)
SERP Benefit, matching contribution accruals vest immediately, whereas the basic contribution accruals relating to the basic contribution paid prior
to 2008 are subject to cliff vesting of 100% at the end of five years and the accruals relating to the basic contribution paid in 2008 and later years
are subject to five-year graded vesting of 20% per year. Messrs. Haldeman, Kari, and Renzi, and Ms. Wisdom have not met the five-year vesting
requirement for the basic contribution. Mr. Weiss is fully vested in his account. The difference in the aggregate balance above and the vested balance
is equal to the non-vested basic contribution plus earnings. The vested and non-vested components under the Thrift/401(k) SERP Benefit for each
Named Executive Officer are as follows: (i) Mr. Haldeman: vested balance: $69,793; non-vested balance: $0; (ii) Mr. Kari: vested balance: $33,754;
non-vested balance: $0; (iii) Mr. Renzi: vested balance: $18,084; non-vested balance: $0; (iv) Mr. Weiss: vested balance: $344,818; non-vested
balance: $0; (v) Ms. Wisdom: vested balance: $71,469; non-vested balance: $3,248. Messrs. Haldeman, Kari and Renzi do not have an unvested
balance since no basic contributions have been made since they joined the company. For a more detailed discussion of the matching contribution
accruals and basic contribution accruals, see Supplemental Executive Retirement Plan Thrift/401(k) SERP Benefit above.
The following 2010 Thrift/401(k) SERP Benefit accrual amounts were reported in the column All Other Compensation in the 2010 Summary
Compensation Table as compensation for each Named Executive Officer for whom such accruals were made and reported during 2010 as follows:
(a) Mr. Haldeman: $22,500; and (b) Mr. Kari: $0. See our Form 10-K filed on February 24, 2011. Messrs. Haldeman and Kari both had accruals of
$0 during 2009 because, based on their hire dates, they were not eligible for Thrift/401(k) SERP Benefit accruals. See Amendment No. 2 to our
Form 10-K filed on April 12, 2010. In addition, Messrs. Renzi and Weiss and Ms. Wisdom had Thrift/401(k) SERP Benefit accrual amounts of $0,
$57,300 and $33,529 respectively for 2010, although this was not reported in the Summary Compensation Table because they were not Named
Executive Officers for 2010.
Table 91 Potential Payments Upon Termination of Employment or Change-in-Control as of December 31, 2011
Death Disability
(1) The amount reported as Deferred Base Salary is equal to any earned but unpaid Deferred Base Salary, adjusted to reflect the approved funding level.
(2) The amounts reported under Target Opportunity are equal to the first installment associated with the 2011 Target Opportunity and the second
installment associated with the 2010 Target Opportunity. Both amounts have been adjusted to reflect the approved funding levels and the individual
differentiation based on division and/or individual performance.
(3) The amounts reported under Non-Qualified Pension and Non-Qualified Deferred Compensation reflect the non-vested Pension SERP Benefit and the
non-vested Thrift/401(k) SERP Benefit, respectively, as of December 31, 2011. Under the terms of the SERP, a participant continues to accrue
service while disabled (as defined in the SERP).
(4) The amount reported under Equity Awards reflects the immediate vesting of the Named Executive Officers outstanding RSU grants in the event of
death or disability. Death also results in the immediate settlement of the outstanding RSUs, while a Disability event results in continued vesting of
all grants in accordance with the vesting schedule outlined in the award agreement as if termination had not occurred. The values shown were
calculated by multiplying the number of RSUs that will continue to vest by the closing price or our common stock on December 30, 2011 ($0.212),
the last trading day of the year.
Alternative Settlement Provisions for Equity Awards in the Event of Certain Terminations
RSUs
The RSUs awarded to our employees, including our Named Executive Officers, contain alternative settlement
provisions in the event of certain terminations, as follows:
Death. Immediate vesting and settlement occurs in the event of death.
355 Freddie Mac
Disability and Retirement. In the event of disability, normal retirement, or a retirement other than a normal
retirement (all as defined in the 2004 Employee Plan), RSUs will vest immediately and will be settled in
accordance with the vesting schedule outlined in the award agreement as if termination had not occurred. This
treatment is subject to the executives signing an agreement containing certain restrictive covenants to protect our
business interests. Violation of any of the covenants results in the forfeiture of unsettled shares and the requirement
to repay any after-tax gain realized from the settlement of shares within 12 months of the forfeiture event.
Involuntary Termination Without Cause. In the event of an involuntary termination other than for cause, the
Compensation Committee may, contingent on approval from FHFA, provide for RSUs to vest immediately and
settle in accordance with the vesting schedule outlined in the award agreement as if termination had not occurred.
Under interim guidance provided by FHFA, this provision is limited to awards scheduled to vest within 12 months
of the executives termination date.
All Other Terminations. If the Named Executive Officers employment is terminated for any reason other than
those described above, all RSUs unvested as of the date of termination are forfeited.
Stock Options
The stock options granted to our employees, including our Named Executive Officers, all of which were exercisable
as of December 31, 2011, include alternative settlement provisions in the event of certain terminations which are similar
to the provisions for RSUs, with the following modifications:
Death. The stock options remain exercisable until the earlier of the original expiration date or three years after
the date of termination in the event of death.
Disability. The stock options remain exercisable for the full balance of their term in the event of disability.
Retirement. In the event of retirement, as defined in the 2004 Employee Plan, stock options will remain
exercisable for the full balance of their term, subject to the executives signing an agreement containing the same
restrictive covenants as described above for RSUs.
All Other Terminations. If the individuals employment is terminated for any reason other than those described
above, the stock options remain exercisable until the earlier of the original expiration date or 90 days following
termination.
Director Compensation
After we entered conservatorship, FHFA approved compensation for Board members in the form of cash retainers
only, paid on a quarterly basis. Under the terms of the Purchase Agreement, without Treasurys consent, we are prohibited
from making stock grants to directors while this agreement remains in effect. We do not maintain any pension or
retirement plans for directors. Non-employee directors are reimbursed for reasonable out-of-pocket costs for attending
each meeting of the Board or a Board committee of which they are a member.
The reasons for this shift toward compensation delivered entirely in cash were similar, in the case of director
compensation, to some of those described above regarding the structural change in executive compensation (see
Overview Executive Management Compensation Program Overview of Program Structure). However, the
considerations underlying director and executive compensation differed in one key respect. There is no provision in the
director compensation program for pay that varies depending on business results. While such incentive compensation is
deemed appropriate to give management strong incentives to devise and execute business plans and achieve positive
financial results, it is viewed in the case of directors as inconsistent with their oversight role.
356 Freddie Mac
Board compensation levels during conservatorship are shown in the table below.
Table 92 Board Compensation 2011 Non-Employee Director Compensation Levels
Board Service
Cash Compensation
Annual Retainer . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ....................................... $160,000
Annual Retainer for Non-Executive Chairman . . . . . . . . . . . . . . . . . . . ....................................... 290,000
Committee Service (Cash)
Annual Retainer for Audit Committee Chair . . . . . . . . . . . . . . . . . . . . ..... . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 25,000
Annual Retainer for Business and Risk Committee Chair . . . . . . . . . . . ..... . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15,000
Annual Retainer for Committee Chairs (other than Audit or Business and Risk) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10,000
Annual Retainer for Audit Committee Members . . . . . . . . . . . . . . . . . ..... . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10,000
The following table summarizes the 2011 compensation provided to all persons who served as non-employee
directors during 2011.
Security Ownership
Our only class of voting stock is our common stock. (Upon its appointment as Conservator, FHFA immediately
succeeded to the voting rights of holders of our common stock.) The following table shows the beneficial ownership of
our common stock as of March 6, 2012 by our current directors, our Named Executive Officers, all of our directors and
executive officers as a group, and holders of more than 5% of our common stock. Beneficial ownership is determined in
accordance with SEC rules for computing the number of shares of common stock beneficially owned by a person and the
percentage ownership of that person. As of March 6, 2012, each director and Named Executive Officer, and all of our
directors and executive officers as a group, owned less than 1% of our outstanding common stock. The information
presented below is based on information provided to us by the individuals or entities specified in the table.
Director Independence
The non-employee members of the Board evaluated the independence, as defined in both Sections 4 and 5 of our
Guidelines and in Section 303A.02 of the NYSE Listed Company Manual, of the members of our Board who have served
in 2012, each of whom also served on our Board in 2011. In connection with that evaluation, the non-employee members
of the Board determined that all current members of our Board (other than Charles E. Haldeman, Jr., our CEO) were
independent during their service in 2011 and 2012. Mr. Haldeman is not considered an independent director because he is
our CEO.
The non-employee members of the Board also concluded that all current members of the Audit Committee, the
Compensation Committee, and the Nominating and Governance Committee are independent within the meaning of both
Sections 4 and 5 of our Guidelines and Section 303A.02 of the NYSE Listed Company Manual. The non-employee
members of the Board also determined that all current members of the Audit Committee are independent within the
meaning of Rule 10A-3 promulgated under the Exchange Act, and Section 303A.06 of the NYSE Listed Company
Manual.
In determining the independence of each Board member, the non-employee members of the Board reviewed the
following categories or types of relationships, in addition to those specifically addressed by the standards contained in
Section 5 of our Guidelines, to determine whether those relationships, either individually or when aggregated with other
360 Freddie Mac
relationships, would constitute a material relationship between the Director and us that would impair a Directors
judgment as a member of the Board or create the perception or appearance of such an impairment:
Board Memberships With For-Profit Business Partners. Mses. Bammann and Byrd and Messrs. Glauber, Lynch,
Retsinas, Rose and Shanks serve as directors of other companies that engage or have engaged in business with us
resulting in payments between us and such companies during the past three fiscal years. After considering the
nature and extent of the specific relationship between each of those companies and us, and the fact that these
Board members are directors of these other companies rather than employees, the non-employee members of the
Board concluded that those business relationships did not constitute material relationships between any of the
Directors and us that would impair their independence as our Directors.
Board Memberships With Charitable Organizations To Which We Have Made Contributions. Mr. Retsinas serves as
a board member of a charitable organization that has received monetary contributions from us or the Freddie Mac
Foundation. The total annual amount contributed was below the applicable threshold in our Guidelines that would
require a specific determination that Mr. Retsinas is independent in spite of the contributions. The non-employee
members of the Board considered the contributions and the nature of the organization and concluded that the
relationship with the charitable organization did not constitute a material relationship between Mr. Retsinas and us
that would impair his independence as our Director.
Board Members Who Are Executive Officers Or Employees Of Business Partners. Mr. Williams was appointed as
Executive Director of the Government Practice at The Corporate Executive Board Company in January 2010 and
served in that role during 2011. In January 2012, Mr. Williams became a Senior Fellow of the Government Practice
of CEB. CEB provides best practices research and analysis and executive education to corporations through
memberships in various subject-matter interest groups organized and managed by CEB. Mr. Williams
responsibilities at CEB include contributing to and authoring literature; advising on the development of CEBs state
and local government service strategy and its existing federal government service offerings; and promoting future
CEB services. In 2009, 2010, 2011 and 2012 year-to-date, we paid CEB $362,100, $515,700, $447,500 and
$492,400, respectively, for memberships in certain of CEBs subject-matter interest groups. Currently, we are a
member of 14 CEB groups, and in 2009, 2010 and 2011 we were a member of 11, 12 and 13 groups, respectively.
The annual amounts of our payments to CEB in 2009 and 2010 were substantially below 2% of CEBs annual
revenues for the applicable years and the 2011 and 2012 payments are substantially less than 2% of CEBs 2010
revenues (the latest year for which CEB revenue is publicly available). Therefore, under our Guidelines, those
annual payments do not preclude the non-employee members of the Board from concluding that Mr. Williams is
independent. The non-employee members of the Board considered those payments and the nature and extent of the
relationship between us and CEB and concluded that this business relationship did not constitute a material
relationship between Mr. Williams and us that would impair Mr. Williams independence as our Director.
Financial Relationships with For-Profit Business Partners. Since 2005, Ms. Bammann has owned stock of
JPMorgan Chase & Co., or JPMorgan. In the aggregate, this stock represents a material portion of her net worth.
JPMorgan conducts significant business with Freddie Mac, including, among other things, as a single-family and
multifamily seller/servicer, as an underwriter of our debt and mortgage securities and as a capital markets
counterparty. In order to eliminate any potential conflict of interest that might arise as a result of this stock
ownership, Ms. Bammann has agreed to recuse herself from discussing and acting upon any matters that are to be
considered by the full Board or any of the committees of which she is a member (including the Business and Risk
Committee, which she chairs), and that relate directly to JPMorgan, and that therefore might affect the value of her
JPMorgan stock. The Audit Committee Chairman, in consultation with the Non-Executive Chairman, will address
any questions that may arise regarding whether recusal from a particular discussion or action is appropriate.
In evaluating Ms. Bammanns independence in light of her ownership of JPMorgan stock, the non-employee
members of the Board considered the nature and extent of Freddie Macs business relationship with JPMorgan and any
potential impact that her stock ownership might have on her independent judgment as a Freddie Mac director, taking into
account the recusal arrangement. The non-employee members of the Board concluded that Ms. Bammanns recusal
arrangement concerning JPMorgan would address any actual or potential conflicts of interest that might arise with respect
to her ownership of JPMorgan stock. Accordingly, the non-employee members concluded that Ms. Bammanns ownership
of JPMorgan stock does not constitute a material relationship between her and Freddie Mac that would impair her
independence as a Freddie Mac Director.
Mr. Rose receives an annuity and retiree medical benefits from JPMorgan in connection with his retirement from that
firm in 2001. The amount of Mr. Roses annuity is fixed and does not depend in any way on JPMorgans revenues or
361 Freddie Mac
profits. In evaluating the impact of Mr. Roses annuity from JPMorgan on his independence, the non-employee members
of the Board considered the structure of the annuity, the amount of the annuity as a percentage of Mr. Roses annual
adjusted gross income, the retiree medical benefits and Freddie Macs business relationship with JPMorgan. The non-
employee members of the Board also were informed that Mr. Rose had agreed to recuse himself from discussing or acting
upon any matter to be considered by our Board that could threaten the viability of JPMorgan. The non-employee members
of the Board concluded that Mr. Roses JPMorgan annuity and retiree medical benefits do not constitute a material
relationship between him and Freddie Mac that would impair his independence as a Freddie Mac Director.
Board Diversity
The Board identifies Director nominees or candidates when the Conservator has requested that the Board identify
candidates for the Conservator to consider for election by written consent and when there is a vacancy on the Board, at
which time the Board may exercise the authority delegated to it by the Conservator to fill such vacancies, subject to
review by the Conservator.
Our charter provides that our Board must at all times have at least one person from the homebuilding, mortgage
lending, and real estate industries, and at least one person from an organization representing community or consumer
interests or one person who has demonstrated a career commitment to the provision of housing for low-income
households. In addition, the examination guidance for corporate governance issued by FHFA provides that in identifying
individuals for nomination for election to the Board, the Board should consider the knowledge of such individuals, as a
group, in the areas of business, finance, accounting, risk management, public policy, mortgage lending, real estate, low-
income housing, homebuilding, regulation of financial institutions, and any other areas that may be relevant to our safe
and sound operation.
In addition, the Board has adopted a formal policy (articulated in our Guidelines) with regard to the consideration of
diversity in identifying director nominees and candidates. As articulated in the policy, the Board seeks to have a diversity
of talent, perspectives, experience and cultures among its members, including minorities, women and individuals with
disabilities, and considers such diversity in the candidate solicitation and nomination processes. The policy also states that
the Board seeks to have a diversity of talent on the Board and that candidates are selected, in part, for their experience
and expertise. The policy also explains that when identifying director nominees, the Nominating and Governance
Committee considers, among other factors, our needs, the talents and skills then available on the Board, and, with respect
to incumbent directors, their continued involvement in business and professional activities relevant to us, the skills and
experience that should be represented on the Board, the availability of other individuals with desirable skills to join the
Board, and the desire to maintain a diverse Board.
FHFA also has adopted a final rule regarding minority and women inclusion that became effective on January 28,
2011. The final rule implements section 1116 of HERA and requires us to, among other things, promote diversity and the
inclusion of women, minorities, and individuals with disabilities in all activities, including in the election of directors, as
required by these regulations.
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the
following persons on behalf of the registrant and in the capacities and on the dates indicated.
Signature Capacity Date
/s/ Charles E. Haldeman, Jr. Chief Executive Officer and Director March 9, 2012
Charles E. Haldeman, Jr. (Principal Executive Officer)
/s/ Ross J. Kari Executive Vice President Chief Financial Officer March 9, 2012
Ross J. Kari (Principal Financial Officer)
/s/ Robert D. Mailloux Senior Vice President Corporate Controller and March 9, 2012
Robert D. Mailloux Principal Accounting Officer (Principal Accounting Officer)
3.1 Federal Home Loan Mortgage Corporation Act (12 U.S.C. 1451 et seq.), as amended through July 21,
2010 (incorporated by reference to Exhibit 3.1 to the Registrants Quarterly Report on Form 10-Q for the
quarterly period ended June 30, 2010, as filed on August 9, 2010)
3.2 Bylaws of the Federal Home Loan Mortgage Corporation, as amended and restated June 3, 2011
(incorporated by reference to Exhibit 3.1 to the Registrants Current Report on Form 8-K as filed on June
7, 2011)
4.1 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)
4.2 Certificate of Creation, Designation, Powers, Preferences, Rights, Privileges, Qualifications, Limitations,
Restrictions, Terms and Conditions of Variable Rate, Non-Cumulative Preferred Stock (par value $1.00
per share), dated April 23, 1996 (incorporated by reference to Exhibit 4.2 to the Registrants Registration
Statement on Form 10 as filed on July 18, 2008)
4.3 Certificate of Creation, Designation, Powers, Preferences, Rights, Privileges, Qualifications, Limitations,
Restrictions, Terms and Conditions of 5.81% Non-Cumulative Preferred Stock (par value $1.00 per
share), dated October 27, 1997 (incorporated by reference to Exhibit 4.3 to the Registrants Registration
Statement on Form 10 as filed on July 18, 2008)
4.4 Certificate of Creation, Designation, Powers, Preferences, Rights, Privileges, Qualifications, Limitations,
Restrictions, Terms and Conditions of 5% Non-Cumulative Preferred Stock (par value $1.00 per share),
dated March 23, 1998 (incorporated by reference to Exhibit 4.4 to the Registrants Registration Statement
on Form 10 as filed on July 18, 2008)
4.5 Certificate of Creation, Designation, Powers, Preferences, Rights, Privileges, Qualifications, Limitations,
Restrictions, Terms and Conditions of 5.1% Non-Cumulative Preferred Stock (par value $1.00 per share),
dated September 23, 1998 (incorporated by reference to Exhibit 4.5 to the Registrants Registration
Statement on Form 10 as filed on July 18, 2008)
4.6 Amended and Restated Certificate of Creation, Designation, Powers, Preferences, Rights, Privileges,
Qualifications, Limitations, Restrictions, Terms and Conditions of Variable Rate, Non-Cumulative
Preferred Stock (par value $1.00 per share), dated September 29, 1998 (incorporated by reference to
Exhibit 4.6 to the Registrants Registration Statement on Form 10 as filed on July 18, 2008)
4.7 Certificate of Creation, Designation, Powers, Preferences, Rights, Privileges, Qualifications, Limitations,
Restrictions, Terms and Conditions of 5.3% Non-Cumulative Preferred Stock (par value $1.00 per share),
dated October 28, 1998 (incorporated by reference to Exhibit 4.7 to the Registrants Registration
Statement on Form 10 as filed on July 18, 2008)
4.8 Certificate of Creation, Designation, Powers, Preferences, Rights, Privileges, Qualifications, Limitations,
Restrictions, Terms and Conditions of 5.1% Non-Cumulative Preferred Stock (par value $1.00 per share),
dated March 19, 1999 (incorporated by reference to Exhibit 4.8 to the Registrants Registration Statement
on Form 10 as filed on July 18, 2008)
4.9 Certificate of Creation, Designation, Powers, Preferences, Rights, Privileges, Qualifications, Limitations,
Restrictions, Terms and Conditions of 5.79% Non-Cumulative Preferred Stock (par value $1.00 per
share), dated July 21, 1999 (incorporated by reference to Exhibit 4.9 to the Registrants Registration
Statement on Form 10 as filed on July 18, 2008)
4.10 Certificate of Creation, Designation, Powers, Preferences, Rights, Privileges, Qualifications, Limitations,
Restrictions, Terms and Conditions of Variable Rate, Non-Cumulative Preferred Stock (par value $1.00
per share), dated November 5, 1999 (incorporated by reference to Exhibit 4.10 to the Registrants
Registration Statement on Form 10 as filed on July 18, 2008)
4.11 Certificate of Creation, Designation, Powers, Preferences, Rights, Privileges, Qualifications, Limitations,
Restrictions, Terms and Conditions of Variable Rate, Non-Cumulative Preferred Stock (par value $1.00
per share), dated January 26, 2001 (incorporated by reference to Exhibit 4.11 to the Registrants
Registration Statement on Form 10 as filed on July 18, 2008)
4.12 Certificate of Creation, Designation, Powers, Preferences, Rights, Privileges, Qualifications, Limitations,
Restrictions, Terms and Conditions of Variable Rate, Non-Cumulative Preferred Stock (par value $1.00
per share), dated March 23, 2001 (incorporated by reference to Exhibit 4.12 to the Registrants
Registration Statement on Form 10 as filed on July 18, 2008)
4.13 Certificate of Creation, Designation, Powers, Preferences, Rights, Privileges, Qualifications, Limitations,
Restrictions, Terms and Conditions of 5.81% Non-Cumulative Preferred Stock (par value $1.00 per
share), dated March 23, 2001 (incorporated by reference to Exhibit 4.13 to the Registrants Registration
Statement on Form 10 as filed on July 18, 2008)
4.14 Certificate of Creation, Designation, Powers, Preferences, Rights, Privileges, Qualifications, Limitations,
Restrictions, Terms and Conditions of Variable Rate, Non-Cumulative Preferred Stock (par value $1.00
per share), dated May 30, 2001 (incorporated by reference to Exhibit 4.14 to the Registrants Registration
Statement on Form 10 as filed on July 18, 2008)
4.15 Certificate of Creation, Designation, Powers, Preferences, Rights, Privileges, Qualifications, Limitations,
Restrictions, Terms and Conditions of 6% Non-Cumulative Preferred Stock (par value $1.00 per share),
dated May 30, 2001 (incorporated by reference to Exhibit 4.15 to the Registrants Registration Statement
on Form 10 as filed on July 18, 2008)
4.16 Certificate of Creation, Designation, Powers, Preferences, Rights, Privileges, Qualifications, Limitations,
Restrictions, Terms and Conditions of 5.7% Non-Cumulative Preferred Stock (par value $1.00 per share),
dated October 30, 2001 (incorporated by reference to Exhibit 4.16 to the Registrants Registration
Statement on Form 10 as filed on July 18, 2008)
4.17 Certificate of Creation, Designation, Powers, Preferences, Rights, Privileges, Qualifications, Limitations,
Restrictions, Terms and Conditions of 5.81% Non-Cumulative Preferred Stock (par value $1.00 per
share), dated January 29, 2002 (incorporated by reference to Exhibit 4.17 to the Registrants Registration
Statement on Form 10 as filed on July 18, 2008)
4.18 Certificate of Creation, Designation, Powers, Preferences, Rights, Privileges, Qualifications, Limitations,
Restrictions, Terms and Conditions of Variable Rate, Non-Cumulative Perpetual Preferred Stock (par
value $1.00 per share), dated July 17, 2006 (incorporated by reference to Exhibit 4.18 to the Registrants
Registration Statement on Form 10 as filed on July 18, 2008)
4.19 Certificate of Creation, Designation, Powers, Preferences, Rights, Privileges, Qualifications, Limitations,
Restrictions, Terms and Conditions of 6.42% Non-Cumulative Perpetual Preferred Stock (par value $1.00
per share), dated July 17, 2006 (incorporated by reference to Exhibit 4.19 to the Registrants Registration
Statement on Form 10 as filed on July 18, 2008)
4.20 Certificate of Creation, Designation, Powers, Preferences, Rights, Privileges, Qualifications, Limitations,
Restrictions, Terms and Conditions of 5.9% Non-Cumulative Perpetual Preferred Stock (par value $1.00
per share), dated October 16, 2006 (incorporated by reference to Exhibit 4.20 to the Registrants
Registration Statement on Form 10 as filed on July 18, 2008)
4.21 Certificate of Creation, Designation, Powers, Preferences, Rights, Privileges, Qualifications, Limitations,
Restrictions, Terms and Conditions of 5.57% Non-Cumulative Perpetual Preferred Stock (par value $1.00
per share), dated January 16, 2007 (incorporated by reference to Exhibit 4.21 to the Registrants
Registration Statement on Form 10 as filed on July 18, 2008)
4.22 Certificate of Creation, Designation, Powers, Preferences, Rights, Privileges, Qualifications, Limitations,
Restrictions, Terms and Conditions of 5.66% Non-Cumulative Perpetual Preferred Stock (par value $1.00
per share), dated April 16, 2007 (incorporated by reference to Exhibit 4.22 to the Registrants
Registration Statement on Form 10 as filed on July 18, 2008)
4.23 Certificate of Creation, Designation, Powers, Preferences, Rights, Privileges, Qualifications, Limitations,
Restrictions, Terms and Conditions of 6.02% Non-Cumulative Perpetual Preferred Stock (par value $1.00
per share), dated July 24, 2007 (incorporated by reference to Exhibit 4.23 to the Registrants Registration
Statement on Form 10 as filed on July 18, 2008)
4.24 Certificate of Creation, Designation, Powers, Preferences, Rights, Privileges, Qualifications, Limitations,
Restrictions, Terms and Conditions of 6.55% Non-Cumulative Perpetual Preferred Stock (par value $1.00
per share), dated September 28, 2007 (incorporated by reference to Exhibit 4.24 to the Registrants
Registration Statement on Form 10 as filed on July 18, 2008)
4.25 Certificate of Creation, Designation, Powers, Preferences, Rights, Privileges, Qualifications, Limitations,
Restrictions, Terms and Conditions of Fixed-to-Floating Rate Non-Cumulative Perpetual Preferred Stock
(par value $1.00 per share), dated December 4, 2007 (incorporated by reference to Exhibit 4.25 to the
Registrants Registration Statement on Form 10 as filed on July 18, 2008)
4.26 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)
4.27 Federal Home Loan Mortgage Corporation Global Debt Facility Agreement, dated February 25, 2011
(incorporated by reference to Exhibit 4.1 to the Registrants Quarterly Report on Form 10-Q for the
quarterly period ended March 31, 2011, as filed on May 4, 2011)
10.1 Federal Home Loan Mortgage Corporation 2004 Stock Compensation Plan (as amended and restated as of
June 6, 2008) (incorporated by reference to Exhibit 10.1 to the Registrants Registration Statement on
Form 10 as filed on July 18, 2008)
10.2 First Amendment to the Federal Home Loan Mortgage Corporation 2004 Stock Compensation Plan
(incorporated by reference to Exhibit 10.2 to the Registrants Registration Statement on Form 10 as filed
on July 18, 2008)
10.3 Second Amendment to the Federal Home Loan Mortgage Corporation 2004 Stock Compensation Plan
(incorporated by reference to Exhibit 10.4 to the Registrants Quarterly Report on Form 10-Q for the
quarterly period ended June 30, 2009, as filed on August 7, 2009)
10.4 Form of Nonqualified Stock Option Agreement for executive officers under the Federal Home Loan
Mortgage Corporation 2004 Stock Compensation Plan for awards on and after March 4, 2005 but prior to
January 1, 2006 (incorporated by reference to Exhibit 10.3 to the Registrants Registration Statement on
Form 10 as filed on July 18, 2008)
10.5 Form of Nonqualified Stock Option Agreement for executive officers under the Federal Home Loan
Mortgage Corporation 2004 Stock Compensation Plan for awards on and after January 1, 2006
(incorporated by reference to Exhibit 10.4 to the Registrants Registration Statement on Form 10 as filed
on July 18, 2008)
10.6 Form of Restricted Stock Units Agreement for executive officers under the Federal Home Loan Mortgage
Corporation 2004 Stock Compensation Plan for awards on and after March 4, 2005 (incorporated by
reference to Exhibit 10.5 to the Registrants Registration Statement on Form 10 as filed on July 18,
2008)
10.7 Form of Restricted Stock Units Agreement for executive officers under the Federal Home Loan Mortgage
Corporation 2004 Stock Compensation Plan for supplemental bonus awards on March 7, 2008
(incorporated by reference to Exhibit 10.6 to the Registrants Registration Statement on Form 10 as filed
on July 18, 2008)
10.8 Form of Performance Restricted Stock Units Agreement for executive officers under the Federal Home Loan
Mortgage Corporation 2004 Stock Compensation Plan for supplemental bonus awards on March 29, 2007
(incorporated by reference to Exhibit 10.7 to the Registrants Registration Statement on Form 10 as filed
on July 18, 2008)
10.9 Form of Performance Restricted Stock Units Agreement for executive officers under the Federal Home Loan
Mortgage Corporation 2004 Stock Compensation Plan for awards on March 7, 2008 (incorporated by
reference to Exhibit 10.8 to the Registrants Registration Statement on Form 10 as filed on July 18,
2008)
10.10 Federal Home Loan Mortgage Corporation Global Amendment to Affected Stock Options under
Nonqualified Stock Option Agreements and Separate Dividend Equivalent Rights, effective December 31,
2005 (incorporated by reference to Exhibit 10.9 to the Registrants Registration Statement on Form 10 as
filed on July 18, 2008)
10.11 Federal Home Loan Mortgage Corporation Amendment to Restricted Stock Units Agreements and
Performance Restricted Stock Units Agreements, dated December 31, 2008 (incorporated by reference to
Exhibit 10.10 to the Registrants Annual Report on Form 10-K for the fiscal year ended December 31,
2008, as filed on March 11, 2009)
10.12 Federal Home Loan Mortgage Corporation 1995 Stock Compensation Plan (incorporated by reference to
Exhibit 10.10 to the Registrants Registration Statement on Form 10 as filed on July 18, 2008)
10.13 First Amendment to the Federal Home Loan Mortgage Corporation 1995 Stock Compensation Plan
(incorporated by reference to Exhibit 10.11 to the Registrants Registration Statement on Form 10 as filed
on July 18, 2008)
10.14 Second Amendment to the Federal Home Loan Mortgage Corporation 1995 Stock Compensation Plan
(incorporated by reference to Exhibit 10.12 to the Registrants Registration Statement on Form 10 as filed
on July 18, 2008)
10.15 Third Amendment to the Federal Home Loan Mortgage Corporation 1995 Stock Compensation Plan
(incorporated by reference to Exhibit 10.13 to the Registrants Registration Statement on Form 10 as filed
on July 18, 2008)
10.16 Form of Nonqualified Stock Option Agreement for executive officers under the Federal Home Loan
Mortgage Corporation 1995 Stock Compensation Plan (incorporated by reference to Exhibit 10.14 to the
Registrants Registration Statement on Form 10 as filed on July 18, 2008)
10.17 Form of Restricted Stock Units Agreement for executive officers under the Federal Home Loan Mortgage
Corporation 1995 Stock Compensation Plan (incorporated by reference to Exhibit 10.15 to the
Registrants Registration Statement on Form 10 as filed on July 18, 2008)
10.18 Federal Home Loan Mortgage Corporation Employee Stock Purchase Plan (as amended and restated as of
January 1, 2005) (incorporated by reference to Exhibit 10.16 to the Registrants Registration Statement on
Form 10 as filed on July 18, 2008)
10.19 Federal Home Loan Mortgage Corporation 1995 Directors Stock Compensation Plan (as amended and
restated June 8, 2007) (incorporated by reference to Exhibit 10.17 to the Registrants Registration
Statement on Form 10 as filed on July 18, 2008)
10.20 Form of Nonqualified Stock Option Agreement for non-employee directors under the Federal Home Loan
Mortgage Corporation 1995 Directors Stock Compensation Plan for awards in 2006 (incorporated by
reference to Exhibit 10.20 to the Registrants Registration Statement on Form 10 as filed on July 18,
2008)
10.21 Form of Restricted Stock Units Agreement for non-employee directors under the Federal Home Loan
Mortgage Corporation 1995 Directors Stock Compensation Plan for awards in 2006 (incorporated by
reference to Exhibit 10.23 to the Registrants Registration Statement on Form 10 as filed on July 18,
2008)
10.22 Form of Restricted Stock Units Agreement for non-employee directors under the Federal Home Loan
Mortgage Corporation 1995 Directors Stock Compensation Plan for awards since 2006 (incorporated by
reference to Exhibit 10.24 to the Registrants Registration Statement on Form 10 as filed on July 18,
2008)
10.23 Federal Home Loan Mortgage Corporation Directors Deferred Compensation Plan (as amended and
restated April 3, 1998) (incorporated by reference to Exhibit 10.25 to the Registrants Registration
Statement on Form 10 as filed on July 18, 2008)
10.24 First Amendment to the Federal Home Loan Mortgage Corporation Directors Deferred Compensation Plan
(as amended and restated April 3, 1998) (incorporated by reference to Exhibit 10.27 to the Registrants
Annual Report on Form 10-K for the fiscal year ended December 31, 2008, as filed on March 11, 2009)
10.25 Federal Home Loan Mortgage Corporation Executive Deferred Compensation Plan (as amended and restated
effective January 1, 2008) (incorporated by reference to Exhibit 10.28 to the Registrants Registration
Statement on Form 10 as filed on July 18, 2008)
10.26 First Amendment to the Federal Home Loan Mortgage Corporation Executive Deferred Compensation Plan
(as amended and restated effective January 1, 2008) (incorporated by reference to Exhibit 10.6 to the
Registrants Quarterly Report on Form 10-Q for the quarterly period ended September 30, 2008, as filed
on November 14, 2008)
10.27 2009 Officer Short-Term Incentive Program (incorporated by reference to Exhibit 10.30 to the Registrants
Annual Report on Form 10-K for the fiscal year ended December 31, 2008, as filed on March 11, 2009)
10.28 2010 Vice President and Non-Officer Long-Term Incentive Award Program (incorporated by reference to
Exhibit 10.3 to the Registrants Quarterly Report on Form 10-Q for the quarterly period ended June 30,
2009, as filed on August 9, 2010)
10.29 Officer Severance Policy, dated April 11, 2011 (incorporated by reference to Exhibit 10.2 to the Registrants
Quarterly Report on Form 10-Q for the quarterly period ended March 31, 2011, as filed on May 4,
2011)
10.30 Federal Home Loan Mortgage Corporation Severance Plan (as restated and amended effective January 1,
1997) (incorporated by reference to Exhibit 10.31 to the Registrants Registration Statement on Form 10
as filed on July 18, 2008)
10.31 First Amendment to the Federal Home Loan Mortgage Corporation Severance Plan (incorporated by
reference to Exhibit 10.32 to the Registrants Registration Statement on Form 10 as filed on July 18,
2008)
10.32 Federal Home Loan Mortgage Corporation Supplemental Executive Retirement Plan (as amended and
restated effective January 1, 2008) (incorporated by reference to Exhibit 10.33 to the Registrants
Registration Statement on Form 10 as filed on July 18, 2008)
10.33 First Amendment to the Federal Home Loan Mortgage Corporation Supplemental Executive Retirement
Plan (As Amended and Restated January 1, 2008) (incorporated by reference to Exhibit 10.38 to the
Registrants Annual Report on Form 10-K for the fiscal year ended December 31, 2009, as filed on
February 24, 2010)
10.34 Second Amendment to the Federal Home Loan Mortgage Corporation Supplemental Executive Retirement
Plan (as Amended and Restated January 1, 2008) (incorporated by reference to Exhibit 10.1 to the
Registrants Current Report on Form 8-K as filed on June 28, 2011)
10.35 Federal Home Loan Mortgage Corporation Long-Term Disability Plan (incorporated by reference to Exhibit
10.34 to the Registrants Registration Statement on Form 10 as filed on July 18, 2008)
10.36 First Amendment to the Federal Home Loan Mortgage Corporation Long-Term Disability Plan (incorporated
by reference to Exhibit 10.35 to the Registrants Registration Statement on Form 10 as filed on July 18,
2008)
10.37 Second Amendment to the Federal Home Loan Mortgage Corporation Long-Term Disability Plan
(incorporated by reference to Exhibit 10.36 to the Registrants Registration Statement on Form 10 as filed
on July 18, 2008)
10.38 Executive Management Compensation Program (as amended and restated as of June 2, 2011) (incorporated
by reference to Exhibit 10.4 to the Registrants Quarterly Report on Form 10-Q for the quarterly period
ended June 30, 2011, as filed on August 8, 2011)
10.39 Federal Home Loan Mortgage Corporation Mandatory Executive Deferred Base Salary Plan, Effective as of
January 1, 2009 (incorporated by reference to Exhibit 10.45 to the Registrants Annual Report on Form
10-K for the fiscal year ended December 31, 2009, as filed on February 24, 2010)
10.40 First Amendment To The Federal Home Loan Mortgage Corporation Mandatory Executive Deferred Base
Salary Plan (As Effective January 1, 2009) (incorporated by reference to Exhibit 10.5 to the Registrants
Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2011, as filed on August 8,
2011)
10.41 Executive Management Compensation Recapture Policy (incorporated by reference to Exhibit 10.4 to the
Registrants Current Report on Form 8-K, as filed on December 24, 2009)
10.42 Memorandum Agreement, dated July 20, 2009, between Freddie Mac and Charles E. Haldeman, Jr.
(incorporated by reference to Exhibit 10.1 to the Registrants Current Report on Form 8-K, as filed on
July 21, 2009)
10.43 Recapture Agreement, dated July 21, 2009, between Freddie Mac and Charles E. Haldeman, Jr.
(incorporated by reference to Exhibit 10.2 to the Registrants Current Report on Form 8-K, as filed on
July 21, 2009)
10.44 Restrictive Covenant and Confidentiality Agreement, dated July 21, 2009, between Freddie Mac and Charles
E. Haldeman, Jr. (incorporated by reference to Exhibit 10.7 to the Registrants Quarterly Report on Form
10-Q for the quarterly period ended September 30, 2009, as filed on November 6, 2009)
10.45 Memorandum Agreement, dated September 24, 2009, between Freddie Mac and Ross J. Kari (incorporated
by reference to Exhibit 10.1 to the Registrants Current Report on Form 8-K, as filed on September 24,
2009)
10.46 Recapture Agreement, dated September 24, 2009, between Freddie Mac and Ross J. Kari (incorporated by
reference to Exhibit 10.2 to the Registrants Current Report on Form 8-K, as filed on September 24,
2009)
10.47 Restrictive Covenant and Confidentiality Agreement, dated September 24, 2009, between Freddie Mac and
Ross J. Kari (incorporated by reference to Exhibit 10.9 to the Registrants Quarterly Report on Form 10-
Q for the quarterly period ended September 30, 2009, as filed on November 6, 2009)
10.48 Restrictive Covenant and Confidentiality Agreement, dated April 14, 2010, between Freddie Mac and
Anthony Renzi
10.49 Restrictive Covenant and Confidentiality Agreement, dated October 15, 2004, between Freddie Mac and
Jerry Weiss
10.50 Restrictive Covenant and Confidentiality Agreement, dated December 19, 2007, between Freddie Mac and
[Paige H. Wisdom]
10.51 Description of non-employee director compensation (incorporated by reference to Exhibit 10.1 to the
Registrants Current Report on Form 8-K as filed on December 23, 2008)
10.52 PC Master Trust Agreement dated January 4, 2012
10.53 Form of Indemnification Agreement between the Federal Home Loan Mortgage Corporation and executive
officers (for agreements with officers entered into prior to August 2011) and outside Directors
(incorporated by reference to Exhibit 10.2 to the Registrants Current Report on Form 8-K as filed on
December 23, 2008)
10.54 Form of Indemnification Agreement between the Federal Home Loan Mortgage Corporation and executive
officers (for agreements with officers entered into beginning in August 2011)
10.55 Consent of Defendant Federal Home Loan Mortgage Corporation with the Securities and Exchange
Commission, dated September 18, 2007 (incorporated by reference to Exhibit 10.65 to the Registrants
Registration Statement on Form 10 as filed on July 18, 2008)
10.56 Letters, dated September 1, 2005, setting forth an agreement between Freddie Mac and FHFA (incorporated
by reference to Exhibit 10.67 to the Registrants Registration Statement on Form 10 as filed on July 18,
2008)
10.57 Amended and Restated Senior Preferred Stock Purchase Agreement dated as of September 26, 2008,
between the United States Department of the Treasury and Federal Home Loan Mortgage Corporation,
acting through the Federal Housing Finance Agency as its duly appointed Conservator (incorporated by
reference to Exhibit 10.1 to the Registrants Quarterly Report on Form 10-Q for the quarterly period
ended September 30, 2008, as filed on November 14, 2008)
10.58 Amendment to Amended and Restated Senior Preferred Stock Purchase Agreement, dated as of May 6,
2009, between the United States Department of the Treasury and Federal Home Loan Mortgage
Corporation, acting through the Federal Housing Finance Agency as its duly appointed Conservator
(incorporated by reference to Exhibit 10.6 to the Registrants Quarterly Report on Form 10-Q for the
period ended March 31, 2009, as filed on May 12, 2009)
10.59 Second Amendment dated as of December 24, 2009, to the Amended and Restated Senior Preferred Stock
Purchase Agreement dated as of September 26, 2008, between the United States Department of the
Treasury and Federal Home Loan Mortgage Corporation, acting through the Federal Housing Finance
Agency as its duly appointed Conservator (incorporated by reference to Exhibit 10.1 to the Registrants
Current Report on Form 8-K, as filed on December 29, 2009)
10.60 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)
10.61 Memorandum of Understanding Among the Department of Treasury, the Federal Housing Finance Agency,
the Federal National Mortgage Association, and the Federal Home Loan Mortgage Corporation, dated
October 19, 2009 (incorporated by reference to Exhibit 10.1 to the Registrants Current Report on Form
8-K, as filed on October 23, 2009)
10.62 Omnibus Consent to HFA Initiative Program Modifications, dated November 23, 2011, among the U.S.
Department of the Treasury, the Federal National Mortgage Association, the Federal Home Loan
Mortgage Corporation and the Federal Housing Finance Agency
12.1 Statement re: computation of ratio of earnings to fixed charges and computation of ratio of earnings to
combined fixed charges and preferred stock dividends
24.1 Powers of Attorney
31.1 Certification of Chief Executive Officer pursuant to Securities Exchange Act Rule 13a-14(a)
31.2 Certification of Executive Vice President Chief Financial Officer pursuant to Securities Exchange Act
Rule 13a-14(a)
32.1 Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350
32.2 Certification of Executive Vice President Chief Financial Officer pursuant to 18 U.S.C. Section 1350
(1) Senior preferred stock and preferred stock dividends represent pre-tax earnings required to cover any senior preferred stock and preferred stock
dividend requirements computed using our effective tax rate, whenever there is an income tax provision, for the relevant periods.
(2) Ratio of earnings to fixed charges is computed by dividing earnings (loss), as adjusted by total fixed charges. For the ratio to equal 1.00, earnings
(loss), as adjusted must increase by $5.7 billion, $14.9 billion, $18.2 billion, $44.1 billion, and $5.5 billion for the years ended December 31, 2011,
2010, 2009, 2008, and 2007, respectively.
(3) Ratio of earnings to combined fixed charges and preferred stock dividends is computed by dividing earnings (loss), as adjusted by total fixed charges
including preferred stock dividends. For the ratio to equal 1.00, earnings (loss), as adjusted must increase by $12.2 billion, $20.6 billion,
$22.3 billion, $44.8 billion, and $5.9 billion for the years ended December 31, 2011, 2010, 2009, 2008, and 2007, respectively.
Exhibit 31.1
CERTIFICATION
PURSUANT TO SECURITIES EXCHANGE ACT RULE 13a-14(a)
I, Charles E. Haldeman, Jr., certify that:
1. I have reviewed this Annual Report on Form 10-K for the year ended December 31, 2011 of the Federal Home Loan
Mortgage Corporation;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material
fact necessary to make the statements made, in light of the circumstances under which such statements were made, not
misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present
in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the
periods presented in this report;
4. The registrants other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and
procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting
(as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
a. Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed
under our supervision, to ensure that material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly during the period in which this report
is being prepared;
b. Designed such internal control over financial reporting, or caused such internal control over financial reporting to be
designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and
the preparation of financial statements for external purposes in accordance with generally accepted accounting
principles;
c. Evaluated the effectiveness of the registrants disclosure controls and procedures and presented in this report our
conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by
this report based on such evaluation; and
d. Disclosed in this report any change in the registrants internal control over financial reporting that occurred during
the registrants most recent fiscal quarter (the registrants fourth fiscal quarter in the case of an annual report) that
has materially affected, or is reasonably likely to materially affect, the registrants internal control over financial
reporting; and
5. The registrants other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control
over financial reporting, to the registrants auditors and the audit committee of the registrants board of directors (or
persons performing the equivalent functions):
a. All significant deficiencies and material weaknesses in the design or operation of internal control over financial
reporting which are reasonably likely to adversely affect the registrants ability to record, process, summarize and
report financial information; and
b. Any fraud, whether or not material, that involves management or other employees who have a significant role in the
registrants internal control over financial reporting.
CERTIFICATION
PURSUANT TO SECURITIES EXCHANGE ACT RULE 13a-14(a)
I, Ross J. Kari, certify that:
1. I have reviewed this Annual Report on Form 10-K for the year ended December 31, 2011 of the Federal Home Loan
Mortgage Corporation;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material
fact necessary to make the statements made, in light of the circumstances under which such statements were made, not
misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present
in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the
periods presented in this report;
4. The registrants other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and
procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting
(as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
a. Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed
under our supervision, to ensure that material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly during the period in which this report
is being prepared;
b. Designed such internal control over financial reporting, or caused such internal control over financial reporting to be
designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and
the preparation of financial statements for external purposes in accordance with generally accepted accounting
principles;
c. Evaluated the effectiveness of the registrants disclosure controls and procedures and presented in this report our
conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by
this report based on such evaluation; and
d. Disclosed in this report any change in the registrants internal control over financial reporting that occurred during
the registrants most recent fiscal quarter (the registrants fourth fiscal quarter in the case of an annual report) that
has materially affected, or is reasonably likely to materially affect, the registrants internal control over financial
reporting; and
5. The registrants other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control
over financial reporting, to the registrants auditors and the audit committee of the registrants board of directors (or
persons performing the equivalent functions):
a. All significant deficiencies and material weaknesses in the design or operation of internal control over financial
reporting which are reasonably likely to adversely affect the registrants ability to record, process, summarize and
report financial information; and
b. Any fraud, whether or not material, that involves management or other employees who have a significant role in the
registrants internal control over financial reporting.
CERTIFICATION
PURSUANT TO 18 U.S.C. SECTION 1350,
AS ENACTED BY SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Annual Report on Form 10-K for the year ended December 31, 2011 of the Federal Home Loan
Mortgage Corporation (the Company), as filed with the Securities and Exchange Commission on the date hereof (the
Report), I, Charles E. Haldeman, Jr., Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that to my knowledge:
1. The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
2. The information contained in the Report fairly presents, in all material respects, the financial condition and results of
operations of the Company.
CERTIFICATION
PURSUANT TO 18 U.S.C. SECTION 1350,
AS ENACTED BY SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Annual Report on Form 10-K for the year ended December 31, 2011 of the Federal Home Loan
Mortgage Corporation (the Company), as filed with the Securities and Exchange Commission on the date hereof (the
Report), I, Ross J. Kari, Executive Vice President Chief Financial Officer of the Company, certify, pursuant to
18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that to my knowledge:
1. The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
2. The information contained in the Report fairly presents, in all material respects, the financial condition and results of
operations of the Company.