10-Q 1 f71076e10vq.htm 10-Q e10vq
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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
 
 
FORM 10-Q
 
 
x   QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934.
 
For the quarterly period ended March 31, 2009
 
or
 
o   TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934.
 
For the transition period from                to
 
Commission File Number: 000-53330
 
 
Federal Home Loan Mortgage Corporation
(Exact name of registrant as specified in its charter)
 
Freddie Mac
     
Federally chartered corporation   52-0904874
(State or other jurisdiction of
incorporation or organization)
  (I.R.S. Employer
Identification No.)
     
8200 Jones Branch Drive, McLean, Virginia   22102-3110
(Address of principal executive offices)   (Zip Code)
 
(703) 903-2000
 
(Registrant’s telephone number, including area code)
 
Indicate by check mark whether the registrant:  (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.     x Yes  o No
 
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).     o Yes  o No
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
 
Large accelerated filer o Accelerated filer o
 
Non-accelerated filer (Do not check if a smaller reporting company) x Smaller reporting company o
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  o Yes   x No
 
As of May 4, 2009, there were 648,220,792 shares of the registrant’s common stock outstanding.
 


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TABLE OF CONTENTS
 
             
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     Risk Management
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     Our Portfolios
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Throughout this Quarterly Report on Form 10-Q, we use certain acronyms and terms and refer to certain accounting pronouncements which are defined in the Glossary.
 
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FINANCIAL STATEMENTS
 
         
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PART I — FINANCIAL INFORMATION
 
This Quarterly Report on Form 10-Q includes forward-looking statements, which may include statements pertaining to the conservatorship and our current expectations and objectives for internal control remediation efforts, future business plans, capital management, economic and market conditions and trends, market share, credit losses, and results of operations and financial condition on a GAAP, Segment Earnings and fair value basis. You should not rely unduly on our forward-looking statements. Actual results might differ significantly from those described in or implied by such forward-looking statements due to various factors and uncertainties, including those described in (i) Management’s Discussion and Analysis, or MD&A, “MD&A — FORWARD-LOOKING STATEMENTS” and “RISK FACTORS” in this Form 10-Q and in the comparably captioned sections of our Annual Report on Form 10-K for the year ended December 31, 2008, or 2008 Annual Report, and (ii) the “BUSINESS” section of our 2008 Annual Report. These forward-looking statements are made as of the date of this Form 10-Q and we undertake no obligation to update any forward-looking statement to reflect events or circumstances after the date of this Form 10-Q, or to reflect the occurrence of unanticipated events.
 
Throughout PART I of this Form 10-Q, including the Financial Statements and MD&A, we use certain acronyms and terms and refer to certain accounting pronouncements which are defined in the Glossary.
 
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 
EXECUTIVE SUMMARY
 
You should read this MD&A in conjunction with our consolidated financial statements and related notes for the three months ended March 31, 2009 and our 2008 Annual Report.
 
Freddie Mac was chartered by Congress in 1970 to stabilize the nation’s 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. Our participation in the secondary mortgage market includes providing our credit guarantee for residential mortgages originated by mortgage lenders and investing in mortgage loans and mortgage-related securities. We refer to our investments in mortgage loans and mortgage-related securities as our mortgage-related investments portfolio. Through our credit guarantee activities, we securitize mortgage loans by issuing PCs to third-party investors. We also resecuritize mortgage-related securities that are issued by us or Ginnie Mae as well as private, or non-agency, entities. We also guarantee multifamily mortgage loans that support housing revenue bonds issued by third parties and we guarantee other mortgage loans held by third parties. Securitized mortgage-related assets that back PCs and Structured Securities that are held by third parties are not reflected as our assets. Our Structured Securities represent beneficial interests in pools of PCs and certain other types of mortgage-related assets. We earn management and guarantee fees for providing our guarantee and performing management activities (such as ongoing trustee services, administration of pass-through amounts, paying agent services, tax reporting and other required services) with respect to issued PCs and Structured Securities. Our management activities are essential to and inseparable from our guarantee activities. We do not provide or charge for the activities separately. The management and guarantee fee is paid to us over the life of the related PCs and Structured Securities and reflected in earnings, as management and guarantee income, as it is accrued.
 
We had a net loss attributable to Freddie Mac of $9.9 billion for the first quarter of 2009 and a deficit in total equity of $6.0 billion as of March 31, 2009. Our financial results for the first quarter of 2009 reflect the adverse conditions in the U.S. mortgage markets. Deterioration of market conditions, including declining home prices, higher mortgage delinquency rates and higher loss severities, contributed to large credit-related expenses and other-than-temporary impairments for the first quarter of 2009.
 
We continue to operate under the conservatorship that commenced on September 6, 2008, conducting our business under the direction of FHFA as our Conservator. 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.
 
We are working with our Conservator to, among other things, help distressed homeowners through adverse times. Currently, we are primarily focusing on initiatives that support the Making Home Affordable Program announced by the Obama Administration in February 2009 (previously known as the Homeowner Affordability and Stability Plan). The MHA Program includes (i) Home Affordable Refinance, which gives eligible homeowners with loans owned or guaranteed by Freddie Mac or Fannie Mae an opportunity to refinance into more affordable monthly payments, and (ii) the Home Affordable Modification program, which commits U.S. government, Freddie Mac and Fannie Mae funds to keep eligible homeowners in their homes by preventing avoidable foreclosures. We will play an additional role under the Home Affordable Modification program as the compliance agent for foreclosure prevention activities. As the
 
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program compliance agent, we will conduct examinations and review servicer compliance with the published rules for the program with respect to mortgages owned or guaranteed by us, Fannie Mae and banks and by trusts backing non-agency mortgage-related securities and report results to Treasury. We will also advise and consult with Treasury about the design, results and future improvement of the MHA Program. At present, it is difficult for us to predict the full impact of these initiatives on us. However, we are devoting significant internal resources to their implementation and, to the extent our servicers and borrowers participate in these programs in large numbers, it is likely that the costs we incur will be substantial.
 
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 our conservatorship, including whether we will continue to exist. However, we are not aware of any current plans of our Conservator to significantly change our business structure in the near-term.
 
Significant recent developments with respect to the conservatorship, our business and the MHA Program include the following:
 
  •  At March 31, 2009, the unpaid principal balance of our mortgage-related investments portfolio was $867.1 billion, compared to $804.8 billion at December 31, 2008. During the three months ended March 31, 2009, we grew our mortgage-related investments portfolio to acquire and hold increased amounts of mortgage loans and mortgage-related securities to provide additional liquidity to the mortgage market, subject to the limitation on the size of such portfolio set forth in the Purchase Agreement.
 
  •  On March 4, 2009, we announced two new mortgage initiatives under the MHA Program. First, we announced the Freddie Mac Relief Refinance MortgageSM, which is our business implementation of Home Affordable Refinance. We began purchasing these mortgages in April 2009. This mortgage product is designed to assist borrowers with Freddie Mac-owned mortgages who are current on their mortgage payments but who have been unable to refinance due to declining property values and tightening credit terms. Second, we announced our support for the Home Affordable Modification program, which began in March 2009 and is designed to help more at-risk borrowers stay in their homes by lowering their monthly payments. As part of our support for this program, we have directed our servicers to ensure that every possible effort is made to achieve a successful workout for delinquent borrowers through the new Home Affordable Modification program or Freddie Mac’s other workout options before completing a foreclosure.
 
  •  Effective March 13, 2009, David M. Moffett resigned from his position as Chief Executive Officer and as a member of our Board of Directors, John A. Koskinen, previously our non-executive Chairman of the Board, was appointed Interim Chief Executive Officer and Robert R. Glauber was appointed interim non-executive Chairman of the Board. Mr. Koskinen will also be performing the functions of principal financial officer on an interim basis following the death of David Kellermann, our Acting Chief Financial Officer, on April 22, 2009. Mr. Moffett has agreed to return to the company temporarily as a consultant to Mr. Koskinen to provide advice and assistance in connection with Mr. Koskinen’s functioning as principal financial officer. In addition, the Board is working to appoint a permanent Chief Executive Officer and a permanent Chief Financial Officer. Following the appointment of a Chief Executive Officer, the Board expects that Mr. Koskinen will return to the position of non-executive Chairman of the Board.
 
  •  On March 18, 2009, the Federal Reserve announced that it was increasing its planned purchases of (i) our direct obligations and those of Fannie Mae and the FHLBs from $100 billion to $200 billion and (ii) mortgage-related securities issued by us, Fannie Mae and Ginnie Mae from $500 billion to $1.25 trillion. According to information provided by the Federal Reserve, it held $24.9 billion of our direct obligations and had net purchases of $163.1 billion of our mortgage-related securities under this program as of April 29, 2009.
 
  •  According to information provided by Treasury, it held $124.3 billion of mortgage-related securities issued by us and Fannie Mae as of March 31, 2009 under the purchase program it announced in September 2008.
 
  •  On March 31, 2009, we received $30.8 billion in funding from Treasury under the Purchase Agreement, which increased the aggregate liquidation preference of the senior preferred stock to $45.6 billion as of that date. On such date, we also paid dividends of $370 million in cash on the senior preferred stock to Treasury for the first quarter of 2009 at the direction of the Conservator.
 
  •  On April 28, 2009, the Obama Administration announced the details of its effort under the MHA Program to achieve greater affordability for homeowners by lowering payments on their second mortgages. This program provides for the modification or extinguishment of junior liens in cases in which the first mortgage has been modified under the MHA Program, and includes incentive payments to servicers and borrowers, as well as compensation to investors under certain circumstances. Incentive fees to a borrower whose junior mortgage has
 
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  been modified are expected to take the form of reduction of the outstanding principal amount of that borrower’s first mortgage. It is possible, but not certain, that we will have to pay these fees by reducing the outstanding principal of first mortgages that we own or guarantee. We directly own or guarantee an immaterial amount of second mortgages. We are still evaluating the potential impact of the program on our first mortgages in our single-family mortgage portfolio.
 
  •  On May 6, 2009, FHFA, acting on our behalf in its capacity as Conservator, and Treasury amended the Purchase Agreement to, among other items: (i) increase the funding available under the Purchase Agreement from $100 billion to $200 billion: (ii) increase the limit on our mortgage-related investments portfolio as of December 31, 2009 from $850 billion to $900 billion; and (iii) revise the limit on our aggregate indebtedness and the method of calculating such limit. The amendment also expands the category of persons covered by the restrictions on executive compensation contained in the Purchase Agreement. For more information, see “LIQUIDITY AND CAPITAL RESOURCES — Liquidity — Actions of Treasury, the Federal Reserve and FHFA.
 
To address our deficit in net worth as of March 31, 2009, FHFA has submitted a draw request, on our behalf, to Treasury under the Purchase Agreement in the amount of $6.1 billion. We expect to receive these funds by June 30, 2009. Upon funding of the $6.1 billion draw request:
 
  •  the aggregate liquidation preference on the senior preferred stock owned by Treasury will increase from $45.6 billion to $51.7 billion;
 
  •  the corresponding annual cash dividends payable to Treasury will increase to $5.2 billion, which exceeds our annual historical earnings in most periods; and
 
  •  the amount remaining under Treasury’s announced funding commitment will be $149.3 billion, which does not include the initial liquidation preference of $1 billion reflecting the cost of the initial funding commitment (as no cash was received).
 
Our implementation of the MHA Program requires us, in some cases, to modify loans when default is imminent even though the borrower’s mortgage payments are current. In our 2008 Annual Report, we disclosed the possibility that, if current loans were modified and were purchased from PC pools under this program, our guarantee might not be eligible for an exception from derivative accounting under SFAS 133, thereby requiring us to account for our guarantee as a derivative instrument. In April, we obtained confirmation from regulatory authorities of an interpretation that modifications of currently performing loans where default is reasonably foreseeable will not alter our ability to apply the exception from derivative accounting under SFAS 133. As a result, we will not recognize any pre-tax charge relating to the initial impact of accounting for our guarantee as a derivative. For a further discussion of this issue, see “BUSINESS — Our Business and Statutory Mission — Recent Developments Impacting Our Business” in our 2008 Annual Report.
 
We are dependent upon the continued support of Treasury and FHFA in order to continue operating our business. We also receive substantial support from the Federal Reserve. 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.
 
Under conservatorship, we have changed certain business practices to provide support for the mortgage market in a manner that serves public policy and other non-financial objectives but that may not contribute to profitability. Some of these changes increased our expenses or required us to forego revenue opportunities in the near term. It is not possible at present to estimate the extent to which these costs may be offset, if at all, by the prevention or reduction of potential future costs of loan defaults and foreclosures due to these changes in business practices.
 
For more information on the terms of the conservatorship, the powers of our Conservator and certain of the initiatives, programs and agreements described above, see “BUSINESS — Conservatorship and Related Developments” in our 2008 Annual Report.
 
Housing and Economic Conditions and Impact on First Quarter 2009 Results
 
Our financial results for the first quarter of 2009 reflect the continuing adverse conditions in the U.S. mortgage markets, which deteriorated dramatically during the last half of 2008 and have continued to deteriorate in 2009. As a result, we experienced significantly higher credit-related expenses for the first quarter of 2009 as compared to the first quarter of 2008. Our provision for credit losses was $8.8 billion in the first quarter of 2009 compared to $1.2 billion in the first quarter of 2008, principally due to increased estimates of incurred losses caused by the deteriorating economic conditions, evidenced by our increased rates of delinquency and foreclosure; increased mortgage loan loss severities;
 
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and, to a much lesser extent, concerns about the failure or potential failure of certain of our seller/servicer counterparties to perform under their recourse or repurchase obligations to us.
 
Home prices nationwide declined an estimated 1.4% in the first quarter of 2009 based on our own internal index, which is based on properties underlying our single-family mortgage portfolio. The percentage decline in home prices in the last twelve months has been particularly large in the states of California, Florida, Arizona and Nevada, where we have significant concentrations of mortgage loans. Unemployment rates also worsened significantly, and the national unemployment rate increased to 8.5% at March 31, 2009 as compared to 7.2% at December 31, 2008. However, certain states have experienced much higher unemployment rates, such as California, Florida, Nevada and Michigan, where the unemployment rate reached 11.2%, 9.7%, 10.4% and 12.6%, respectively, at March 31, 2009. Both consumer and business credit tightened considerably during the fourth quarter of 2008 and the first quarter of 2009, as financial institutions have been more cautious in their lending activities. Although there was improvement in credit and liquidity conditions toward the end of the quarter, there is a continuation of higher, or wide, credit spreads for both mortgage and corporate loans.
 
These macroeconomic conditions and other factors, such as our temporary suspensions of foreclosure transfers of occupied homes, contributed to a substantial increase in the number and aging of delinquent loans in our single-family mortgage portfolio during the first quarter of 2009. While temporary suspensions of foreclosure transfers reduced our charge-offs and REO activity during the first quarter of 2009, our provision for credit losses includes expected losses on those foreclosures currently suspended. We also observed a continued increase in market-reported delinquency rates for mortgages serviced by financial institutions, not only for subprime and Alt-A loans but also for prime loans, and we experienced an increase in delinquency rates for all product types during the first quarter of 2009. This delinquency data suggests that continuing home price declines and growing unemployment are significantly affecting behavior by a broader segment of mortgage borrowers. Additionally, as the slump in the U.S. housing market has persisted for more than a year, increasing numbers of borrowers that began with significant equity are now “underwater,” or owing more on their mortgage loans than their homes are currently worth. Our loan loss severities, or the average amount of recognized losses per loan, also continued to increase in the first quarter of 2009, especially in the states of California, Florida, Nevada and Arizona, where home price declines have been more severe and where we have significant concentrations of mortgage loans with higher average loan balances than in other states.
 
The continued deterioration in economic and housing market conditions during the first quarter of 2009 also led to a further decline in the performance of the non-agency mortgage-related securities in our mortgage-related investments portfolio. Furthermore, the mortgage-related securities backed by subprime, MTA, Alt-A and other loans, have significantly greater concentrations in the states that are undergoing the greatest stress, including California, Florida, Arizona and Nevada. As a result of these and other factors, we recognized $7.1 billion of other-than-temporary security impairments primarily on available-for-sale non-agency securities in the first quarter of 2009.
 
Consolidated Results of Operations
 
Net loss attributable to Freddie Mac was $9.9 billion and $151 million for the first quarters of 2009 and 2008, respectively. Net loss increased in the first quarter of 2009 compared to the first quarter of 2008, principally due to losses on investment activities, increased credit-related expenses, which consist of the provision for credit losses and REO operations expense, and increased losses on loans purchased. These loss and expense items for the three months ended March 31, 2009 were partially offset by higher net interest income and lower losses on our guarantee asset in the first quarter of 2009, compared to the first quarter of 2008. As a result of the net loss, at March 31, 2009, our liabilities exceeded our assets under GAAP and the Director of FHFA has submitted a draw request under the Purchase Agreement in the amount of $6.1 billion to Treasury. We expect to receive such funds by June 30, 2009.
 
Net interest income was $3.9 billion for the first quarter of 2009, compared to $798 million for the first quarter of 2008. As compared to the first quarter of 2008, we held higher amounts of fixed-rate agency mortgage-related securities in our mortgage-related investments portfolio and had significantly lower interest rates on our short- and long- term borrowings for the three months ended March 31, 2009.
 
Non-interest income (loss) was $(3.1) billion for the three months ended March 31, 2009, compared to non-interest income (loss) of $614 million for the three months ended March 31, 2008. The increase in non-interest loss in the first quarter of 2009 was primarily due to higher losses on investment activity, which were partially offset by lower losses on our guarantee asset. Increased losses on investment activity during the first quarter of 2009 were principally attributed to $7.1 billion of security impairments primarily recognized on available-for-sale non-agency mortgage-related securities backed by subprime, MTA and Alt-A and other loans during the quarter.
 
Non-interest expense for the three months ended March 31, 2009 and 2008 totaled $11.6 billion and $2.0 billion, respectively. This includes credit-related expenses of $9.1 billion and $1.4 billion for the three months ended March 31,
 
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2009 and 2008, respectively. The significant increase in our provision for credit losses was due to continued credit deterioration in our single-family credit guarantee portfolio, primarily from further increases in delinquency rates and higher loss severities on a per-property basis. Credit deterioration has been largely driven by declines in home prices and regional economic conditions. REO operations expense increased primarily as a result of higher foreclosure acquisition volume and higher losses on REO dispositions, partially offset by a decrease in market-based writedowns of existing REO inventory.
 
Non-interest expense, excluding credit-related expenses discussed above, for the three months ended March 31, 2009 totaled $2.5 billion compared to $535 million for the three months ended March 31, 2008. Losses on loans purchased increased to $2.0 billion for the three months ended March 31, 2009, compared to $51 million for the three months ended March 31, 2008, due to higher volumes of loan modifications of loans in our PCs in the first quarter of 2009, which will cause our purchases of these loans out of the PCs to increase. Administrative expenses totaled $372 million for the three months ended March 31, 2009, down from $397 million for the three months ended March 31, 2008, primarily due to a reduction in the use of consultants and other cost reduction measures during the first quarter of 2009 compared to the first quarter of 2008.
 
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 segment are included in the All Other category. We manage and evaluate performance of the segments and All Other using a Segment Earnings approach, subject to the conduct of our business under the direction of the Conservator.
 
In managing our business, we present the operating performance of our segments using Segment Earnings. Segment Earnings differs significantly from, and should not be used as a substitute for, net loss as determined in accordance with GAAP.
 
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 with Treasury, may negatively impact our Segment Earnings and the performance of individual segments. See “MD&A — EXECUTIVE SUMMARY — Segment Earnings” in our 2008 Annual Report.
 
Segment Earnings is calculated for the segments by adjusting GAAP net loss for certain investment-related activities and credit guarantee-related activities. Segment Earnings includes certain reclassifications among income and expense categories that have no impact on net loss but provide us with a meaningful metric to assess the performance of each segment and our company as a whole. Segment Earnings does not include the effect of the establishment of the valuation allowance against our deferred tax assets, net. For more information on Segment Earnings, including the adjustments made to GAAP net loss to calculate Segment Earnings and the limitations of Segment Earnings as a measure of our financial performance, see “CONSOLIDATED RESULTS OF OPERATIONS — Segment Earnings” and “NOTE 16: SEGMENT REPORTING” to our consolidated financial statements.
 
Table 1 presents Segment Earnings by segment and the All Other category and includes a reconciliation of Segment Earnings to net loss prepared in accordance with GAAP.
 
Table 1 — Reconciliation of Segment Earnings to GAAP Net Loss
 
                 
    Three Months Ended
 
    March 31,  
    2009     2008  
    (in millions)  
 
Segment Earnings, net of taxes:
               
Investments
  $ (1,572 )   $ 113  
Single-family Guarantee
    (5,485 )     (458 )
Multifamily
    140       98  
All Other
          (4 )
Reconciliation to GAAP net loss:
               
Derivative- and foreign currency denominated debt-related adjustments
    1,558       (1,194 )
Credit guarantee-related adjustments
    (1,398 )     (174 )
Investment sales, debt retirements and fair value-related adjustments
    28       1,525  
Fully taxable-equivalent adjustments
    (100 )     (110 )
                 
Total pre-tax adjustments
    88       47  
Tax-related adjustments(1)
    (3,022 )     53  
                 
Total reconciling items, net of taxes
    (2,934 )     100  
                 
Net loss attributable to Freddie Mac
  $ (9,851 )   $ (151 )
                 
(1)  Includes a non-cash charge related to the establishment of a partial valuation allowance against our deferred tax assets, net of approximately $3.1 billion that is not included in Segment Earnings for the three months ended March 31, 2009.
 
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Consolidated Balance Sheets Analysis
 
During the first quarter of 2009, total assets increased by $96 billion to $947 billion while total liabilities increased by $71.4 billion to $953 billion. Total equity (deficit) was $(6.0) billion at March 31, 2009 compared to $(30.6) billion at December 31, 2008.
 
Our cash and other investments portfolio increased by $35.1 billion during the first quarter of 2009 to $99.4 billion, with a $23.9 billion increase in securities purchased under agreements to resell and a $8.4 billion increase in highly liquid shorter-term cash and cash equivalent assets. On March 31, 2009, we received $30.8 billion from Treasury under the Purchase Agreement pursuant to a draw request that FHFA submitted to Treasury on our behalf. The unpaid principal balance of our mortgage-related investments portfolio increased 8%, or $62.3 billion, during the first quarter of 2009 to $867.1 billion. The increase in our mortgage-related investments portfolio resulted from our acquiring and holding increased amounts of mortgage loans and mortgage-related securities to provide additional liquidity to the mortgage market, and, to a lesser degree, more favorable investment opportunities for agency securities as a result of a broad market decline driven by a lack of liquidity in the market. Deferred tax assets, net decreased $2.1 billion during the first quarter of 2009 to $13.3 billion, primarily attributable to the decline in the net loss in AOCI, net of taxes, as discussed below.
 
Short-term debt increased by $18.2 billion during the first quarter of 2009 to $453.3 billion, and long-term debt increased by $48.3 billion to $456.2 billion. The increase in our long-term debt reflects the improvement during the first quarter of spreads on our debt and our increased access to the debt markets as a result of decreased interest rates and the Federal Reserve’s purchases in the secondary market of our long-term debt under its purchase program. Additionally, our reserve for guarantee losses on PCs increased during the quarter by $6.9 billion to $21.8 billion as a result of probable incurred losses, primarily attributable to the overall macroeconomic environment with declining home values, higher mortgage delinquency rates, and increasing unemployment.
 
Total equity (deficit) of $(6.0) billion at March 31, 2009 reflects the $30.8 billion in funding from Treasury we received on that date pursuant to a draw under the Purchase Agreement, and a $10.2 billion net loss attributable to common stockholders for the first quarter of 2009. In addition, the net loss in AOCI, net of taxes, declined by $4.1 billion, resulting largely from unrealized gains on our agency mortgage-related securities and the recognition of certain unrealized losses as other-than-temporary impairments on our non-agency mortgage-related securities.
 
Consolidated Fair Value Balance Sheets Analysis
 
Our consolidated fair value measurements are a component of our risk management processes, as we use daily estimates of the changes in fair value to calculate our PMVS and duration gap measures. Included in our fair value results for the three months ended March 31, 2009 are the funds received from Treasury of $30.8 billion under the Purchase Agreement.
 
During the three months ended March 31, 2009, the fair value of net assets, before capital transactions, decreased by $15.7 billion compared to a $17.4 billion decrease during the three months ended March 31, 2008. The fair value of net assets as of March 31, 2009 was $(80.9) billion, compared to $(95.6) billion as of December 31, 2008. The decline in the fair value of our net assets, before capital transactions, during the first quarter of 2009 principally related to an increase in the fair value of our single-family guarantee obligation primarily due to the declining credit environment. Included in the reduction of the fair value of net assets is $6.5 billion related to our partial valuation allowance for our deferred tax assets, net for the three months ended March 31, 2009.
 
Liquidity and Capital Resources
 
Liquidity
 
During the first quarter of 2009, the Federal Reserve was an active purchaser in the secondary market of our long-term debt under its purchase program as discussed below and, as a result, spreads on our debt and access to the debt markets improved toward the end of the quarter. Prior to that time and commencing in the second half of 2008, we had experienced less demand for our debt securities, as reflected in wider spreads on our term and callable debt. This resulted in overall deterioration in our access to unsecured medium and long term debt markets to fund our purchases of mortgage assets and to refinance maturing debt. Therefore, we have been required to refinance our debt on a more frequent basis, exposing us to an increased risk of insufficient demand and adverse credit market conditions. We have also had to expand our use of derivatives. However, the use of these derivatives may expose us to additional counterparty credit risk. Because we use a mix of pay-fixed interest rate swaps and short-term debt to synthetically create the substantive economic equivalent of various longer-term fixed rate debt funding structures, our business results would be adversely affected if our access to the derivative markets were disrupted. See “MD&A — LIQUIDITY AND CAPITAL RESOURCES — Liquidity” in our 2008 Annual Report for more information on our debt funding
 
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activities and risks posed by current market challenges and “RISK FACTORS” in our 2008 Annual Report for a discussion of the risks to our business posed by our reliance on the issuance of debt to fund our operations.
 
Treasury and the Federal Reserve have taken a number of actions affecting our access to debt financing, including the following:
 
  •  Treasury entered into the Lending Agreement with us on September 18, 2008, under which we may request funds through December 31, 2009. As of March 31, 2009, we had not borrowed against the Lending Agreement.
 
  •  The Federal Reserve has implemented a program to purchase, in the secondary market, up to $200 billion in direct obligations of Freddie Mac, Fannie Mae, and the FHLBs.
 
The Lending Agreement is scheduled to expire on December 31, 2009. Upon expiration, we will not have a liquidity backstop available to us (other than Treasury’s ability to purchase up to $2.25 billion of our obligations under its permanent authority) if we are unable to obtain funding from issuances of debt or other conventional sources. Under such circumstances, our long-term liquidity contingency strategy is currently dependent on extension of the Lending Agreement beyond December 31, 2009 which will require amendment of existing law.
 
Our annual dividend obligation on the senior preferred stock exceeds our annual historical earnings in most periods, and will contribute to increasingly negative cash flows in future periods, if we continue to pay the dividends in cash. In addition, the continuing deterioration in the financial and housing markets and further net losses in accordance with GAAP will make it more likely that we will continue to have additional draws under the Purchase Agreement in future periods, which will make it more difficult to pay senior preferred dividends in cash in the future.
 
Capital Adequacy
 
On October 9, 2008, FHFA announced that it was suspending capital classification of us during conservatorship in light of the Purchase Agreement.
 
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, up to the maximum aggregate amount that may be funded under the Purchase Agreement. At March 31, 2009, our liabilities exceeded our assets by $6.01 billion and FHFA has submitted a draw request, on our behalf, to Treasury under the Purchase Agreement in the amount of $6.1 billion. Our draw request is rounded up to the nearest $100 million. Following receipt of this pending draw, the aggregate liquidation preference of the senior preferred stock will increase to $51.7 billion and the amount remaining under the Treasury’s funding agreement will be $149.3 billion.
 
Treasury will be entitled to annual cash dividends of $5.2 billion based on this aggregate liquidation preference. This dividend obligation, combined with potentially substantial commitment fees payable to Treasury starting in 2010 (the amounts of which have not yet been determined) and limited flexibility to pay down draws under the Purchase Agreement, will have an adverse impact on our future financial position and net worth. In addition, we expect to make additional draws under the Purchase Agreement in future periods, due to a variety of factors that could materially affect the level and volatility of our net worth. For instance, if financial and housing markets conditions continue to deteriorate, resulting in further GAAP net losses, we will likely need to take additional draws, which would increase our senior preferred dividend obligation. For additional information concerning the potential impact of the Purchase Agreement, including taking additional draws, see “RISK FACTORS” in our 2008 Annual Report. For additional information on our capital management during conservatorship and factors that could affect the level and volatility of our net worth, see “LIQUIDITY AND CAPITAL RESOURCES — Capital Adequacy” and “NOTE 9: REGULATORY CAPITAL” to our consolidated financial statements.
 
Risk Management
 
Credit Risks
 
Our total mortgage portfolio is subject primarily to two types of credit risk: mortgage credit risk and institutional credit risk. 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 PC, Structured Security or other mortgage-related guarantee. 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 and credit market conditions deteriorated during 2008 and continued to deteriorate in the first quarter of 2009. These conditions were brought about by a number of factors, which have increased our exposure to both
 
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mortgage credit and institutional credit risks. Factors that have negatively affected the mortgage and credit markets included:
 
  •  the effect of changes in other financial institutions’ underwriting standards in past years, which allowed for the origination of significant amounts of new higher-risk mortgage products in 2006 and 2007 and the early months of 2008. These mortgages have performed particularly poorly during the current housing and economic downturn, and have defaulted at historically high rates. However, even with the tightening of underwriting standards during 2008, economic conditions will continue to negatively impact recent originations;
 
  •  increases in unemployment;
 
  •  declines in home prices nationally;
 
  •  higher incidence of institutional insolvencies;
 
  •  higher levels of foreclosures and delinquencies;
 
  •  significant volatility in interest rates;
 
  •  significantly lower levels of liquidity in institutional credit markets;
 
  •  wider credit spreads;
 
  •  rating agency downgrades of mortgage-related securities and financial institutions; and
 
  •  declines in market rents and increased vacancy rates affecting multifamily housing operators and investors.
 
The deteriorating economic conditions discussed above and the effect of any current or future government actions to remedy them have increased the uncertainty of future economic conditions, including unemployment rates and home price changes. While our forecast using our own home price index is for a national decline of 5% to 10% in 2009, there continues to be divergence among economists about the amount and timeframe of decline that may occur. The following statistics illustrate the credit deterioration of loans in our single-family mortgage portfolio, which consists of single-family mortgage loans in our mortgage-related investments portfolio and those backing our PCs, Structured Securities and other mortgage-related guarantees.
 
Table 2 — Credit Statistics, Single-Family Mortgage Portfolio(1)
 
                                         
    As of
    03/31/2009   12/31/2008   09/30/2008   06/30/2008   03/31/2008
 
Delinquency rate(2)
    2.29 %     1.72 %     1.22 %     0.93 %     0.77 %
Non-performing assets (in millions)(3)
  $ 63,326     $ 47,959     $ 35,497     $ 27,480     $ 22,379  
REO inventory (in units)
    29,145       29,340       28,089       22,029       18,419  
                                         
                                         
    For the Three Months Ended
    03/31/2009   12/31/2008   09/30/2008   06/30/2008   03/31/2008
        (in units, unless noted)    
 
Loan modifications(4)
    24,623       17,695       8,456       4,687       4,246  
REO acquisitions
    13,988       12,296       15,880       12,410       9,939  
REO disposition severity ratio(5)
    36.7 %     32.8 %     29.3 %     25.2 %     21.4 %
Single-family credit losses (in millions)(6)
  $ 1,318     $ 1,151     $ 1,270     $ 810     $ 528  
(1)  Consists of single-family mortgage loans for which we actively manage credit risk, which are those loans held in our mortgage-related investments portfolio as well as those loans underlying our PCs, Structured Securities and other mortgage-related guarantees and excluding certain Structured Transactions and that portion of our Structured Securities that are backed by Ginnie Mae Certificates.
(2)  Single-family delinquency rate information is based on the number of loans that are 90 days or more past due and those in the process of foreclosure, excluding Structured Transactions. Mortgage loans whose contractual terms have been modified under agreement with the borrower are not included if the borrower is less than 90 days delinquent under the modified terms. Delinquency rates for our single-family mortgage portfolio including Structured Transactions were 2.41% and 1.83% at March 31, 2009 and December 31, 2008, respectively. See “RISK MANAGEMENT — Credit Risks — Credit Performance — Delinquencies” for further information.
(3)  Includes those loans in our single-family mortgage portfolio, based on unpaid principal balances, that are past due for 90 days or more or where contractual terms have been modified as a troubled debt restructuring. Also includes the carrying value of single-family REO properties.
(4)  Consist of modifications under agreement with the borrower. Excludes forbearance agreements, which are made in certain circumstances and under which reduced or no payments are required during a defined period, as well as repayment plans, which are separate agreements with the borrower to repay past due amounts and return to compliance with the original terms.
(5)  Calculated as the aggregate amount of our losses recorded on disposition of REO properties during the respective quarterly period divided by the aggregate unpaid principal balances of the related loans with the borrowers. The amount of losses recognized on disposition of the properties is equal to the amount by which the unpaid principal balance of loans exceeds the amount of net sales proceeds from disposition of the properties. Excludes other related credit losses, such as property maintenance and costs, as well as related recoveries from credit enhancements, such as mortgage insurance.
(6)  Consists of REO operations expense plus charge-offs, net of recoveries from third-party insurance and other credit enhancements. Excludes other market-based fair value losses, such as losses on loans purchased and other-than-temporary impairments of securities. See “RISK MANAGEMENT — Credit Risks — Credit Performance — Credit Loss Performance” for further information.
 
As the table above illustrates, we have experienced continued deterioration in the performance of our single-family mortgage portfolio due to several factors, including the following:
 
  •  Reflecting the expansion of the housing and economic downturn to a broader group of borrowers, in the first quarter of 2009 we experienced a significant increase in delinquency rate of fixed-rate amortizing loans, which
 
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  represents a more traditional mortgage product. The delinquency rate for single-family fixed-rate amortizing loans increased to 2.25% at March 31, 2009 as compared to 1.69% at December 31, 2008.
 
  •  Certain loan groups within the single-family mortgage portfolio, such as Alt-A and interest-only loans, as well as 2006 and 2007 vintage loans, continue to be larger contributors to our worsening credit statistics. These loans have been more affected by macroeconomic factors, such as recent declines in home prices, which have resulted in erosion in the borrower’s equity. These loans are also concentrated in the West region. The West region comprised 26% of the unpaid principal balances of our single-family mortgage portfolio as of March 31, 2009, but accounted for 46% of our REO acquisitions in the first quarter of 2009, based on the related loan amount prior to our acquisition. In addition, states in the West region (especially California, Arizona and Nevada) and Florida tend to have higher average loan balances than the rest of the U.S. and were most affected by the steep home price declines. California and Florida were the states with the highest credit losses in the first quarter of 2009 comprising 44% of our single-family credit losses on a combined basis.
 
We have taken several steps during 2008 and continuing in 2009 designed to support homeowners and mitigate the growth of our non-performing assets, some of which were undertaken at the direction of FHFA. We continue to expand our efforts to increase our use of foreclosure alternatives, and have expanded our staff to assist our seller/servicers in completing loan modifications and other outreach programs with the objective of keeping more borrowers in their homes. We expect that many of these efforts will have a negative impact on our financial results. See “MD&A — EXECUTIVE SUMMARY — Credit Overview” in the 2008 Annual Report for more information. Some recent developments and initiatives include:
 
  •  We completed approximately 40,000 workout plans and other agreements with borrowers out of the estimated 349,000 single-family loans in our single-family mortgage portfolio that were or became delinquent (90 days or more past due or were in foreclosure) during the first quarter of 2009.
 
  •  As discussed above, on March 4, 2009, we announced two new mortgage initiatives under the MHA Program.
 
  •  On March 5, 2009, we announced a plan to begin leasing our REO property inventory on a month-to-month basis to qualified tenants and former owners of these properties in order to provide affected families with additional time to determine their options.
 
These activities and those discussed in our 2008 Annual Report will create fluctuations in our credit statistics. For example, beginning in November 2008, we implemented a temporary suspension of foreclosure transfers of occupied homes. This has reduced the rate of growth of our REO inventory and of charge-offs, a component of our credit losses, since November 2008 but caused our reserve for guarantee losses to rise. This also has created an increase in the number of delinquent loans that remain in our single-family mortgage portfolio, which results in higher reported delinquency rates than without the suspension of foreclosure transfers. In addition, the implementation of the MHA Program in the second quarter of 2009 may cause the number of our forbearance agreements, modifications and related losses, such as losses on loans purchased, to rise. It is not possible at present to estimate the extent to which these costs may be offset, if at all, by the prevention or reduction of potential future costs of loan defaults and foreclosures due to these changes in business practices.
 
Our investments in non-agency mortgage-related securities, which are primarily backed by subprime, MTA and Alt-A loans, also were affected by the deteriorating credit conditions in the last half of 2008 and continuing into the first three months of 2009. The table below illustrates the increases in delinquency rates for subprime first lien, MTA and Alt-A loans that back the non-agency mortgage-related securities we own. Given the recent deterioration in the economic outlook and the forecast for continued home price declines in 2009, the performance of the loans backing these securities could continue to deteriorate.
 
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Table 3 — Credit Statistics, Non-Agency Mortgage-Related Securities Backed by Subprime, MTA and Alt-A Loans
 
                                         
    As of
    03/31/2009   12/31/2008   09/30/2008   06/30/2008   03/31/2008
 
Delinquency rates:(1)
                                       
Non-agency mortgage-related securities backed by:
                                       
Subprime first lien
    42 %     38 %     35 %     31 %     27 %
MTA
    36       30       24       18       12  
Alt-A(2)
    20       17       14       12       10  
Cumulative collateral loss:(3)
                                       
Non-agency mortgage-related securities backed by:
                                       
Subprime first lien
    7 %     6 %     4 %     2 %     1 %
MTA
    2       1       1              
Alt-A(2)
    2       1       1              
Gross unrealized losses, pre-tax (in millions)(4)(5)
  $ 27,475     $ 30,671     $ 22,411     $ 25,858     $ 28,065  
Impairment loss for the three months ended (in millions)(5)
  $ 6,956     $ 6,794     $ 8,856     $ 826     $  
(1)  Based on the number of loans that are 60 days or more past due. Mortgage loans whose contractual terms have been modified under agreement with the borrower are not included if the borrower is less than 60 days delinquent under the modified terms.
(2)  Excludes non-agency mortgage-related securities backed by other loans primarily comprised of securities backed by home equity lines of credit.
(3)  Based on the actual losses incurred on the collateral underlying these securities. Actual losses incurred on the securities that we hold are less than the losses on the underlying collateral as presented in this table, as the securities we hold include significant credit enhancements, particularly through subordination.
(4)  Gross unrealized losses, pre-tax, represent the aggregate of the amount by which amortized cost exceeds fair value measured at the individual lot level.
(5)  Includes mortgage-related securities backed by subprime, MTA, Alt-A and other loans.
 
We held unpaid principal balances of $114.4 billion of non-agency mortgage-related securities backed by subprime, MTA, Alt-A and other loans, in our mortgage-related investments portfolio as of March 31, 2009, compared to $119.5 billion as of December 31, 2008. We received monthly remittances of principal repayments on these securities of $5.1 billion during the first quarter of 2009, representing a partial return of our investment in these securities. We recognized impairment losses on non-agency mortgage-related securities backed by subprime, MTA, Alt-A and other loans of approximately $6.9 billion for the first quarter of 2009. As of March 31, 2009, we recognized an aggregate of $23.4 billion of impairment losses on these non-agency mortgage-related securities since the second quarter of 2008, of which $13.8 billion is expected to be recovered. See “NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES — Recently Issued Accounting Standards, Not Yet Adopted — Additional Guidance and Disclosures for Fair Value Measurements and Change in the Impairment Model for Debt Securities — Change in the Impairment Model for Debt Securities” to our consolidated financial statements for information on how other-than-temporary impairments will be recorded on our financial statements commencing in the second quarter of 2009. Gross unrealized losses, pre-tax, on securities backed by subprime, MTA, Alt-A and other loans reflected in AOCI, decreased by $3.2 billion to $27.5 billion at March 31, 2009. This decrease includes the impact of $6.9 billion of impairment losses recorded on non-agency mortgage-related securities during the first quarter of 2009, which more than offset the declines in non-agency mortgage asset prices that occurred during the first quarter of 2009. We believe the declines in the fair value of the non-agency mortgage-related securities are attributable to poor underlying collateral performance and decreased liquidity and larger risk premiums in the mortgage market.
 
Interest Rate and Other Market Risks
 
Our mortgage-related investments portfolio activities expose us to interest-rate risk and other market risks arising primarily from the uncertainty as to when borrowers will pay the outstanding principal balance of mortgage loans that are held or underlie securities in our mortgage-related investments portfolio, known as prepayment risk, and the resulting potential mismatch in the timing of our receipt of cash flows related to our assets versus the timing of payment of cash flows related to our liabilities. As interest rates fluctuate, we use derivatives to adjust the interest-rate characteristics of our debt funding in order to more closely match those of our assets.
 
The recent market environment has been increasingly volatile. Throughout 2008 and into 2009, we adjusted our interest rate risk models to reflect rapidly changing market conditions. In particular, prepayment models were dynamically adjusted to more accurately reflect the current environment. Due to extreme spread volatility, we adjusted interest-rate risk hedging methodologies to more accurately attribute OAS spread volatility and interest rate risk.
 
Operational Risks
 
Operational risks are inherent in all of our business activities and can become apparent in various ways, including accounting or operational errors, business interruptions, fraud, failures of the technology used to support our business activities, difficulty in filling executive officer vacancies and other operational challenges from failed or inadequate internal controls. These operational risks may expose us to financial loss, interfere with our ability to sustain timely
 
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financial reporting, or result in other adverse consequences. Management of our operational risks takes place through the enterprise risk management framework, with the business areas retaining primary responsibility for identifying, assessing and reporting their operational risks.
 
As a result of management’s evaluation of our disclosure controls and procedures, our Interim Chief Executive Officer, who is also performing the functions of principal financial officer on an interim basis, has concluded that our disclosure controls and procedures were not effective as of March 31, 2009, at a reasonable level of assurance. We are continuing to work to improve our financial reporting governance process and remediate material weaknesses and other deficiencies in our internal controls. Although we continue to make progress on our remediation plans, our material weaknesses have not been fully remediated at this time. In view of our mitigating activities, including our remediation efforts through March 31, 2009, we believe that our interim consolidated financial statements for the quarter ended March 31, 2009, have been prepared in conformity with GAAP.
 
Off-Balance Sheet Arrangements
 
We enter into certain business arrangements that are not recorded on our consolidated balance sheets or may be recorded in amounts that differ from the full contract or notional amount of the transaction. Most of these arrangements relate to our financial guarantee and securitization activity for which we record guarantee assets and obligations, but the related securitized assets are owned by third parties. These off-balance sheet arrangements may expose us to potential losses in excess of the amounts recorded on our consolidated balance sheets.
 
Our maximum potential off-balance sheet exposure to credit losses relating to our PCs, Structured Securities and other mortgage-related guarantees is primarily represented by the unpaid principal balance of the related loans and securities held by third parties, which was $1,379 billion and $1,403 billion at March 31, 2009 and December 31, 2008, respectively. Based on our historical credit losses, which in 2008 averaged approximately 20.1 basis points of the aggregate unpaid principal balance of our PCs and Structured Securities, we do not believe that the maximum exposure is representative of our actual exposure on these guarantees.
 
Legislative and Regulatory Matters
 
Pending Legislation
 
On May 7, 2009, the House of Representatives passed a bill that, among other things, would require originators to retain a level of credit risk for certain mortgages that they sell, enhance consumer disclosures, impose new servicing standards and allow for assignee liability. If enacted, the legislation would impact Freddie Mac and the overall mortgage market. However, it is unclear when, or if, the Senate will consider comparable legislation.
 
The House of Representatives has passed several bills that would impact executive and employee compensation paid by companies receiving federal financial assistance, including Freddie Mac. One bill would impose a 90% tax on the aggregate bonuses received by certain executives and employees of such companies. Another bill would prohibit “unreasonable and excessive” compensation by certain companies that have received federal financial assistance and prohibit these companies from paying non-performance based bonuses. Under this bill, Treasury would be required to establish certain standards regarding compensation payments. It is unclear when, or if, the Senate will consider comparable legislation. The adoption of any legislation that results in a significant tax on compensation or that imposes significant compensation restrictions would likely have an adverse impact on Freddie Mac’s ability to recruit and retain executives and employees whose compensation would be limited or reduced as a result of such legislation.
 
In March 2009, the House of Representatives passed a housing-related bill that, among other items, includes provisions intended to stem the rate of foreclosures by allowing bankruptcy judges to modify the terms of mortgages on principal residences for borrowers in Chapter 13 bankruptcy. Specifically, the House bill would allow judges to adjust interest rates, extend repayment terms and lower the outstanding principal amount to the current estimated fair value of the underlying property. On May 6, 2009, the Senate passed a similar housing-related bill that did not include bankruptcy cramdown provisions. It is unclear when, or if, the Senate will reconsider other alternative bankruptcy-related legislation.
 
Affordable Housing Goals
 
In March 2009, we reported to FHFA that we did not meet the 2008 housing goals or home purchase subgoals, but that we did meet the multifamily special affordable target. We believe that achievement of the goals and subgoals was infeasible in 2008 under the terms of the Federal Housing Enterprises Financial Safety and Soundness Act of 1992, and accordingly submitted an infeasibility analysis to FHFA. In March 2009, FHFA notified us that it had determined that achievement of the housing goals and home purchase subgoals was infeasible, with the exception of the underserved areas goal. Based on our financial condition in 2008, FHFA concluded that achievement by us of the
 
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underserved areas goal was feasible, but challenging. Accordingly, FHFA decided not to require us to submit a housing plan.
 
Under the Reform Act, the annual housing goals for Freddie Mac and Fannie Mae in place for 2008 remain in effect for 2009, except that within 270 days from July 30, 2008, FHFA must review the 2009 housing goals to determine the feasibility of such goals in light of current market conditions and, after seeking public comment for up to 30 days, FHFA may make adjustments to the 2009 goals consistent with market conditions.
 
On April 28, 2009, FHFA announced that it has analyzed current market conditions and is issuing and seeking comments on a proposed rule that would adjust the affordable housing goal and home purchase subgoal levels for 2009. As proposed, Freddie Mac’s goals and subgoals for 2009 would be as follows:
 
Table 4 — Housing Goals and Home Purchase Subgoals for 2009(1)
 
         
    Housing Goals
 
Low- and moderate-income goal
    51 %
Underserved areas goal
    37  
Special affordable goal
    23  
Multifamily special affordable volume target (in billions)
  $ 3.92  
         
         
    Home Purchase
    Subgoals
 
Low- and moderate-income subgoal
    40 %
Underserved areas subgoal
    30  
Special affordable subgoal
    14  
(1)  An individual mortgage may qualify for more than one of the goals or subgoals. Each of the goal and subgoal percentages will be determined independently and cannot be aggregated to determine a percentage of total purchases that qualifies for these goals or subgoals.
 
The proposed rule would permit loans we own or guarantee that are modified in accordance with the MHA Program to be treated as mortgage purchases and count toward the housing goals. In addition, the proposed rule would exclude from the 2009 housing goals loans with original principal balances that exceed the base nationwide conforming loan limits (e.g., $417,000 for a one-unit single-family property) in certain high-cost areas and exceed 150% of the nationwide conforming loan limits in Alaska, Guam, Hawaii and the Virgin Islands.
 
Effective beginning calendar year 2010, the Reform Act requires that FHFA establish single-family and multifamily annual affordable housing goals by regulation.
 
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SELECTED FINANCIAL DATA(1)
 
                 
    For the Three Months
 
    Ended March 31,  
    2009     2008  
    (dollars in millions, except
 
    share related amounts)  
 
Statement of Operations Data
               
Net interest income
  $ 3,859     $ 798  
Non-interest income (loss)
    (3,088 )     614  
Non-interest expense
    (11,559 )     (1,983 )
Net loss attributable to Freddie Mac
    (9,851 )     (151 )
Net loss attributable to common stockholders
    (10,229 )     (424 )
Per common share data:
               
Earnings (loss):
               
Basic
    (3.14 )     (0.66 )
Diluted
    (3.14 )     (0.66 )
Cash common dividends
          0.25  
Weighted average common shares outstanding (in thousands):(2)
               
Basic
    3,255,718       646,338  
Diluted
    3,255,718       646,338  
                 
                 
    March 31,
    December 31,
 
    2009     2008  
    (dollars in millions)  
 
Balance Sheet Data
               
Total assets
  $ 946,950     $ 850,963  
Short-term debt
    453,312       435,114  
Long-term senior debt
    451,690       403,402  
Long-term subordinated debt
    4,509       4,505  
All other liabilities
    43,447       38,576  
Total equity (deficit)
    (6,008 )     (30,634 )
Portfolio Balances
               
Mortgage-related investments portfolio(3)
    867,104       804,762  
Total PCs and Structured Securities issued(4)
    1,834,820       1,827,238  
Total mortgage portfolio
    2,246,503       2,207,476  
Non-performing assets
    63,845       48,385  
                 
                 
    For the Three Months
 
    Ended March 31,  
    2009     2008  
 
Ratios
               
Return on average assets(5)
    (4.4 )%     (0.1 )%
Non-performing assets ratio(6)
    3.3       1.2  
Return on common equity(7)
    N/A       (23.3 )
Return on total Freddie Mac stockholders’ equity(8)
    N/A       (2.8 )
Dividend payout ratio on common stock(9)
    N/A       N/A  
Equity to assets ratio(10)
    (2.0 )     2.7  
Preferred stock to core capital ratio(11)
    N/A       36.8  
 (1)  See “NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES — Change in Accounting Principles” to our consolidated financial statements for information regarding accounting changes impacting the current period. See “NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES — Recently Adopted Accounting Standards” in our 2008 Annual Report for information regarding accounting changes impacting previously reported results.
 (2)  For the three months ended March 31, 2009, 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. This warrant is included in basic earnings per share for the first quarter of 2009, because it is unconditionally exercisable by the holder at a cost of $.00001 per share.
 (3)  The mortgage-related investments portfolio presented on our consolidated balance sheets differs from the mortgage-related investments portfolio in this table because the consolidated balance sheet amounts include valuation adjustments, discounts, premiums and other deferred balances. See “CONSOLIDATED BALANCE SHEETS ANALYSIS — Table 19 — Characteristics of Mortgage Loans and Mortgage-Related Securities in our Mortgage-Related Investments Portfolio” for more information.
 (4)  Includes PCs and Structured Securities that are held in our mortgage-related investments portfolio. See “OUR PORTFOLIOS — Table 52 — Freddie Mac’s Total Mortgage Portfolio and Segment Portfolio Composition” for the composition of our total mortgage portfolio. Excludes Structured Securities for which we have resecuritized our PCs and Structured Securities. These resecuritized securities do not increase our credit-related exposure and consist of single-class Structured Securities backed by PCs, REMICs, and principal-only strips. The notional balances of interest-only strips are excluded because this line item is based on unpaid principal balance. Includes other guarantees issued that are not in the form of a PC, such as long-term standby commitments and credit enhancements for multifamily housing revenue bonds.
 (5)  Ratio computed as annualized net loss attributable to Freddie Mac divided by the simple average of the beginning and ending balances of total assets.
 (6)  Ratio computed as non-performing assets divided by the ending unpaid principal balances of our total mortgage portfolio, excluding non-Freddie Mac securities.
 (7)  Ratio computed as annualized net 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 computed for periods in which Total Freddie Mac stockholders’ equity (deficit) is less than zero.
 (8)  Ratio computed as annualized net (loss) attributable to Freddie Mac divided by the simple average of the beginning and ending balances of total Freddie Mac stockholders’ equity (deficit). Ratio is not computed for periods in which total Freddie Mac stockholders’ equity (deficit) is less than zero.
 (9)  Ratio computed as common stock dividends declared divided by net loss attributable to common stockholders. Ratio is not computed for periods in which we report a net loss attributable to common stockholders.
(10)  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.
(11)  Ratio computed as preferred stock (excluding senior preferred stock), at redemption value divided by core capital. Senior preferred stock does not meet the statutory definition of core capital. Ratio is not computed for periods in which core capital is less than zero. See “NOTE 9: REGULATORY CAPITAL” to our consolidated financial statements for more information regarding core capital.
 
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CONSOLIDATED RESULTS OF OPERATIONS
 
The following discussion of our consolidated results of operations should be read in conjunction with our consolidated financial statements including the accompanying notes. Also see “CRITICAL ACCOUNTING POLICIES AND ESTIMATES” for more information concerning our more significant accounting policies and estimates applied in determining our reported financial position and results of operations.
 
Table 5 — Summary Consolidated Statements of Operations — GAAP Results
 
                 
    Three Months Ended
 
    March 31,  
    2009     2008  
    (in millions)  
 
Net interest income
  $ 3,859     $ 798  
Non-interest income (loss):
               
Management and guarantee income
    780       789  
Gains (losses) on guarantee asset
    (156 )     (1,394 )
Income on guarantee obligation
    910       1,169  
Derivative gains (losses)
    181       (245 )
Gains (losses) on investment activity
    (4,944 )     1,219  
Gains (losses) on debt recorded at fair value
    467       (1,385 )
Gains (losses) on debt retirement
    (104 )     305  
Recoveries on loans impaired upon purchase
    50       226  
Low-income housing tax credit partnerships
    (106 )     (117 )
Trust management income (expense)
    (207 )     3  
Other income
    41       44  
                 
Non-interest income (loss)
    (3,088 )     614  
                 
Non-interest expense
    (11,559 )     (1,983 )
                 
Loss before income tax benefit
    (10,788 )     (571 )
Income tax benefit
    937       422  
                 
Net loss
  $ (9,851 )   $ (149 )
Less: Net (income) attributable to noncontrolling interest
          (2 )
                 
Net loss attributable to Freddie Mac
  $ (9,851 )   $ (151 )
                 
 
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Net Interest Income
 
Table 6 presents an analysis of net interest income, including average balances and related yields earned on assets and incurred on liabilities.
 
Table 6 — Net Interest Income/Yield and Average Balance Analysis
 
                                                 
    Three Months Ended March 31,  
    2009     2008  
          Interest
                Interest
       
    Average
    Income
    Average
    Average
    Income
    Average
 
    Balance(1)(2)     (Expense)(1)     Rate     Balance(1)(2)     (Expense)(1)     Rate  
    (dollars in millions)  
 
Interest-earning assets:
                                               
Mortgage loans(3)
  $ 118,555     $ 1,580       5.33 %   $ 84,291     $ 1,243       5.90 %
Mortgage-related securities
    698,464       8,760       5.02       628,721       8,133       5.17  
                                                 
Total mortgage-related investments portfolio
    817,019       10,340       5.06       713,012       9,376       5.26  
Non-mortgage-related securities
    11,197       211       7.53       30,565       313       4.10  
Cash and cash equivalents
    49,932       76       0.61       8,891       88       3.90  
Federal funds sold and securities purchased under agreements to resell
    33,605       18       0.22       14,435       119       3.31  
                                                 
Total interest-earning assets
    911,753       10,645       4.67       766,903       9,896       5.16  
                                                 
Interest-bearing liabilities:
                                               
Short-term debt
    362,566       (1,122 )     (1.24 )     204,650       (2,044 )     (3.95 )
Long-term debt(4)
    521,151       (5,364 )     (4.12 )     538,295       (6,725 )     (4.99 )
                                                 
Total interest-bearing liabilities
    883,717       (6,486 )     (2.94 )     742,945       (8,769 )     (4.70 )
Expense related to derivatives(5)
          (300 )     (0.13 )           (329 )     (0.18 )
Impact of net non-interest-bearing funding
    28,036             0.09       23,958             0.15  
                                                 
Total funding of interest-earning assets
  $ 911,753       (6,786 )     (2.98 )   $ 766,903       (9,098 )     (4.73 )
                                                 
Net interest income/yield
            3,859       1.69               798       0.43  
Fully taxable-equivalent adjustments(6)
            102       0.05               107       0.05  
                                                 
Net interest income/yield (fully taxable-equivalent basis)
          $ 3,961       1.74             $ 905       0.48  
                                                 
(1)  Excludes mortgage loans and mortgage-related securities traded, but not yet settled.
(2)  For securities, we calculated average balances based on their unpaid principal balance plus their associated deferred fees and costs (e.g., premiums and discounts), but excluded the effect of mark-to-fair-value changes.
(3)  Non-performing loans, where interest income is recognized when collected, are included in average balances.
(4)  Includes current portion of long-term debt.
(5)  Represents changes in fair value of derivatives in cash flow hedge relationships that were previously deferred in AOCI and have been reclassified to earnings as the associated hedged forecasted issuance of debt and mortgage purchase transactions affect earnings. 2008 also includes the accrual of periodic cash settlements of all derivatives in qualifying hedge accounting relationships.
(6)  The determination of net interest income/yield (fully taxable-equivalent basis), which reflects fully taxable-equivalent adjustments to interest income, involves the conversion of tax-exempt sources of interest income to the equivalent amounts of interest income that would be necessary to derive the same net return if the investments had been subject to income taxes using our federal statutory tax rate of 35%.
 
Net interest income and net interest yield on a fully taxable-equivalent basis increased during the first quarter of 2009 compared to the first quarter of 2008 primarily due to: (a) a decrease in funding costs as a result of the replacement of higher cost short- and long-term debt with lower cost debt issuances; (b) a significant increase in the average size of our mortgage-related investments portfolio including the purchases of fixed-rate assets; and (c) $715 million of income related to the accretion of other-than-temporary impairments of investments in available-for-sale securities recorded primarily during the second half of 2008.
 
During the first quarter of 2009, our short-term funding balances increased significantly when compared to the first quarter of 2008. Our use of short-term debt funding has been driven by varying levels of demand for our long-term and callable debt in the worldwide financial markets in 2008 and the first quarter of 2009. Recently, the Federal Reserve has been an active purchaser in the secondary market of our long-term debt under its purchase program and, as a result, spreads on our debt and access to the debt markets improved toward the end of the first quarter of 2009. Due to our limited ability to issue long-term and callable debt during the second half of 2008 and part of the first quarter of 2009, we increased our use of a mix of derivatives and short-term debt to synthetically create the substantive economic equivalent of various longer-term fixed rate debt funding structures. However, since these derivatives are not in hedge accounting relationships the accrual of periodic settlements related to these derivatives is not recognized in net interest income but rather is recognized in gains (losses) on derivatives. The use of these derivatives may expose us to additional counterparty credit risk. See “Non-Interest Income (Loss) — Derivative Overview” for additional information.
 
The increase in our mortgage-related investments portfolio resulted from our acquiring and holding increased amounts of mortgage loans and mortgage-related securities to provide additional liquidity to the mortgage market. Also, during the first quarter of 2009, continued liquidity concerns in the market resulted in more favorable investment
 
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opportunities for agency mortgage-related securities at wider spreads. In response, we increased our purchase activities, resulting in an increase in the average balance of our interest-earning assets.
 
The increases in net interest income and net interest yield on a fully taxable-equivalent basis during the first quarter of 2009 were partially offset by the impact of declining interest rates on floating rate assets held in our mortgage-related investments portfolio. We also increased our cash and other investments portfolio during the first quarter of 2009 compared to the first quarter of 2008, and shifted from higher-yielding, longer-term non-mortgage-related securities to lower-yielding, shorter-term cash and cash equivalents and securities purchased under agreements to resell. This shift, in combination with lower short-term rates, also partially offset the increase in net interest income and net interest yield.
 
Non-Interest Income (Loss)
 
Management and Guarantee Income
 
Table 7 provides summary information about management and guarantee income. Management and guarantee income consists of contractual amounts due to us (reflecting buy-ups and buy-downs to base management and guarantee fees) as well as amortization of certain pre-2003 deferred fees received by us that were recorded as deferred income as a component of other liabilities. Beginning in 2003, delivery and buy-down fees are reflected within income on guarantee obligation as the guarantee obligation is amortized.
 
Table 7 — Management and Guarantee Income
 
                                 
    Three Months Ended March 31,  
    2009     2008  
    Amount     Rate     Amount     Rate  
    (dollars in millions, rates in basis points)  
 
Contractual management and guarantee fees(1)
  $ 782       17.4     $ 757       17.4  
Amortization of deferred fees included in other liabilities
    (2 )     0.0       32       0.8  
                                 
Total management and guarantee income
  $ 780       17.4     $ 789       18.2  
                                 
Unamortized balance of deferred fees included in other liabilities, at period end
  $ 181             $ 379          
                                 
(1)  Consists of management and guarantee fees related to all issued and outstanding guarantees, including those issued prior to adoption of FIN 45 in January 2003, which did not require the establishment of a guarantee asset.
 
Management and guarantee income decreased slightly for the three months ended March 31, 2009 compared to the three months ended March 31, 2008 primarily due to a decrease in amortization of pre-2003 deferred fees. This decrease was partially offset by a higher amount of contractual management and guarantee fee income resulting from higher average balances of our PCs and Structured Securities in the first quarter of 2009. The ending balance of our issued PCs and Structured Securities increased by 2% and 10%, during the first quarters of 2009 and 2008, respectively, on an annualized basis.
 
Gains (Losses) on Guarantee Asset
 
Upon issuance of a financial guarantee, we record a guarantee asset on our consolidated balance sheets representing the fair value of the management and guarantee fees we expect to receive over the life of our PCs and Structured Securities. Subsequent changes in the fair value of the future cash flows of our guarantee asset are reported in the current period income as gains (losses) on guarantee asset.
 
The change in fair value of our guarantee asset reflects:
 
  •  reductions related to the management and guarantee fees received that are considered a return of our recorded investment in our guarantee asset; and
 
  •  changes in the fair value of management and guarantee fees we expect to receive over the life of the financial guarantee.
 
Contractual management and guarantee fees shown in Table 8 represent cash received in each period for those financial guarantees with an established guarantee asset. A portion of these contractual management and guarantee fees is attributed to imputed interest income on the guarantee asset.
 
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Table 8 — Attribution of Change — Gains (Losses) on Guarantee Asset
 
                 
    Three Months Ended
 
    March 31,  
    2009     2008  
    (in millions)  
 
Contractual management and guarantee fees
  $ (733 )   $ (689 )
Portion related to imputed interest income
    249       215  
                 
Return of investment on guarantee asset
    (484 )     (474 )
Change in fair value of management and guarantee fees
    328       (920 )
                 
Gains (losses) on guarantee asset
  $ (156 )   $ (1,394 )
                 
 
Contractual management and guarantee fees increased in the first quarter of 2009 as compared to the first quarter of 2008, primarily due to increases in the average balance of our PCs and Structured Securities issued.
 
As shown in the table above, the change in fair value of management and guarantee fees was $328 million in the first quarter of 2009 compared to $(920) million in the first quarter of 2008. This increase in the gain on our guarantee asset in the first quarter of 2009 was principally attributed to an improvement in the fair values of excess-servicing, interest-only mortgage securities, compared to a decline in fair values of such securities during the first quarter of 2008. Our valuation methodology for the guarantee asset uses market-based information, including market values of excess-servicing, interest-only mortgage securities, to determine the fair value of future cash flows associated with the guarantee asset.
 
Income on Guarantee Obligation
 
Upon issuance of our guarantee, we record a guarantee obligation on our consolidated balance sheets representing the estimated fair value of our obligation to perform under the terms of the guarantee. Our guarantee obligation is amortized into income using a static effective yield determined at inception of the guarantee based on forecasted repayments of the principal balances on loans underlying the guarantee. See “CRITICAL ACCOUNTING POLICIES AND ESTIMATES — Application of the Static Effective Yield Method to Amortize the Guarantee Obligation” in our 2008 Annual Report for additional information on application of the static effective yield method. The static effective yield is periodically evaluated and amortization is adjusted when significant changes in economic events cause a shift in the pattern of our economic release from risk. When this type of change is required, a cumulative catch-up adjustment, which could be significant in a given period, will be recognized. In the first quarter of 2009, we enhanced our methodology for evaluating significant changes in economic events to be more in line with the current economic environment and to monitor the rate of amortization on our guarantee obligation so that it remains reflective of our expected duration of losses.
 
Table 9 provides information about the components of income on guarantee obligation.
 
Table 9 — Income on Guarantee Obligation
 
                 
    Three Months Ended
 
    March 31,  
    2009     2008  
    (in millions)  
 
Amortization income related to:
               
Static effective yield
  $ 775     $ 580  
Cumulative catch-up
    135       589  
                 
Total income on guarantee obligation
  $ 910     $ 1,169  
                 
 
Amortization income decreased primarily due to less significant cumulative catch-up adjustments partially offset by higher static effective yield rates during the first quarter of 2009 as compared to the first quarter of 2008. The cumulative catch-up adjustments recognized during the first quarter of 2008 were principally due to more significant declines in home prices during that period. We estimate that the national decline in home prices, based on our own index of our single-family mortgage portfolio was 1.4% and 2.9% during the first quarters of 2009 and 2008, respectively.
 
Derivative Overview
 
During 2008, we elected cash flow hedge accounting relationships for certain commitments to sell mortgage-related securities; however, we discontinued hedge accounting for these derivative instruments in December 2008. In addition, during 2008, we designated certain derivative positions as cash flow hedges of changes in cash flows associated with our forecasted issuances of debt, consistent with our risk management goals, in an effort to reduce interest rate risk related volatility in our consolidated statements of operations. In conjunction with our entry into conservatorship on September 6, 2008, we determined that we could no longer assert that the associated forecasted issuances of debt were probable of occurring and, as a result, we ceased designating derivative positions as cash flow
 
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hedges associated with forecasted issuances of debt. The previous deferred amount related to these hedges remains in our AOCI balance and will be recognized into earnings over the expected time period for which the forecasted issuances of debt impact earnings. Any subsequent changes in fair value of those derivative instruments are included in derivative gains (losses) on our consolidated statements of operations. As a result of our discontinuance of this hedge accounting strategy, we transferred $27.6 billion in notional amount and $(488) million in fair value from open cash flow hedges to closed cash flow hedges on September 6, 2008. For a discussion of the impact of derivatives on our consolidated financial statements and our discontinuation of derivatives designated as cash flow hedges see “NOTE 10: DERIVATIVES” to our consolidated financial statements.
 
Table 10 presents the gains and losses related to derivatives that were not accounted for in hedge accounting relationships. Derivative gains (losses) represents the change in fair value of derivatives not accounted for in hedge accounting relationships because the derivatives did not qualify for, or we did not elect to pursue, hedge accounting, resulting in fair value changes being recorded to earnings. Derivative gains (losses) also includes the accrual of periodic settlements for derivatives that are not in hedge accounting relationships. Although derivatives are an important aspect of our management of interest-rate risk, they generally increase the volatility of reported net loss, particularly when they are not accounted for in hedge accounting relationships.
 
Table 10 — Derivative Gains (Losses)
 
                 
    Derivative Gains (Losses)(1)  
Derivatives not Designated as Hedging
  Three Months Ended March 31,  
Instruments under SFAS 133(2)
  2009     2008  
    (in millions)  
 
Interest-rate swaps:
               
Receive-fixed
               
Foreign-currency denominated
  $ 187     $ 193  
U.S. dollar denominated
    (1,803 )     9,503  
                 
Total receive-fixed swaps
    (1,616 )     9,696  
Pay-fixed
    6,705       (15,133 )
Basis (floating to floating)
    1       2  
                 
Total interest-rate swaps
    5,090       (5,435 )
Option-based:
               
Call swaptions
               
Purchased
    (3,387 )     3,240  
Written
    117       (6 )
Put swaptions
               
Purchased
    45       (125 )
Written
    13       3  
Other option-based derivatives(3)
    25       24  
                 
Total option-based
    (3,187 )     3,136  
Futures
    28       647  
Foreign-currency swaps(4)
    (573 )     1,237  
Forward purchase and sale commitments
    (412 )     511  
Credit derivatives
    1       4  
Swap guarantee derivatives
    (31 )      
                 
Subtotal
    916       100  
Accrual of periodic settlements:
               
Receive-fixed interest rate swaps(5)
    1,088       73  
Pay-fixed interest rate swaps
    (1,942 )     (477 )
Foreign-currency swaps
    49       57  
Other
    70       2  
                 
Total accrual of periodic settlements
    (735 )     (345 )
                 
Total
  $ 181     $ (245 )
                 
(1)  Gains (losses) are reported as derivative gains (losses) on our consolidated statements of operations.
(2)  See “NOTE 10: DERIVATIVES” to our consolidated financial statements for additional information about the purpose of entering into derivatives not designated as hedging instruments and our overall risk management strategies.
(3)  Primarily represents purchased interest rate caps and floors, as well as certain written options, including guarantees of stated final maturity of issued Structured Securities and written call options on PCs we issued.
(4)  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.
(5)  Includes imputed interest on zero-coupon swaps.
 
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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. 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. Due to limits on our ability to issue long-term and callable debt beginning in the second half of 2008 and part of the first quarter of 2009, we increased our use of pay-fixed interest rate swaps. However, the use of these derivatives may expose us to additional counterparty credit risk. For a discussion regarding our ability to issue debt see “LIQUIDITY AND CAPITAL RESOURCES — Liquidity — Debt Securities.” During the first quarter of 2009, fair value gains on our pay-fixed interest rate swaps of $6.7 billion were partially offset by losses on our receive-fixed interest rate swaps of $1.6 billion as longer-term swap interest rates increased, resulting in an overall gain recorded for derivatives.
 
Additionally, we use swaptions and other option-based derivatives to adjust the characteristics of our debt in response to changes in the expected lives of mortgage-related assets in our mortgage-related investments portfolio. We recorded losses of $3.4 billion on our purchased call swaptions during the three months ended March 31, 2009, compared to gains of $3.2 billion during the three months ended March 31, 2008. The losses during the three months ended March 31, 2009 were attributable to increasing swap interest rates and a decrease in implied volatility, compared to the gains during the three months ended March 31, 2008, which were attributable to decreasing swap interest rates and an increase in implied volatility.
 
As a result of our election of the fair value option for our foreign-currency denominated debt, foreign-currency translation gains and losses and fair value adjustments related to our foreign-currency denominated debt are recognized on our consolidated statements of operations as gains (losses) on debt recorded at fair value. We use a combination of foreign-currency swaps and foreign-currency denominated receive-fixed interest rate swaps to hedge the changes in fair value of our foreign-currency denominated debt related to fluctuations in exchange rates and interest rates, respectively.
 
For the three months ended March 31, 2009, we recognized fair value gains of $467 million on our foreign-currency denominated debt, consisting of $580 million in translation gains and $(113) million related to interest-rate and instrument-specific credit risk adjustments. Derivative gains (losses) on foreign-currency swaps of $(573) million largely offset fair value translation gains of $580 million on our foreign-currency denominated debt. In addition, derivative gains (losses) of $187 million on foreign-currency denominated receive-fixed interest rate swaps largely offset the interest-rate and instrument-specific credit risk adjustments included in gains (losses) on debt recorded at fair value for the three months ended March 31, 2009.
 
For the three months ended March 31, 2008, we recognized fair value losses of $1.4 billion on our foreign-currency denominated debt, consisting of $1.2 billion in translation losses and $(171) million related to interest-rate and instrument-specific credit risk adjustments. Derivative gains (losses) on foreign-currency swaps of $1.2 billion offset fair value translation losses of $1.2 billion on our foreign-currency denominated debt. In addition, derivative gains (losses) of $193 million on foreign-currency denominated receive-fixed interest rate swaps largely offset the interest-rate and instrument-specific credit risk adjustments included in gains (losses) on debt recorded at fair value for the three months ended March 31, 2008.
 
For a discussion of the instrument-specific credit risk and our election to adopt the fair value option on our foreign-currency denominated debt see “NOTE 17: FAIR VALUE DISCLOSURES— Fair Value Election — Foreign-Currency Denominated Debt with the Fair Value Option Elected” in our 2008 Annual Report.
 
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Gains (Losses) on Investment Activity
 
Gains (losses) on investment activity includes gains and losses on certain assets where changes in fair value are recognized through earnings, gains and losses related to sales, impairments and other valuation adjustments. Table 11 summarizes the components of gains (losses) on investment activity.
 
Table 11 — Gains (Losses) on Investment Activity
 
                 
    Three Months Ended
 
    March 31,  
    2009     2008  
    (in millions)  
 
Gains (losses) on trading securities(1)
  $ 2,131     $ 971  
Gains (losses) on sale of mortgage loans(2)
    151       71  
Gains (losses) on sale of available-for-sale securities
    51       215  
Impairments on available-for-sale securities
    (7,130 )     (71 )
Lower-of-cost-or-fair-value adjustments
    (129 )     33  
Gains (losses) on mortgage loans elected at fair value
    (18 )      
                 
Total gains (losses) on investment activity
  $ (4,944 )   $ 1,219  
                 
(1)  Includes mark-to-fair value adjustments recorded in accordance with EITF 99-20 on securities classified as trading.
(2)  Represents gains (losses) on mortgage loans sold in connection with securitization transactions.
 
Gains (Losses) on Trading Securities
 
We recognized net gains on trading securities of $2.1 billion for the first quarter of 2009, as compared to net gains of $971 million for the first quarter of 2008. The unpaid principal balance of our securities classified as trading was approximately $253 billion at March 31, 2009 compared to approximately $103 billion at March 31, 2008 primarily due to our increased purchases of agency mortgage-related securities. The increased balance in our trading portfolio combined with tightening OAS levels, contributed $1.0 billion to the gains on these trading securities for the first quarter of 2009. In addition, during the first quarter of 2009, we sold agency securities classified as trading with unpaid principal balances of approximately $36 billion, which generated realized gains of $1.1 billion.
 
Impairments on Available-For-Sale Securities
 
During the first quarter of 2009, we recorded other-than-temporary impairments related to investments in available-for-sale securities of $7.1 billion, of which approximately $6.9 billion related to non-agency mortgage-related securities backed by subprime, MTA, Alt-A and other loans. The remaining $0.2 billion related to other-than-temporary impairments of available-for-sale non-mortgage-related asset-backed securities in our cash and other investments portfolio where we did not have the intent to hold to a forecasted recovery of the unrealized losses. The decision to impair these securities is consistent with our consideration of these securities as a contingent source of liquidity. See “NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES — Recently Issued Accounting Standards, Not Yet Adopted — Additional Guidance and Disclosures for Fair Value Measurements and Change in the Impairment Model for Debt Securities — Change in the Impairment Model for Debt Securities” to our consolidated financial statements for information on how other-than-temporary impairments will be recorded on our financial statements commencing in the second quarter of 2009.
 
During the first quarter of 2008, we recognized $71 million of other-than-temporary impairments related to investments in available-for-sale securities, including $68 million attributed to $1.3 billion of obligations of states and political subdivisions in an unrealized loss position that we did not have the intent to hold to a forecasted recovery.
 
See “CONSOLIDATED BALANCE SHEETS ANALYSIS — Mortgage-Related Investments Portfolio — Other-Than-Temporary Impairments on Available-for-Sale Mortgage-Related Securities” for additional information.
 
Gains (Losses) on Debt Recorded at Fair Value
 
We elected the fair value option for our foreign-currency denominated debt effective January 1, 2008. Accordingly, foreign-currency exposure is a component of gains (losses) on debt recorded at fair value. We manage the foreign-currency exposure associated with our foreign-currency denominated debt through the use of derivatives. For the three months ended March 31, 2009, we recognized fair value gains of $467 million on our foreign-currency denominated debt primarily due to the U.S. dollar strengthening relative to the Euro. However, the U.S. dollar weakened for the three months ended March 31, 2008, contributing to our recognition of fair value losses of $1.4 billion on our foreign-currency denominated debt. See “Derivative Overview” for additional information about how we mitigate changes in the fair value of our foreign-currency denominated debt by using derivatives.
 
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Gains (Losses) on Debt Retirement
 
Gains (losses) on debt retirement were $(104) million and $305 million during the three months ended March 31, 2009 and 2008, respectively. This change was due to a decreased level of call activity involving our debt with coupon levels that increase at pre-determined intervals.
 
Recoveries on Loans Impaired Upon Purchase
 
Recoveries on loans impaired upon purchase represent the recapture into income of previously recognized losses on loans purchased and provision for credit losses associated with purchases of delinquent loans under our financial guarantee. Recoveries occur when a non-performing loan is repaid in full or when at the time of foreclosure the estimated fair value of the acquired property, less costs to sell, exceeds the carrying value of the loan. For impaired loans where the borrower has made required payments that return the loan to less than 90 days delinquent, the recovery amounts are instead accreted into interest income over time as periodic payments are received.
 
During the three months ended March 31, 2009 and 2008, we recognized recoveries on loans impaired upon purchase of $50 million and $226 million, respectively. Our recoveries on impaired loans decreased due to a lower rate of loan payoffs and a higher proportion of modified loans among those purchased during the first quarter of 2009, as compared to the first quarter of 2008. In addition, our temporary suspensions of foreclosure transfers on occupied homes during the first quarter of 2009 reduced our recognition of recoveries.
 
Trust Management Income (Expense)
 
Trust management income (expense) represents the amounts we earn as administrator, issuer and trustee, net of related expenses, related to the management of remittances of principal and interest on loans underlying our PCs and Structured Securities. Trust management income (expense) was $(207) million and $3 million in the first quarter of 2009 and first quarter of 2008, respectively. We experienced trust management expenses associated with shortfalls in interest payments on PCs, known as compensating interest, which significantly exceeded our trust management income during the first quarter of 2009. The increase in expense for these shortfalls was attributable to significantly higher refinancing activity and lower interest income on trust assets, which we receive as fee income, in the first quarter of 2009, as compared to the first quarter of 2008. If mortgage interest rates remain low, we expect refinancing activity to remain elevated in the near term and our trust management expenses will likely exceed our related income. See “MD&A — CONSOLIDATED RESULTS OF OPERATIONS — Segment Earnings-Results — Single-Family Guarantee” in our 2008 Annual Report for further information on compensating interest.
 
Other Income (Losses)
 
Other income (losses) primarily consists of resecuritization fees, net hedging gains and losses, fees associated with servicing and technology-related programs, fees related to multifamily loans (including application and other fees) and various other fees received from mortgage originators and servicers. Other income (losses) declined to $41 million in the first quarter of 2009 compared to $44 million in the first quarter of 2008.
 
Non-Interest Expense
 
Table 12 summarizes the components of non-interest expense.
 
Table 12 — Non-Interest Expense
 
                 
    Three Months Ended
 
    March 31,  
    2009     2008  
    (in millions)  
 
Administrative expenses:
               
Salaries and employee benefits
  $ 207     $ 231  
Professional services
    60       72  
Occupancy expense
    18       15  
Other administrative expenses
    87       79  
                 
Total administrative expenses
    372       397  
Provision for credit losses
    8,791       1,240  
REO operations expense
    306       208  
Losses on loans purchased
    2,012       51  
Other expenses
    78       87  
                 
Total non-interest expense
  $ 11,559     $ 1,983  
                 
 
Administrative Expenses
 
Administrative expenses decreased for the three months ended March 31, 2009, compared to the three months ended March 31, 2008, in part due to a decrease in the number of consultants and full-time employees as well as other cost reduction measures.
 
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Provision for Credit Losses
 
Our reserves for mortgage loan and guarantee losses reflects our best projection of defaults we believe are likely as a result of loss events that have occurred through March 31, 2009. The substantial deterioration in the national housing market, the uncertainty in other macroeconomic factors and the uncertainty of the effect of any current or future government actions to address the economic and housing crisis makes forecasting of default rates increasingly imprecise. Our reserves also include the impact of our projections of the results of strategic loss mitigation initiatives, including our temporary suspensions of certain foreclosure transfers, a higher volume of loan modifications, and projections of recoveries through repurchases by seller/servicers of defaulted loans due to failure to follow contractual underwriting requirements at the time of the loan origination. An inability to realize the benefits of our loss mitigation plans, a lower realized rate of seller/servicer repurchases or default rates that exceed our current projections will cause our losses to be significantly higher than those currently estimated.
 
The provision for credit losses was $8.8 billion in the first quarter of 2009 compared to $1.2 billion in the first quarter of 2008, as continued weakening in the housing market and a rapid rise in unemployment affected our single-family mortgage portfolio. See “Table 2 — Credit Statistics, Single-Family Mortgage Portfolio” for a presentation of the quarterly trend in the deterioration of our credit statistics. For more information regarding how we derive our estimate for the provision for credit losses, see “MD&A — CRITICAL ACCOUNTING POLICIES AND ESTIMATES” in our 2008 Annual Report. We recorded a $7.1 billion increase in our loan loss reserve, which is a reserve for credit losses on loans within our mortgage-related investments portfolio and mortgages underlying our PCs, Structured Securities and other mortgage-related guarantees, at March 31, 2009 as a result of:
 
  •  increased estimates of incurred losses on single-family mortgage loans that are expected to experience higher default rates. Our estimates of incurred losses are higher for single-family loans we purchased or guaranteed in certain years, particularly those we purchased during 2006, 2007 and to a lesser extent 2005 and the first half of 2008;
 
  •  an observed increase in delinquency timeframes resulting from temporary suspensions of foreclosure transfers as well as an increase in the percentage of loans that entered the foreclosure process. We have experienced more significant increases in delinquency and foreclosure starts concentrated in certain regions of the U.S., as well as loans with second lien, third-party financing. For example, as of March 31, 2009, single-family mortgage loans in the states of California and Florida comprise 14% and 7% of our single-family mortgage portfolio, respectively; however the loans in these states have delinquency rates of 3.4% and 6.5%, respectively, compared to 2.29% for the total single-family mortgage portfolio. Similarly, as of March 31, 2009, 14% of loans in our single-family mortgage portfolio have second lien, third-party financing; however we estimate that these loans comprise 24% of our delinquent loans, based on unpaid principal balances;
 
  •  increases in the estimated average loss per loan, or severity of losses, net of expected recoveries from credit enhancements, driven in part by declines in home sales and home prices. See “Table 2 — Credit Statistics, Single-Family Mortgage Portfolio” for quarterly trends in our REO disposition severity ratios and other credit-related statistics. The states with the largest declines in home prices in the last year and highest severity of losses include California, Florida, Nevada and Arizona; and
 
  •  increases in counterparty exposure related to our estimates of recoveries through repurchases by seller/servicers of defaulted loans due to failure to follow contractual underwriting requirements at origination and under separate recourse agreements. Several of our seller/servicers have been acquired by the FDIC, declared bankruptcy or merged with other institutions. In addition, certain of these counterparties have sought or received additional equity capital during the first quarter of 2009. These and other events increase our counterparty exposure, or the likelihood that we may bear the risk of mortgage credit losses without the benefit of recourse, if any, to our counterparty. See “RISK MANAGEMENT — Credit Risks — Institutional Credit Risk” for additional information.
 
We expect our provisions for credit losses will likely remain high during 2009. The likelihood that our provision for credit losses will remain high in future periods will depend on a number of factors, including the impact of the MHA Program on our loss mitigation efforts, changes in property values, regional economic conditions, third-party mortgage insurance coverage and recoveries and the realized rate of seller/servicer repurchases.
 
REO Operations Expense
 
The increase in REO operations expense for the three months ended March 31, 2009, as compared to the three months ended March 31, 2008, was primarily due to increases in the volume of our single-family property foreclosure transfers. The decline in home prices, which has been more dramatic in certain geographical areas, combined with our higher volume of REO acquisitions, resulted in higher disposition losses during the first quarter of 2009 compared to
 
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the first quarter of 2008. Market-based writedowns of REO inventory totaled $32 million and $114 million for the three months ended March 31, 2009 and 2008, respectively. We expect REO operations expense to continue to increase in the remainder of 2009, as single-family REO acquisition volume increases and home prices remain under pressure.
 
Losses on Loans Purchased
 
Losses on delinquent and modified loans purchased from the mortgage pools underlying PCs and Structured Securities occur when the acquisition basis of the purchased loan exceeds the estimated fair value of the loan on the date of purchase. As a result of increases in delinquency rates of loans underlying our PCs and Structured Securities and our increasing efforts to reduce foreclosures, the number of loan modifications increased significantly during the first quarter of 2009, as compared to the first quarter of 2008. When a loan underlying our PCs and Structured Securities is modified, we generally exercise our repurchase option and hold the modified loan in our mortgage-related investments portfolio. See “Recoveries on Loans Impaired upon Purchase” and “RISK MANAGEMENT — Credit Risks — Table 44 — Changes in Loans Purchased Under Financial Guarantees” for additional information about the impacts from these loans on our financial results.
 
During the three months ended March 31, 2009, the market-based valuation of non-performing loans continued to be adversely affected by the expectation of higher default costs and reduced liquidity in the single-family mortgage market. Our losses on loans purchased were $2.0 billion during the three months ended March 31, 2009 compared to $51 million during the three months ended March 31, 2008. The increase in losses on loans purchased is attributed both to the increase in volume of our optional repurchases of delinquent and modified loans underlying our guarantees as well as a decline in market valuations for these loans as compared to the first quarter of 2008. We expect these losses to continue to increase in 2009.
 
Income Tax Benefit
 
For the three months ended March 31, 2009 and 2008, we reported an income tax benefit of $937 million and $422 million, respectively. See “NOTE 12: INCOME TAXES” to our consolidated financial statements for additional information.
 
Segment Earnings
 
Our operations consist of three reportable segments, which are based on the type of business activities each performs — Investments, Single-family Guarantee and Multifamily. Certain activities that are not part of a segment are included in the All Other category; this category consists of certain unallocated corporate items, such as costs associated with remediating our internal controls and near-term restructuring costs, costs related to the resolution of certain legal matters and certain income tax items. We manage and evaluate performance of the segments and All Other using a Segment Earnings approach, subject to the conduct of our business under the direction of the Conservator. 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 with Treasury, may negatively impact our Segment Earnings and the performance of individual segments.
 
Segment Earnings is calculated for the segments by adjusting GAAP net loss for certain investment-related activities and credit guarantee-related activities. Segment Earnings also includes certain reclassifications among income and expense categories that have no impact on net loss but provide us with a meaningful metric to assess the performance of each segment and our company as a whole. We continue to assess the methodologies used for segment reporting and refinements may be made in future periods. Segment Earnings does not include the effect of the establishment of the valuation allowance against our deferred tax assets, net. See “NOTE 16: SEGMENT REPORTING” to our consolidated financial statements for further information regarding our segments and the adjustments and reclassifications used to calculate Segment Earnings, as well as the management reporting and allocation process used to generate our segment results.
 
Segment Earnings — Results
 
Investments
 
Our Investments segment is responsible for investment activity in mortgages and mortgage-related securities, other investments, debt financing, and managing our interest rate risk, liquidity and capital positions. We invest principally in mortgage-related securities and single-family mortgages through our mortgage-related investments portfolio.
 
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Table 13 presents the Segment Earnings of our Investments segment.
 
Table 13 — Segment Earnings and Key Metrics — Investments
 
                 
    Three Months Ended
 
    March 31,  
    2009     2008  
    (dollars in millions)  
 
Segment Earnings:
               
Net interest income
  $ 2,014     $ 299  
Non-interest income (loss)
    (4,306 )     15  
Non-interest expense:
               
Administrative expenses
    (120 )     (131 )
Other non-interest expense
    (7 )     (9 )
                 
Total non-interest expense
    (127 )     (140 )
                 
Segment Earnings (loss) before income tax (expense) benefit
    (2,419 )     174  
Income tax (expense) benefit
    847       (61 )
                 
Segment Earnings (loss), net of taxes
    (1,572 )     113  
                 
Reconciliation to GAAP net income (loss):
               
Derivative- and foreign-currency denominated debt-related adjustments
    1,590       (1,183 )
Investment sales, debt retirements and fair value-related adjustments
    45       1,525  
Fully taxable-equivalent adjustment
    (100 )     (110 )
Tax-related adjustments(1)
    639       (12 )
                 
Total reconciling items, net of taxes
    2,174       220  
                 
GAAP net income (loss)
  $ 602     $ 333  
                 
Key metrics — Investments:
               
Growth:
               
Purchases of securities — Mortgage-related investments portfolio:(2)(3)
               
Guaranteed PCs and Structured Securities
  $ 84,180     $ 21,544  
Non-Freddie Mac mortgage-related securities:
               
Agency mortgage-related securities
    31,321       9,383  
Non-agency mortgage-related securities
    76       860  
                 
Total purchases of securities — Mortgage-related investments portfolio
  $ 115,577     $ 31,787  
                 
Growth rate of mortgage-related investments portfolio (annualized)
    32.42 %     (7.01 )%
Return:
               
Net interest yield — Segment Earnings basis
    0.96 %     0.19 %
(1)  2009 includes an allocation of the non-cash charge related to the establishment of the partial valuation allowance against our deferred tax assets, net that is not included in Segment Earnings.
(2)  Based on unpaid principal balance and excludes mortgage-related securities traded, but not yet settled.
(3)  Excludes single-family mortgage loans.
 
Segment Earnings for our Investments Segment decreased $1.7 billion for the first quarter of 2009 compared to the first quarter of 2008. Security impairments increased during the first quarter of 2009 to $4.4 billion due to an increase in expected credit-related losses on our non-agency mortgage-related securities, compared to $2 million of security impairments recognized during the first quarter of 2008. Security impairments that reflect expected or realized credit-related losses are realized immediately pursuant to GAAP and in Segment Earnings. In contrast, non-credit-related security impairments are included in our GAAP results but are not included in Segment Earnings. Segment Earnings net interest income increased $1.7 billion and Segment Earnings net interest yield increased 77 basis points to 96 basis points for the first quarter of 2009 compared to the first quarter of 2008. The primary drivers underlying the increases in Segment Earnings net interest income and Segment Earnings net interest yield were (a) a decrease in funding costs as a result of the replacement of higher cost short- and long-term debt with lower cost debt issuances and (b) a significant increase in the average size of our mortgage-related investments portfolio including the purchases of fixed-rate assets. Partially offsetting these increases was an increase in derivative interest carry expense on net pay-fixed interest rate swaps, which is recognized within net interest income in Segment Earnings, as a result of decreased interest rates.
 
During the first quarter of 2009, the mortgage-related investments portfolio of our Investments Segment grew at an annualized rate of 32.4% compared to (7.0)% for the first quarter of 2008. The unpaid principal balance of the mortgage-related investments portfolio of our Investments Segment increased from $732 billion at December 31, 2008 to $791 billion at March 31, 2009. The portfolio grew because we acquired and held increased amounts of mortgage loans and mortgage-related securities in our mortgage related investments portfolio to provide additional liquidity to the mortgage market and, to a lesser degree, due to more favorable investment opportunities for agency securities, due to liquidity concerns in the market.
 
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We held $92.6 billion of non-Freddie Mac agency mortgage-related securities and $192.1 billion of non-agency mortgage-related securities as of March 31, 2009 compared to $70.9 billion of non-Freddie Mac agency mortgage-related securities and $197.9 billion of non-agency mortgage-related securities as of December 31, 2008. The decline in the unpaid principal balance of non-agency mortgage-related securities is due to the receipt of monthly principal repayments on these securities. Agency securities comprised approximately 69% of the unpaid principal balance of the Investments Segment mortgage-related investments portfolio at March 31, 2009 compared with 68% at December 31, 2008. See “CONSOLIDATED BALANCE SHEETS ANALYSIS — Mortgage-Related Investments Portfolio” for additional information regarding our mortgage-related securities.
 
The objectives set forth for us under our charter and conservatorship and restrictions set forth in the Purchase Agreement may negatively impact our Investments segment results over the long term. For example, the planned reduction in our mortgage-related investments portfolio balance to $250 billion, through successive annual 10% declines commencing in 2010, will cause a corresponding reduction in our net interest income. This may negatively affect our Investments segment results.
 
Single-Family Guarantee Segment
 
In our Single-family Guarantee segment, we guarantee the payment of principal and interest on single-family mortgage-related securities, including those held in our mortgage-related investments portfolio, in exchange for monthly management and guarantee fees and other up-front compensation. Earnings for this segment consist primarily of management and guarantee fee revenues less the related credit costs (i.e., provision for credit losses) and operating expenses. Earnings for this segment also include the interest earned on assets held in the Investments segment related to single-family guarantee activities, net of allocated funding costs and amounts related to expected net float benefits.
 
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Table 14 presents the Segment Earnings of our Single-family Guarantee segment.
 
Table 14 — Segment Earnings and Key Metrics — Single-Family Guarantee
 
                 
    Three Months Ended
 
    March 31,  
    2009     2008  
    (in millions)  
 
Segment Earnings:
               
Net interest income
  $ 25     $ 77  
Non-interest income:
               
Management and guarantee income
    922       895  
Other non-interest income
    83       104  
                 
Total non-interest income
    1,005       999  
Non-interest expense:
               
Administrative expenses
    (200 )     (204 )
Provision for credit losses
    (8,941 )     (1,349 )
REO operations expense
    (306 )     (208 )
Other non-interest expense
    (22 )     (19 )
                 
Total non-interest expense
    (9,469 )     (1,780 )
                 
Segment Earnings (loss) before income tax expense
    (8,439 )     (704 )
Income tax (expense) benefit
    2,954       246  
                 
Segment Earnings (loss), net of taxes
    (5,485 )     (458 )
                 
Reconciliation to GAAP net income (loss):
               
Credit guarantee-related adjustments
    (1,403 )     (174 )
Tax-related adjustments(1)
    (2,978 )     61  
                 
Total reconciling items, net of taxes(1)
    (4,381 )     (113 )
                 
GAAP net income (loss)
  $ (9,866 )   $ (571 )
                 
Key metrics — Single-family Guarantee:
               
Balances and Growth (in billions, except rate):
               
Average securitized balance of single-family credit guarantee portfolio(2)
  $ 1,780     $ 1,728  
Issuance — Single-family credit guarantees(2)
  $ 104     $ 113  
Fixed-rate products — Percentage of issuances(3)
    99.6 %     92.7 %
Liquidation Rate — Single-family credit guarantees (annualized rate)(4)
    21.2 %     16.4 %
Credit:
               
Delinquency rate(5)
    2.29 %     0.77 %
Delinquency transition rate(6)
    24.8 %     17.6 %
REO inventory (number of units)
    29,145       18,419  
Single-family credit losses, in basis points (annualized)
    28.9       12.1  
Market:
               
Single-family mortgage debt outstanding (total U.S. market, in billions)(7)
  $ 10,454     $ 10,559  
30-year fixed mortgage rate(8)
    4.8 %     5.9 %
(1)  2009 includes an allocation of the non-cash charge related to the partial valuation allowance recorded against our deferred tax assets, net that is not included in Segment Earnings.
(2)  Based on unpaid principal balance.
(3)  Excludes Structured Transactions, but includes interest-only mortgages with fixed interest rates.
(4)  Includes the effect of terminations of long-term standby commitments.
(5)  Represents the percentage of single-family loans in our credit guarantee portfolio, based on loan count, which are 90 days or more past due at period end and excluding loans underlying Structured Transactions. See “RISK MANAGEMENT — Credit Risks — Credit Performance — Delinquencies” for additional information.
(6)  Represents the percentage of loans that have been reported as 90 days or more delinquent, which subsequently transitioned to REO inventory within 12 months of the date of delinquency. The rate does not reflect other loss events, such as short-sales and deed-in-lieu transactions.
(7)  U.S. single-family mortgage debt outstanding as of December 31, 2008 for 2009. Source: Federal Reserve Flow of Funds Accounts of the United States of America dated March 12, 2009.
(8)  Based on Freddie Mac’s PMMS. Represents the national average mortgage commitment rate to a qualified borrower exclusive of the fees and points required by the lender. This commitment rate applies only to conventional financing on conforming mortgages with LTV ratios of 80% or less.
 
Segment Earnings (loss) for our Single-family Guarantee segment declined to a loss of $(5.5) billion for the three months ended March 31, 2009, compared to a loss of $(458) million for the three months ended March 31, 2008. This decline reflects an increase in credit-related expenses due to higher delinquency rates, higher volumes of non-performing loans and foreclosure transfers, higher severity of losses on a per-property basis and a decline in home prices and other regional economic conditions. The increase in Segment Earnings management and guarantee income for the first quarter of 2009 is primarily due to higher average balances of the single-family credit guarantee portfolio partially offset by lower average contractual management and guarantee rates as compared to the first quarter of 2008.
 
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Table 15 below provides summary information about Segment Earnings management and guarantee income for this segment. Segment Earnings management and guarantee income consists of contractual amounts due to us related to our management and guarantee fees as well as amortization of credit fees.
 
Table 15 — Segment Earnings Management and Guarantee Income — Single-Family Guarantee
 
                                 
    Three Months Ended March 31,  
    2009     2008  
          Average
          Average
 
    Amount     Rate     Amount     Rate  
    (dollars in millions, rates in basis points)  
 
Contractual management and guarantee fees
  $ 707       15.5     $ 707       16.1  
Amortization of credit fees included in other liabilities
    215       4.7       188       4.3  
                                 
Total Segment Earnings management and guarantee income
    922       20.2       895       20.4  
                                 
Adjustments to reconcile to consolidated GAAP:
                               
Reclassification between net interest income and management and guarantee fee(1)
    57               38          
Credit guarantee-related activity adjustments(2)
    (220 )             (161 )        
Multifamily management and guarantee income(3)
    21               17          
                                 
Management and guarantee income, GAAP
  $ 780             $ 789          
                                 
(1)  Management and guarantee fees earned on mortgage loans held in our mortgage-related investments portfolio are reclassified from net interest income within the Investments segment to management and guarantee fees within the Single-family Guarantee segment. Buy-up and buy-down fees are transferred from the Single-family Guarantee segment to the Investments segment.
(2)  Primarily represent credit fee amortization adjustments.
(3)  Represents management and guarantee income recognized related to our Multifamily segment that is not included in our Single-family Guarantee segment.
 
For the three months ended March 31, 2009 and 2008, the annualized growth rates of our single-family credit guarantee portfolio were 1.7% and 9.9%, respectively. Our mortgage purchase volumes are impacted by several factors, including origination volumes, mortgage product and underwriting trends, competition, customer-specific behavior, contract terms, and governmental initiatives concerning our business activities. Origination volumes can be affected by government programs, such as the MHA Program. Single-family mortgage purchase volumes from individual customers can fluctuate significantly. Despite these fluctuations, our share of the overall single-family mortgage origination market was higher in the first quarter of 2009 as compared to the first quarter of 2008, as mortgage originators have generally tightened their credit standards, causing conforming mortgages to be the predominant product in the market during this period. We have also tightened our own guidelines for mortgages we purchase and we have seen improvements in the credit quality of mortgages delivered to us in 2009. We expect an increase in our volume in the second quarter of 2009 due to significant refinancing activity caused by recent declines in mortgage interest rates as well as our support of Home Affordable Refinance under the MHA Program.
 
Our Segment Earnings provision for credit losses for the Single-family Guarantee segment increased to $8.9 billion for the three months ended March 31, 2009, compared to $1.3 billion for the three months ended March 31, 2008, due to continued credit deterioration in our single-family credit guarantee portfolio. Mortgages in our single-family credit guarantee portfolio experienced significantly higher delinquency rates, higher transition rates to foreclosure, as well as higher loss severities on a per-property basis compared to the first quarter of 2008. Our provision for credit losses is based on our estimate of incurred losses inherent in both our credit guarantee portfolio and the mortgage loans in our mortgage-related investments portfolio using recent historical performance, such as trends in delinquency rates, recent charge-off experience, recoveries from credit enhancements and other loss mitigation activities.
 
The delinquency rate on our single-family credit guarantee portfolio increased to 2.29% as of March 31, 2009 from 1.72% as of December 31, 2008. Increases in delinquency rates occurred in all product types for the three months ended March 31, 2009. We expect our delinquency rates will continue to rise in the remainder of 2009.
 
Charge-offs, gross, for this segment increased to $1.4 billion in the first quarter of 2009 compared to $0.5 billion in the first quarter of 2008, primarily due to a considerable increase in the volume of REO properties we acquired through foreclosure transfers. Declining home prices resulted in higher charge-offs, on a per property basis, during the first quarter of 2009, and we expect growth in charge-offs to continue in 2009. See “RISK MANAGEMENT — Credit Risks — Table 48 — Single-Family Credit Loss Concentration Analysis” for additional delinquency and credit loss information.
 
Single-family Guarantee REO operations expense increased during the first quarter of 2009, compared to the first quarter of 2008. During 2008 and the first quarter of 2009, we experienced significant increases in delinquency rates and REO activity in all regions of the U.S., particularly in the states of California, Florida, Nevada and Arizona. The West region represented approximately 35% and 22% of our REO property acquisitions during the first quarter of 2009
 
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and first quarter of 2008, respectively, based on the number of units. The highest concentration in the West region is in the state of California. At March 31, 2009, our REO inventory in California comprised 16% of total REO property inventory, based on units, and approximately 25% of our total REO property inventory, based on loan amount prior to acquisition. California has accounted for a significant amount of our credit losses and losses on our loans in this state comprised approximately 29% and 21% of our total credit losses in the first quarter of 2009 and the first quarter of 2008, respectively. We temporarily suspended all foreclosure transfers on occupied homes from November 26, 2008 through January 31, 2009 and from February 14, 2009 through March 6, 2009. On March 7, 2009, we suspended foreclosure transfers on owner-occupied homes where the borrower may be eligible to receive a loan modification under the MHA Program; however, we have continued with initiation and other preclosing steps in the foreclosure process. In addition, we temporarily suspended evictions for occupants of foreclosed homes from November 26, 2008 through April 1, 2009 and announced an initiative to provide for month-to-month rentals to qualified former borrowers and tenants that occupy our newly-foreclosed single-family properties. In part, this was done to allow us to implement our previously-announced Streamlined Modification Program and loan modifications under the MHA Program. These programs are designed to assist delinquent borrowers meeting certain criteria by offering loan modifications and potentially avoiding foreclosure. As a result of our suspension of foreclosure transfers, we experienced an increase in single-family delinquency rates and slower growth in charge-offs, a component of our credit losses, REO acquisitions and REO inventory during the first quarter of 2009, as compared to what we would have experienced without these actions. See “RISK MANAGEMENT — Credit Risks — Loss Mitigation Activities” for further information on these programs.
 
Declines in home prices contributed to the increase in the weighted average estimated current LTV ratio for loans underlying our single-family credit guarantee portfolio to 76% at March 31, 2009 compared to 72% at December 31, 2008 and 67% at March 31, 2008. Approximately 28% of loans in our single-family credit guarantee portfolio had estimated current LTV ratios above 90%, excluding second liens by third parties, at March 31, 2009, compared to 14% at March 31, 2008. In general, higher total LTV ratios indicate that the borrower has less equity in the home and would thus be more likely to default in the event of a financial hardship. We expect that home prices will continue to decline during 2009, and will result in increased current estimated LTV ratios on loans in our single-family credit guarantee portfolio. We expect that declines in home prices combined with the deterioration in rates of unemployment and other factors will result in higher credit losses for our Single-family Guarantee segment during 2009. Our suspension or delay of foreclosure transfers and any imposed delay in foreclosures by regulatory or governmental agencies causes a delay in our recognition of credit losses, and our loan loss reserves to increase. The implementation of any governmental actions or programs that expand the ability of delinquent borrowers to obtain modifications with concessions of past due principal or interest amounts, including proposed changes to bankruptcy laws, could lead to higher charge-offs.
 
Multifamily Segment
 
Through our Multifamily segment, we purchase multifamily mortgages for investment and guarantee the payment of principal and interest on multifamily mortgage-related securities and mortgages underlying multifamily housing revenue bonds. The mortgage loans of the Multifamily segment consist of mortgages that are secured by properties with five or more residential rental units. We typically hold multifamily loans for investment purposes. In 2008, we began holding multifamily mortgages designated held-for-sale as part of our initiative to offer securitization capabilities to the market and our customers. We plan to increase our securitization activity of multifamily loans we hold in our portfolio during 2009, as market conditions permit.
 
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Table 16 presents the Segment Earnings of our Multifamily segment.
 
Table 16 — Segment Earnings and Key Metrics — Multifamily
 
                 
    Three Months Ended March 31,  
    2009     2008  
    (dollars in millions)  
 
Segment Earnings:
               
Net interest income
  $ 118     $ 75  
Non-interest income (loss):
               
Management and guarantee income
    21       17  
LIHTC partnerships
    (106 )     (117 )
Other non-interest income
    3       8  
                 
Total non-interest income (loss)
    (82 )     (92 )
Non-interest expense:
               
Administrative expenses
    (49 )     (49 )
Provision for credit losses
          (9 )
REO operations expense
           
Other non-interest expense
    (5 )     (4 )
                 
Total non-interest expense
    (54 )     (62 )
                 
Segment Earnings (loss) before income tax benefit
    (18 )     (79 )
LIHTC partnerships tax benefit
    151       149  
Income tax benefit
    6       28  
Less: Net (income) loss — noncontrolling interest
    1        
                 
Segment Earnings, net of taxes
    140       98  
                 
Reconciliation to GAAP net income (loss):
               
Derivative and foreign-currency denominated debt-related adjustments
    (32 )     (11 )
Credit guarantee-related adjustments
    5        
Investment sales, debt retirements and fair value-related adjustments
    (17 )      
Tax-related adjustments(1)
    (663 )     4  
                 
Total reconciling items, net of taxes(1)
    (707 )     (7 )
                 
GAAP net income (loss)
  $ (567 )   $ 91  
                 
Key metrics — Multifamily:
               
Balances and Growth:
               
Average balance of Multifamily loan portfolio(2)
  $ 74,243     $ 58,812  
Average balance of Multifamily guarantee portfolio(2)
  $ 15,528     $ 11,336  
Purchases — Multifamily loan portfolio(2)
  $ 3,648     $ 4,063  
Issuances — Multifamily guarantee portfolio(2)
  $ 177     $ 2,382  
Liquidation Rate — Multifamily loan portfolio (annualized rate)
    3.5 %     5.5 %
Credit:
               
Delinquency rate(3)
    0.09 %     0.01 %
Allowance for loan losses
  $ 275     $ 71  
(1)  2009 includes an allocation of the non-cash charge related to the partial valuation allowance recorded against our deferred tax assets, net that is not included in Segment Earnings.
(2)  Based on unpaid principal balance.
(3)  Based on net carrying value of mortgages 90 days or more delinquent as well as those in the process of foreclosure and excluding Structured Transactions.
 
Segment Earnings for our Multifamily segment increased 43% to $140 million for the three months ended March 31, 2009 compared to $98 million for the three months ended March 31, 2008, primarily due to higher net interest income and a lower non-interest loss. Net interest income increased $43 million, or 57%, for the three months ended March 31, 2009 compared to the three months ended March 31, 2008, primarily driven by a 26% increase in the average balances of our Multifamily loan portfolio and significantly lower interest rates resulting in lower cost of funding, partially offset by a decrease in prepayment fees, or yield maintenance income, resulting from declines in loan refinancing activity. We continued to provide stability and liquidity for the financing of rental housing nationwide. Non-interest income (loss) decreased by $10 million primarily due to a decline in equity losses on low-income housing tax partnerships for the three months ended March 31, 2009 compared to the three months ended March 31, 2008. The unpaid principal balance of our multifamily loan portfolio increased to $75.7 billion at March 31, 2009 from $72.7 billion at December 31, 2008 as market fundamentals continued to provide opportunities to purchase loans for our portfolio.
 
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CONSOLIDATED BALANCE SHEETS ANALYSIS
 
The following discussion of our consolidated balance sheets should be read in conjunction with our consolidated financial statements, including the accompanying notes. Also see “CRITICAL ACCOUNTING POLICIES AND ESTIMATES” for more information concerning our more significant accounting policies and estimates applied in determining our reported financial position.
 
Cash and Other Investments Portfolio
 
Table 17 provides detail regarding our cash and other investments portfolio.
 
Table 17 — Cash and Other Investments Portfolio
 
                 
    Fair Value  
    March 31, 2009     December 31, 2008  
    (dollars in millions)  
 
Cash and cash equivalents
  $ 53,754     $ 45,326  
Investments:
               
Non-mortgage-related securities:
               
Available-for-sale securities:
               
Asset-backed securities
    7,614       8,794  
                 
Total available-for-sale non-mortgage-related securities
    7,614       8,794  
                 
Trading:
               
Treasury bills
    3,995        
                 
Total trading non-mortgage-related securities
    3,995        
                 
Total non-mortgage-related available-for-sale and trading securities
    11,609       8,794  
                 
Federal funds sold and securities purchased under agreements to resell:
               
Securities purchased under agreements to resell
    34,050       10,150  
                 
Total cash and other investments portfolio
  $ 99,413     $ 64,270  
                 
 
Our cash and other investments portfolio is important to our cash flow and asset and liability management and our ability to provide liquidity and stability to the mortgage market, as discussed in “MD&A — CONSOLIDATED BALANCE SHEETS ANALYSIS — Cash and Other Investments Portfolio” in our 2008 Annual Report. Cash and cash equivalents comprised $53.8 billion of the $99.4 billion in this portfolio as of March 31, 2009. At March 31, 2009, the investments in this portfolio also included $11.6 billion of non-mortgage-related asset-backed securities and Treasury bills that we could sell to provide us with an additional source of liquidity to fund our business operations.
 
During the first quarter of 2009, we increased the balance of our cash and other investments portfolio by $35.1 billion, primarily due to a $23.9 billion increase in securities purchased under agreements to resell and a $8.4 billion increase in highly liquid shorter-term cash and cash equivalent assets. On March 31, 2009, we received $30.8 billion from Treasury under the Purchase Agreement pursuant to a draw request that FHFA submitted to Treasury on our behalf. At March 31, 2009, the balance of our cash and other investments portfolio also included $4.0 billion of Treasury bills purchased during the first quarter of 2009.
 
We recognized other-than-temporary impairment charges related to our cash and other investments portfolio of $0.2 billion during the first quarter of 2009, for our non-mortgage-related investments with $8.4 billion of unpaid principal balance, as we could not assert the positive intent to hold these securities to recovery of the unrealized losses. The decision to impair these securities is consistent with our consideration of securities from the cash and other investments portfolio as a contingent source of liquidity. We do not expect any contractual cash shortfalls related to these securities. See “NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES — Recently Issued Accounting Standards, Not Yet Adopted — Additional Guidance and Disclosures for Fair Value Measurements and Change in the Impairment Model for Debt Securities — Change in the Impairment Model for Debt Securities” to our consolidated financial statements for information on how other-than-temporary impairments will be recorded on our financial statements commencing in the second quarter of 2009. All unrealized losses in our cash and other investments portfolio have been recognized in earnings through other-than-temporary impairments as of March 31, 2009.
 
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Table 18 provides credit ratings of the non-mortgage-related asset-backed securities in our cash and other investments portfolio at March 31, 2009.
 
Table 18 — Investments in Non-Mortgage-Related Asset-Backed Securities
 
                                         
    March 31, 2009  
                            Current
 
    Amortized
    Fair
    Original%
    Current%
    Investment
 
Collateral Type
  Cost     Value     AAA-rated(1)     AAA-rated(2)     Grade(3)  
    (dollars in millions)                    
 
Non-mortgage-related asset-backed securities:
                                       
Credit cards
  $ 3,471     $ 3,608       100 %     71 %     100 %
Auto credit
    2,095       2,146       100       67       100  
Equipment lease
    679       686       100       91       100  
Student loans
    496       508       100       90       100  
Dealer floor plans(4)
    328       328       100       6       6  
Stranded assets(5)
    211       217       100       100       100  
Insurance premiums
    121       121       100       100       100  
                                         
Total non-mortgage-related asset-backed securities
  $ 7,401     $ 7,614       100       70       95  
                                         
(1)  Reflects the composition of the portfolio that was AAA-rated as of the date of our acquisition of the security, based on unpaid principal balance and the lowest rating available.
(2)  Reflects the AAA-rated composition of the securities as of May 4, 2009, based on unpaid principal balance as of March 31, 2009 and the lowest rating available.
(3)  Reflects the composition of these securities with credit ratings BBB– or above as of May 4, 2009, based on unpaid principal balance as of March 31, 2009 and the lowest rating available.
(4)  Consists of securities backed by liens secured by automobile dealer inventories.
(5)  Consists of securities backed by liens secured by fixed assets owned by regulated public utilities.
 
Mortgage-Related Investments Portfolio
 
We are primarily a buy-and-hold investor in mortgage assets. We invest principally in mortgage loans and mortgage-related securities, which consist of securities issued by us, Fannie Mae, Ginnie Mae and other financial institutions. We refer to these investments that are recorded on our consolidated balance sheets as our mortgage-related investments portfolio. Our mortgage-related securities are classified as either available-for-sale or trading on our consolidated balance sheets.
 
Under the Purchase Agreement with Treasury and FHFA regulation, our mortgage-related investments portfolio may not exceed $900 billion as of December 31, 2009 and then must decline by 10% per year thereafter until it reaches $250 billion. Consistent with our ability under the Purchase Agreement to increase the size of our on-balance sheet mortgage portfolio through the end of 2009, we acquired and held increased amounts of mortgage loans and mortgage-related securities in our mortgage-related investments portfolio to provide additional liquidity to the mortgage market. Table 19 provides unpaid principal balances of the mortgage loans and mortgage-related securities in our mortgage-related investments portfolio. Table 19 includes securities classified as either available-for-sale or trading on our consolidated balance sheets.
 
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Table 19 — Characteristics of Mortgage Loans and Mortgage-Related Securities in our Mortgage-Related Investments Portfolio
 
                                                 
    March 31, 2009     December 31, 2008  
    Fixed Rate     Variable Rate     Total     Fixed Rate     Variable Rate     Total  
    (in millions)  
 
Mortgage loans:
                                               
Single-family:(1)
                                               
Conventional:(2)
                                               
Amortizing
  $ 46,704     $ 1,331     $ 48,035     $ 34,630     $ 1,295     $ 35,925  
Interest-only
    492       977       1,469       440       841       1,281  
                                                 
Total conventional
    47,196       2,308       49,504       35,070       2,136       37,206  
USDA Rural Development/FHA/VA
    1,709             1,709       1,549             1,549  
                                                 
Total single-family
    48,905       2,308       51,213       36,619       2,136       38,755  
Multifamily(3)
    67,280       8,453       75,733       65,322       7,399       72,721  
                                                 
Total unpaid principal balance of mortgage loans
    116,185       10,761       126,946       101,941       9,535       111,476  
                                                 
PCs and Structured Securities:(4)
                                               
Single-family(1)
    364,163       89,270       453,433       328,965       93,498       422,463  
Multifamily
    280       1,708       1,988       332       1,729       2,061  
                                                 
Total PCs and Structured Securities
    364,443       90,978       455,421       329,297       95,227       424,524  
                                                 
Non-Freddie Mac mortgage-related securities:
                                               
Agency mortgage-related securities:(5)
                                               
Fannie Mae:
                                               
Single-family(1)
    57,545       33,956       91,501       35,142       34,460       69,602  
Multifamily
    467       92       559       582       92       674  
Ginnie Mae:
                                               
Single-family(1)
    385       148       533       398       152       550  
Multifamily
    45             45       26             26  
                                                 
Total agency mortgage-related securities
    58,442       34,196       92,638       36,148       34,704       70,852  
                                                 
Non-agency mortgage-related securities:
                                               
Single-family:(1)(6)
                                               
Subprime
    428       70,568       70,996       438       74,413       74,851  
MTA
          19,220       19,220             19,606       19,606  
Alt-A and other
    3,164       21,000       24,164       3,266       21,801       25,067  
Commercial mortgage-backed securities
    24,706       38,978       63,684       25,060       39,131       64,191  
Obligations of states and political subdivisions(7)
    12,696       43       12,739       12,825       44       12,869  
Manufactured housing(8)
    1,116       180       1,296       1,141       185       1,326  
                                                 
Total non-agency mortgage-related securities(9)
    42,110       149,989       192,099       42,730       155,180       197,910  
                                                 
Total mortgage-related securities
    464,995       275,163       740,158       408,175       285,111       693,286  
                                                 
Total unpaid principal balance of mortgage-related investments portfolio
  $ 581,180     $ 285,924       867,104     $ 510,116     $ 294,646       804,762  
                                                 
Premiums, discounts, deferred fees, impairments of unpaid principal balances and other basis adjustments
                    (24,083 )                     (17,788 )
Net unrealized losses on mortgage-related securities, pre-tax
                    (31,509 )                     (38,228 )
Allowance for loan losses on mortgage loans held-for-investment(10)
                    (840 )                     (690 )
                                                 
Total carrying value of mortgage-related investments portfolio
                  $ 810,672                     $ 748,056  
                                                 
 (1)  Variable-rate single-family mortgage loans and mortgage-related securities include those with a contractual coupon rate that, prior to contractual maturity, is either scheduled to change or is subject to change based on changes in the composition of the underlying collateral. Single-family mortgage loans also include mortgages with balloon/reset provisions.
 (2)  See “RISK MANAGEMENT — Credit Risks — Mortgage Credit Risk” for information on Alt-A and subprime loans, which are a component of our single-family conventional mortgage loans
 (3)  Variable-rate multifamily mortgage loans include only those loans that, as of the reporting date, have a contractual coupon rate that is subject to change.
 (4)  For our PCs and Structured Securities, we are subject to the credit risk associated with the underlying mortgage loan collateral.
 (5)  Agency mortgage-related securities are generally not separately rated by nationally recognized statistical rating organizations, but are viewed as having a level of credit quality at least equivalent to non-agency mortgage-related securities AAA-rated or equivalent.
 (6)  Single-family non-agency mortgage-related securities backed by subprime, MTA, Alt-A and other mortgage loans include significant credit enhancements, particularly through subordination. For information about how these securities are rated, see “Table 23 — Ratings of Available-For-Sale Non-Agency Mortgage-Related Securities backed by Subprime, MTA, Alt-A and Other Loans at March 31, 2009 and December 31, 2008” and “Table 24 — Ratings Trend of Available-For-Sale Non-Agency Mortgage-Related Securities backed by Subprime, MTA, Alt-A and Other Loans.”
 (7)  Consists of mortgage revenue bonds. Approximately 57% and 58% of these securities held at March 31, 2009 and December 31, 2008, respectively, were AAA-rated as of those dates, based on the lowest rating available.
 (8)  At March 31, 2009 and December 31, 2008, 15% and 32%, respectively, of mortgage-related securities backed by manufactured housing bonds were rated BBB– or above, based on the lowest rating available. For both dates, 91% of manufactured housing bonds had credit enhancements, including primary monoline insurance, that covered 23% of the manufactured housing bonds based on the unpaid principal balance. At both March 31, 2009 and December 31, 2008, we had secondary insurance on 60% of these bonds that were not covered by the primary monoline insurance, based on the unpaid principal balance. Approximately 3% of the mortgage-related securities backed by manufactured housing bonds were AAA-rated at both March 31, 2009 and December 31, 2008, respectively, based on the unpaid principal balance and the lowest rating available.
 (9)  Credit ratings for most non-agency mortgage-related securities are designated by no fewer than two nationally recognized statistical rating organizations. Approximately 43% and 55% of total non-agency mortgage-related securities held at March 31, 2009 and December 31, 2008, respectively, were AAA-rated as of those dates, based on the unpaid principal balance and the lowest rating available.
(10)  See “RISK MANAGEMENT — Credit Risks — Mortgage Credit Risk — Credit Performance — Loan Loss Reserves” for information about our allowance for loan losses on mortgage loans held-for-investment.
 
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The total unpaid principal balance of our mortgage-related investments portfolio increased by $62.3 billion to $867.1 billion at March 31, 2009 compared to December 31, 2008. The portfolio grew in the first quarter of 2009 because we acquired and held increased amounts of mortgage loans and mortgage-related securities in our mortgage-related investments portfolio to provide additional liquidity to the mortgage market and, to a lesser degree, due to more favorable investment opportunities for agency securities given a broad market decline driven by a lack of liquidity in the market. In response, our net purchase activity increased considerably as we deployed capital at favorable OAS levels. The $62.3 billion increase included purchases of PCs and Structured Securities and agency mortgage-related securities balances totaling $52.7 billion, partially offset by a $5.8 billion decrease in non-agency mortgage-related securities balances, primarily due to principal repayments on securities backed by subprime, MTA, Alt-A and other loans.
 
The balance of mortgage loans held in our mortgage-related investments portfolio increased by $15.5 billion during the first quarter of 2009, including an increase of approximately $3.0 billion in multifamily loans. We invest in multifamily loans on apartment complexes with institutional customers that include both adjustable and fixed rate products. Fixed-rate loans generally include prepayment fees if the borrowers prepay within the yield maintenance period, which is normally the initial five to ten years. We have grown both the adjustable and fixed-rate portfolios during the first quarter of 2009 due to attractive purchase opportunities. While industry-wide loan demand is expected to decline in 2009, we expect continued growth in our multifamily loan portfolio during 2009 as we remain a significant source of debt financing for multifamily properties.
 
As mortgage interest rates declined in the first quarter of 2009, single-family refinance mortgage originations increased and the volume of deliveries of single-family mortgage loans to us for cash purchase rather than for guarantor swap transactions also increased. Loans purchased through the cash purchase program are typically sold to investors through a cash auction of PCs, and, in the interim, are carried as mortgage loans on our consolidated balance sheets. However, because of continuing market disruptions in the first quarter of 2009, demand for our cash auctions of PCs has decreased. Our increased cash purchase activity coupled with fewer PCs sold at cash auctions, as well as our increased purchases of non-performing loans from the mortgage pools underlying our PCs and Structured Securities, resulted in a higher balance of single-family mortgage loans held in our mortgage-related investments portfolio at March 31, 2009 than at December 31, 2008.
 
Higher Risk Components of Our Mortgage-Related Investments Portfolio
 
Our mortgage-related investments portfolio includes mortgage loans with higher risk characteristics and mortgage-related securities backed by subprime, MTA, Alt-A and other loans.
 
During the first quarter of 2009, we did not buy or sell any non-agency mortgage-related securities backed by subprime, MTA or Alt-A and other loans. As discussed below, we recognized impairment losses on these securities in the first quarter of 2009. We believe that the declines in fair values for these securities are attributable to poor underlying collateral performance and decreased liquidity and larger risk premiums in the mortgage market.
 
Higher Risk Single-Family Mortgage Loans
 
Participants in the mortgage market often characterize single-family loans based upon their overall credit quality at the time of origination, generally considering them to be prime or subprime. There is no universally accepted definition of subprime. The subprime segment of the mortgage market primarily serves borrowers with poorer credit payment histories and such loans typically have a mix of credit characteristics that indicate a higher likelihood of default and higher loss severities than prime loans. Such characteristics might include a combination of high LTV ratios, low credit scores or originations using lower underwriting standards such as limited or no documentation of a borrower’s income.
 
We generally do not classify the single-family mortgage loans in our mortgage-related investments portfolio as either prime or subprime; however, we recognize that there are mortgage loans within our mortgage-related investments portfolio with higher risk characteristics. For example, we estimate that there were $2.1 billion and $1.7 billion at March 31, 2009 and December 31, 2008, respectively, of loans with original LTV ratios greater than 90% and FICO credit scores less than 620 at the time of loan origination.
 
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 or may be underwritten with lower or alternative income or asset documentation requirements relative to a full documentation mortgage loan. In determining our Alt-A exposure in loans underlying our single-family mortgage portfolio, we have classified mortgage loans as Alt-A if the lender that delivers them to us has classified the loans as Alt-A, or if the loans had reduced documentation requirements, which
 
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indicate that the loan should be classified as Alt-A. We estimate that approximately $3 billion, or 6% of the single-family mortgage loans in our mortgage-related investments portfolio were classified as Alt-A loans at March 31, 2009.
 
See “RISK MANAGEMENT — Credit Risks — Mortgage Credit Risk” for further information.
 
Non-Agency Mortgage-Related Securities Backed by Subprime Loans
 
We have classified securities as subprime if the securities were labeled as subprime when sold to us. At March 31, 2009 and December 31, 2008, we held $71.0 billion and $74.8 billion, respectively, of non-agency mortgage-related securities backed by subprime loans in our mortgage-related investments portfolio. In addition to the contractual interest payments, we received monthly remittances of principal repayments on these securities, which totaled $3.8 billion during the first quarter of 2009, representing a partial return of our investment in these securities. We have seen a decrease in the annualized rate of principal repayments from 25% in the fourth quarter of 2008 to 21% in the first quarter of 2009. These securities benefit from significant credit enhancement, particularly through subordination. Of these securities, 33% and 58% were investment grade at March 31, 2009 and December 31, 2008, respectively. We recognized impairment losses on these available-for-sale securities of $4.1 billion during the first quarter of 2009. The total remaining unrealized losses, net of tax, on these securities are included in AOCI and totaled $11.4 billion and $12.4 billion at March 31, 2009 and December 31, 2008, respectively.
 
Non-Agency Mortgage-Related Securities Backed by MTA Loans
 
MTA adjustable-rate mortgages (which are a type of option ARM) are indexed to the Moving Treasury Average and have optional payment terms, including options that allow for deferral of principal payments which result in negative amortization for an initial period of years. MTA loans generally have a specified date when the mortgage is recast to require principal payments under new terms, which can result in substantial increases in monthly payments by the borrower.
 
We have classified securities as MTA if the securities were labeled as MTA when sold to us or if we believe the underlying collateral includes a significant amount of MTA loans. We had $19.2 billion and $19.6 billion of non-agency mortgage-related securities classified as MTA at March 31, 2009 and December 31, 2008, respectively. In addition to the contractual interest payments, we received monthly remittances of principal repayments on these securities, which totaled $0.4 billion during the first quarter of 2009, representing a partial return of our investment in these securities. The annualized rate of principal repayments during the first quarter of 2009 on these securities was 8%, unchanged from the fourth quarter of 2008. These securities benefit from significant credit enhancements, particularly through subordination. These securities experienced significant downgrades during the quarter, as 4% and 72% were investment grade at March 31, 2009 and December 31, 2008, respectively. We recognized impairment losses on these available-for-sale securities of $1.0 billion during the first quarter of 2009. The total remaining unrealized losses, net of tax, on these securities are included in AOCI and totaled $2.8 billion and $3.1 billion at March 31, 2009 and December 31, 2008, respectively.
 
Non-Agency Mortgage-Related Securities Backed by Alt-A and Other Loans
 
We have classified securities as Alt-A if the securities were labeled as Alt-A when sold to us or if we believe the underlying collateral includes a significant amount of Alt-A loans. We classified $24.2 billion and $25.1 billion of our single-family non-agency mortgage-related securities as Alt-A and other loans at March 31, 2009 and December 31, 2008, respectively. In addition to the contractual interest payments, we received monthly remittances of principal repayments on these securities, which totaled $0.9 billion during the first quarter of 2009, representing a partial return of our investment in these securities. The annualized rate of principal repayments during the first quarter of 2009 on these securities was 14%, unchanged from the fourth quarter of 2008. These securities benefit from significant credit enhancements, particularly through subordination. Of these securities, 46% and 79% were investment grade at March 31, 2009 and December 31, 2008, respectively. We recognized impairment losses on these available-for-sale securities of $1.8 billion during the first quarter of 2009. The total remaining unrealized losses, net of tax, on these securities are included in AOCI and totaled $3.7 billion and $4.4 billion at March 31, 2009 and December 31, 2008, respectively.
 
Unrealized Losses on Available-for-Sale Mortgage-Related Securities
 
At March 31, 2009, our gross unrealized losses on available-for-sale mortgage-related securities were $48.6 billion. The main components of these losses are gross unrealized losses of $44.5 billion related to non-agency mortgage-related securities backed by subprime, MTA, Alt-A and other loans, as well as commercial mortgage-backed securities. We believe that these unrealized losses on non-agency mortgage-related securities at March 31, 2009 were attributable to poor underlying collateral performance and decreased liquidity and larger risk premiums in the non-agency mortgage market. All securities in an unrealized loss position are evaluated to determine if the impairment is
 
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other-than-temporary. See “NOTE 4: INVESTMENTS IN SECURITIES” to our consolidated financial statements for additional information regarding unrealized losses on available-for-sale securities.
 
Other-Than-Temporary Impairments on Available-for-Sale Mortgage-Related Securities
 
We recognized impairment losses on non-agency mortgage-related securities of approximately $6.9 billion during the first quarter of 2009. Of the $192.1 billion of unpaid principal balance in non-agency mortgage-related securities in our available-for-sale portfolio at March 31, 2009, we identified securities backed by subprime, MTA, Alt-A and other loans with $16.0 billion of unpaid principal balance that are probable of incurring a contractual principal or interest loss, in addition to those securities impaired during 2008. This probable loss is due to significant sustained deterioration in the performance of the underlying collateral of these securities. The probable loss during the first quarter of 2009 is also due to a lack of confidence in the credit enhancements provided by primary monoline bond insurance from two monoline insurers on individual securities in an unrealized loss position. To date, we have recognized impairment losses on non-agency mortgage-related securities backed by four monoline insurers. We have determined that it is both probable a principal and interest shortfall will occur on the insured securities and that, in such a case, there is substantial uncertainty surrounding the insurer’s ability to pay all future claims. The deterioration has not impacted our ability and intent to hold these securities to recovery of the unrealized losses. See “NOTE 4: INVESTMENTS IN SECURITIES — Other-Than-Temporary Impairments on Available-For-Sale Securities” to our consolidated financial statements for additional information. See “RISK MANAGEMENT — Credit Risks — Institutional Credit Risk — Bond Insurers” for more information on institutional credit risk associated with our exposure to bond insurers.
 
We estimate that the future expected principal and interest shortfall on these securities will be significantly less than the impairment loss recognized under GAAP, as we expect these shortfalls to be less than the recent fair value declines. As of March 31, 2009, we have recognized an aggregate of $23.4 billion of impairment losses on non-agency mortgage-related securities backed by subprime, MTA, Alt-A and other loans since the second quarter of 2008, of which $13.8 billion is expected to be recovered. This reflects a reduction in the estimate of future recoveries of prior quarter impairment charges of $3.0 billion as of March 31, 2009. See “NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES — Recently Issued Accounting Standards, Not Yet Adopted — Additional Guidance and Disclosures for Fair Value Measurements and Change in the Impairment Model for Debt Securities — Change in the Impairment Model for Debt Securities” to our consolidated financial statements for information on how other-than-temporary impairments will be recorded on our financial statements commencing in the second quarter of 2009.
 
The decline in mortgage credit performance has been severe for subprime, MTA, Alt-A and other loans. Many of the same global economic factors impacting the performance of our guarantee portfolio also impact the performance of the non-agency mortgage-related securities in our mortgage-related investments portfolio. Rising unemployment, accelerating home price declines, tight credit conditions, volatility in mortgage rates and LIBOR, and weakening consumer confidence not only contributed to poor performance during the first quarter of 2009 but impacted our expectations regarding future performance, both of which are critical in assessing other-than-temporary impairments. Furthermore, the subprime, MTA, Alt-A and other loans backing our securities have significantly greater concentrations in the states that are undergoing the greatest economic stress, such as California, Florida, Arizona and Nevada.
 
Additional information about our securities backed by subprime, MTA, Alt-A and other loans is set forth below:
 
  •  Securities Backed by Subprime Loans: Our securities backed by subprime loans accounted for $4.1 billion of other-than-temporary impairment expense during the first quarter of 2009. Included in this amount are our securities backed by 2006 and 2007 first lien subprime loans which accounted for $10.0 billion of impaired unpaid principal balance and $3.9 billion of other-than-temporary impairment expense during the first quarter of 2009. Delinquencies on the 2006 and 2007 subprime loans backing these securities increased by 8% and 14%, respectively, during the first quarter of 2009.
 
  •  Securities Backed by MTA Loans: Our securities backed by MTA loans accounted for $1.7 billion of the impaired unpaid principal balance and $1.0 billion of other-than-temporary impairment expense during the first quarter 2009. Delinquencies on 2006 and 2007 vintage MTA loans increased 21% and 32%, respectively, during the first quarter of 2009. Securities backed by MTA loans experienced sustained price declines, with prices for this category, on average, falling by approximately 9% in the first quarter of 2009. The MTA sector also experienced significant continued downgrades during the quarter, with none of our securities rated AAA as of March 31, 2009, versus 45% at December 31, 2008.
 
  •  Securities Backed by Alt-A and Other Loans: Our securities backed by Alt-A loans and other loans accounted for $3.6 billion of the impaired unpaid principal balance and $1.8 billion of other-than-temporary impairment expense during the first quarter of 2009, with approximately 69% of the impairment expense coming from loans
 
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  originated in 2006 and 2007. These securities experienced increases in delinquencies of the underlying loans, material price declines and ratings actions during the first quarter of 2009.
 
While it is possible that, under certain conditions (especially given the current economic environment), defaults and severity of losses on our remaining available-for-sale securities for which we have not recorded an impairment charge could exceed our subordination and credit enhancement levels and a principal or interest loss could occur, we do not believe that those conditions were probable at March 31, 2009. Based on our ability and intent to hold our remaining available-for sale securities for a sufficient time to recover all unrealized losses and our consideration of available information, we have concluded that the reduction in fair value of these securities was temporary at March 31, 2009.
 
Our assessments concerning other-than-temporary impairment and accretion of impairment charges require significant judgment and are subject to change as the performance of the individual securities changes, mortgage conditions evolve and our assessments of future performance are updated. Bankruptcy reform, loan modification programs and other government intervention can significantly change the performance of the underlying loans and thus our securities. Current market conditions are unprecedented, in our experience, and actual results could differ materially from our expectations. Furthermore, different market participants could arrive at materially different conclusions regarding the likelihood of various default and severity outcomes, and these differences tend to be magnified for nontraditional products such as MTA loans.
 
Hypothetical Scenarios on our Investments in Non-Agency Mortgage-Related Securities
 
In this section, we present hypothetical scenarios based on an analysis we designed to simulate the distribution of cash flows from the underlying loans to the securities that we hold, considering different default rate and severity assumptions. In preparing each scenario, we use numerous assumptions (in addition to the default rate and severity assumptions), including, but not limited to, the timing of losses, prepayment rates, the collectability of excess interest and interest rates that could materially impact the results. Since we do not use this analysis for determination of our reported results under GAAP, this analysis is hypothetical and may not be indicative of our actual principal shortfalls.
 
Tables 20 – 22 provide the summary results of the default rate and severity hypothetical scenarios for our investments in available-for-sale non-agency mortgage-related securities backed by first lien subprime, MTA and Alt-A loans at March 31, 2009. In light of increasing uncertainty concerning default rates and severity due to the overall deterioration in the economy and the impact of loan modifications, pending bankruptcy reform legislation and other government intervention on the loans underlying our securities, we have provided a number of default and severity scenarios to reflect a broad range of possible outcomes. For example, in the hypothetical scenario for our non-agency mortgage-related securities backed by first lien subprime loans presented in Table 20, we use cumulative default rates of 60% to 80%. However, different market participants could arrive at materially different conclusions regarding the likelihood of various default and severity outcomes. These differences tend to be magnified for nontraditional products such as MTA loans. While the more stressful scenarios are beyond what we currently believe are probable, these tables give insight into the potential economic losses under hypothetical scenarios.
 
In addition to the hypothetical scenarios, these tables also display underlying collateral performance and credit enhancement statistics, by vintage and quartile of delinquency. The current collateral delinquency rates presented in Tables 20, 21 and 22 averaged 42%, 36% and 20%, respectively. Within each of these quartiles, there is a distribution of both credit enhancement levels and delinquency performance, and individual security performance will differ from the quartile as a whole. Furthermore, some individual securities with lower subordination levels could have higher delinquencies.
 
The projected economic losses presented for each hypothetical scenario represent the present value of possible cash shortfalls given the related assumptions. The projected economic losses are based solely on the present value of potential principal shortfalls, as we do not believe that the interest shortfalls are representative of our risk of economic loss since the interest represents cash flow generated by our investment in the securities, whereas the principal amount generally represents the amount of our investment in the securities. Additionally, some of these securities are not subject to principal write-downs until their legal final maturity based on the contractual terms of the security, which leads to a smaller present value loss than on a security that could take principal write-downs earlier. However, these amounts do not represent the other-than-temporary impairment charge that would result under the given scenario. Any other-than-temporary impairment charges would vary depending on the fair value of the security at that point in time, and could be higher than the amount of losses indicated by these scenarios. Impairment charges would also reflect interest shortfalls.
 
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Investments in Non-Agency Mortgage-Related Securities backed by First Lien Subprime Loans
 
Table 20 — Investments in Available-For-Sale Non-Agency Mortgage-Related Securities Backed by First Lien Subprime Loans
 
                                                                     
        March 31, 2009  
        Underlying Collateral Performance   Credit Enhancements Statistics                      
        Unpaid
            Minimum
  Hypothetical Scenarios(4)  
    Delinquency
  Principal
    Collateral
  Average Credit
  Current
  Default
  Severity  
Acquisition Date
  Quartile   Balance     Delinquency(1)   Enhancement(2)   Subordination(3)   Rate   60%     70%     80%  
        (dollars in millions)  
 
2004 & Prior
  1   $ 298       12%       50%       33%       60%     $ 11     $ 13     $ 14  
                                          70       14       20       37  
                                          80       25       47       84  
                                                             
2004 & Prior
  2     287       18%       51%       24%       60%     $     $     $ 4  
                                          70             11       26  
                                          80       14       32       51  
                                                             
2004 & Prior
  3     332       23%       57%       22%       60%     $     $ 1     $ 2  
                                          70       1       3       5  
                                          80       3       7       28  
                                                             
2004 & Prior
  4     299       30%       65%       19%       60%     $     $ 1     $ 4  
                                          70       2       8       16  
                                          80       9       19       32  
                                                     
2004 & Prior subtotal
      $ 1,216       21%       56%       19%                                  
                                                     
2005
  1   $ 2,911       28%       58%       39%       60%     $     $     $  
                                          70             5       54  
                                          80       11       77       278  
                                                             
2005
  2     2,848       35%       59%       34%       60%     $     $     $  
                                          70                    
                                          80             8       109  
                                                             
2005
  3     2,919       43%       54%       28%       60%     $     $     $ 2  
                                          70             7       27  
                                          80       13       46       187  
                                                             
2005
  4     2,860       50%       52%       24%       60%     $     $     $ 2  
                                          70       1       10       42  
                                          80       22       67       198  
                                                     
2005 subtotal
      $ 11,538       39%       56%       24%                                  
                                                     
2006
  1   $ 6,876       37%       33%       20%       60%     $ 3     $ 13     $ 81  
                                          70       46       220       629  
                                          80       378       948       1,654  
                                                             
2006
  2     6,872       45%       28%       12%       60%     $     $ 38     $ 144  
                                          70       92       299       656  
                                          80       437       918       1,508  
                                                             
2006
  3     7,018       51%       26%       7%       60%     $ 2     $ 22     $ 168  
                                          70       104       418       938  
                                          80       633       1,290       1,990  
                                                             
2006
  4     6,757       58%       28%       3%       60%     $ 4     $ 12     $ 99  
                                          70       60       262       727  
                                          80       455       1,076       1,804  
                                                     
2006 subtotal
      $ 27,523       48%       29%       3%                                  
                                                     
2007
  1   $ 6,706       26%       32%       21%       60%     $ 8     $ 40     $ 221  
                                          70       81       693       1,528  
                                          80       998       1,982       2,969  
                                                             
2007
  2     6,959       36%       27%       17%       60%     $     $ 17     $ 184  
                                          70       103       521       1,166  
                                          80       804       1,561       2,331  
                                                             
2007
  3     6,669       44%       26%       12%       60%     $ 4     $ 46     $ 185  
                                          70       117       432       977  
                                          80       669       1,364       2,098  
                                                             
2007
  4     6,895       54%       27%       9%       60%     $ 1     $ 16     $ 96  
                                          70       52       378       960  
                                          80       666       1,389       2,169  
                                                     
2007 subtotal
      $ 27,229       40%       28%       9%                                  
                                                     
Subtotal uninsured non-agency mortgage-related securities backed by first lien subprime loans
      $ 67,506       42%       34%       3%                                  
                                                     
Non-agency mortgage-related securities, backed by first lien subprime loans with monoline bond insurance:
                                                                   
Non-investment grade monoline — no other-than-temporary impairments to date       $ 1,175                                                          
Non-investment grade monoline — other-than-temporary impairments taken         1,600                                                          
                                                     
Subtotal non-agency mortgage-related securities, backed by first lien subprime loans with monoline bond insurance(5)
      $ 2,775                                                          
                                                     
Total non-agency mortgage-related securities, backed by first lien subprime loans
      $ 70,281                                                          
                                                     
(1)  Determined based on loans that are 60 days or more past due that underlie the securities. Collateral delinquency percentages are calculated based on the unpaid principal balance and information provided primarily by Intex Solutions, Inc.
(2)  Consists of subordination, financial guarantees and other credit enhancements. Does not include the benefit of excess interest.
(3)  Reflects the current subordination credit enhancement of the lowest security in each quartile.
(4)  Reflects the present value of projected principal losses based on the disclosed hypothetical cumulative default and loss severity rates against the outstanding collateral balance.
(5)  Represents the amount of unpaid principal balance covered by monoline insurance coverage. This amount does not represent the maximum amount of losses we could recover, as the monoline insurance also covers interest.
 
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Investments in Non-Agency Mortgage-Related Securities Backed by MTA Loans
 
Table 21 — Investments in Non-Agency Mortgage-Related Securities Backed by MTA Loans
 
                                                                     
        March 31, 2009  
        Underlying Collateral Performance   Credit Enhancement Statistics   Hypothetical Scenarios(4)  
        Unpaid
        Average
  Minimum
                     
    Delinquency
  Principal
    Collateral
  Credit
  Current
  Default
  Severity  
Acquisition Date
  Quartile   Balance     Delinquency(1)   Enhancement(2)   Subordination(3)   Rate   50%     60%     70%  
        (dollars in millions)  
 
2005 & Prior
  1   $ 914       29%       29%       20%       50%     $ 14     $ 50     $ 106  
                                          60       59       131       214  
                                          70       131       226       328  
                                                             
2005 & Prior
  2     993       33%       22%       18%       50%     $ 45     $ 95     $ 151  
                                          60       100       168       239  
                                          70       162       246       332  
                                                             
2005 & Prior
  3     896       35%       30%       18%       50%     $ 21     $ 46     $ 78  
                                          60       50       90       152  
                                          70       97       170       250  
                                                             
2005 & Prior
  4     1,009       40%       28%       20%       50%     $ 15     $ 59     $ 115  
                                          60       73       140       215  
                                          70       144       232       326  
                                                     
2005 & Prior subtotal
      $ 3,812       34%       27%       18%                                  
                                                     
2006
  1   $ 2,247       34%       17%       8%       50%     $ 92     $ 163     $ 274  
                                          60       193       334       479  
                                          70       347       518       691  
                                                             
2006
  2     2,074       39%       15%       9%       50%     $ 23     $ 104     $ 228  
                                          60       164       313       446  
                                          70       332       486       646  
                                                             
2006
  3     2,364       41%       18%       9%       50%     $ 30     $ 97     $ 203  
                                          60       141       271       406  
                                          70       299       466       644  
                                                             
2006
  4     2,260       46%       23%       12%       50%     $ 28     $ 100     $ 200  
                                          60       134       253       385  
                                          70       269       426       591  
                                                     
2006 subtotal
      $ 8,945       40%       18%       8%                                  
                                                     
2007
  1   $ 1,488       21%       21%       7%       50%     $ 8     $ 36     $ 107  
                                          60       50       141       235  
                                          70       145       259       377  
                                                             
2007
  2     1,468       29%       19%       7%       50%     $ 4     $ 27     $ 85  
                                          60       52       121       205  
                                          70       136       239       351  
                                                             
2007
  3     1,424       35%       14%       10%       50%     $ 58     $ 129     $ 204  
                                          60       149       239       330  
                                          70       245       352       460  
                                                             
2007
  4     1,366       42%       33%       9%       50%     $ 13     $ 42     $ 81  
                                          60       53       100       150  
                                          70       103       165       252  
                                                     
2007 subtotal
      $ 5,746       31%       22%       7%                                  
                                                     
Subtotal uninsured non-agency mortgage-related securities backed by MTA loans
      $ 18,503       36%       21%       7%                                  
                                                     
Non-agency mortgage-related securities, backed by MTA loans with monoline bond insurance:
                                                                   
Non-investment grade monoline — no other-than-temporary impairments to date
      $ 182                                                          
Non-investment grade monoline — other-than-temporary impairments taken
        535                                                          
                                                     
Subtotal non-agency mortgage-related securities, backed by MTA loans with monoline bond insurance(5)
      $ 717                                                          
                                                     
Total non-agency mortgage-related securities, backed by MTA loans
      $ 19,220                                                          
                                                     
(1)  Determined based on loans that are 60 days or more past due that underlie the securities. Collateral delinquency percentages are calculated based on the unpaid principal balances and information provided primarily by Intex Solutions, Inc.
(2)  Consists of subordination, financial guarantees and other credit enhancements. Does not include the benefit of excess interest.
(3)  Reflects the current subordination credit enhancement of the lowest security in each quartile.
(4)  Reflects the present value of projected principal losses based on the disclosed hypothetical cumulative default and loss severity rates against the outstanding collateral balance.
(5)  Represents the amount of unpaid principal balance covered by monoline insurance coverage. This amount does not represent the maximum amount of losses we could recover, as the monoline insurance also covers interest.
 
            38 Freddie Mac


Table of Contents

Investments in Non-Agency Mortgage-Related Securities Backed by Alt-A Loans
 
Table 22 — Investments in Non-Agency Mortgage-Related Securities backed by Alt-A Loans
 
                                                                     
    March 31, 2009  
        Underlying
  Credit
                     
        Collateral Performance   Enhancement Statistics                      
        Unpaid
            Minimum
  Hypothetical Scenarios(4)  
    Delinquency
  Principal
    Collateral
  Average Credit
  Current
  Default
  Severity  
Acquisition Date
  Quartile   Balance     Delinquency(1)   Enhancement(2)   Subordination(3)   Rate   45%     55%     65%  
        (dollars in millions)  
 
2004 & Prior
  1   $ 1,150       3%       10%       7%       20%     $ 15     $ 26     $ 44  
                                          35       73       112       153  
                                          50       152       211       273  
                                          65       237       317       398  
                                                             
2004 & Prior
  2     1,179       6%       13%       8%       20%     $ 1     $ 3     $ 13  
                                          35       37       73       115  
                                          50       114       179       244  
                                          65       205       293       380  
                                                             
2004 & Prior
  3     1,171       11%       17%       11%       20%     $     $ 1     $ 5  
                                          35       16       37       76  
                                          50       74       135       201  
                                          65       160       245       334  
                                                             
2004 & Prior
  4     1,180       18%       24%       13%       20%     $     $     $ 2  
                                          35       10       30       57  
                                          50       55       98       145  
                                          65       117       181       252  
                                                     
2004 & Prior subtotal
      $ 4,680       9%       16%       7%                                  
                                                     
                                                             
2005
  1   $ 2,023       5%       8%       5%       20%     $ 41     $ 75     $ 111  
                                          35       165       233       302  
                                          50       302       402       503  
                                          65       443       575       708  
                                                             
2005
  2     2,192       13%       12%       6%       20%     $ 16     $ 33     $ 56  
                                          35       106       181       258  
                                          50       255       367       481  
                                          65       412       561       711  
                                                             
2005
  3     2,085       18%       14%       8%       20%     $ 6     $ 21     $ 42  
                                          35       74       116       159  
                                          50       157       237       327  
                                          65       279       398       519  
                                                             
2005
  4     2,057       29%       20%       7%       20%     $ 2     $ 7     $ 17  
                                          35       34       56       82  
                                          50       84       133       186  
                                          65       161       242       342  
                                                     
2005 subtotal
      $ 8,357       16%       14%       5%                                  
                                                     
2006
  1   $ 1,022       7%       11%       5%       20%     $ 17     $ 33     $ 51  
                                          35       80       115       150  
                                          50       150       201       252  
                                          65       222       289       356  
                                                             
2006
  2     1,032       19%       14%       5%       20%     $ 15     $ 26     $ 38  
                                          35       66       106       147  
                                          50       150       211       273  
                                          65       241       323       406  
                                                             
2006
  3     1,020       34%       12%       1%       20%     $ 7     $ 10     $ 16  
                                          35       26       41       57  
                                          50       63       98       136  
                                          65       123       179       242  
                                                             
2006
  4     1,059       50%       10%       5%       20%     $     $     $  
                                          35                    
                                          50       4       26       63  
                                          65       67       143       224  
                                                     
2006 subtotal
      $ 4,133       28%       12%       1%                                  
                                                     
                                                             
2007
  1   $ 479       29%       8%       5%       20%     $ 12     $ 20     $ 28  
                                          35       40       54       68  
                                          50       68       89       111  
                                          65       99       130       161  
                                                             
2007
  2     737       35%       6%       6%       20%     $     $ 1     $ 1  
                                          35       4       12       27  
                                          50       43       78       113  
                                          65       111       158       206  
                                                             
2007
  3     778       40%       11%       4%       20%     $     $     $ 1  
                                          35       4       7       10  
                                          50       18       44       78  
                                          65       69       121       177  
                                                             
2007
  4     603       48%       13%       1%       20%     $     $     $  
                                          35             1       2  
                                          50       8       19       31  
                                          65       32       69       109  
                                                     
2007 subtotal
      $ 2,597       38%       10%       1%                                  
                                                     
Subtotal uninsured non-agency mortgage-related securities backed by Alt-A loans
      $ 19,767       20%       13%       1%                                  
                                                     
Non-agency mortgage-related securities, backed by Alt-A loans with monoline bond insurance:
                                                                   
Non-investment grade monoline — no other-than-temporary impairments to date       $ 189                                                          
Non-investment grade monoline — other-than-temporary impairments taken         326                                                          
                                                     
Subtotal non-agency mortgage-related securities, backed by Alt-A loans with monoline bond insurance(5)
      $ 515                                                          
                                                     
Total non-agency mortgage-related securities, backed by Alt-A loans
      $ 20,282                                                          
                                                     
(1)  Determined based on loans that are 60 days or more past due that underlie the securities. Collateral delinquency percentages are calculated based on the unpaid principal balance and information provided primarily by Intex Solutions, Inc.
(2)  Consists of subordination, financial guarantees and other credit enhancements. Does not include the benefit of excess interest.
(3)  Reflects the current subordination credit enhancement of the lowest security in each quartile.
(4)  Reflects the present value of projected principal losses based on the disclosed hypothetical cumulative default and loss severity rates against the outstanding collateral balance.
(5)  Represents the amount of unpaid principal balance covered by monoline insurance coverage. This amount does not represent the maximum amount of losses we could recover, as the monoline insurance also covers interest.
 
            39 Freddie Mac


Table of Contents

Ratings of Non-Agency Mortgage-Related Securities
 
Table 23 shows the ratings of available-for-sale non-agency mortgage-related securities backed by subprime, MTA, Alt-A and other loans held at March 31, 2009 based on their ratings as of March 31, 2009 as well as those held at December 31, 2008 based on their ratings as of December 31, 2008. Tables 23 and 24 use the lowest rating available for each security.
 
Table 23 — Ratings of Available-For-Sale Non-Agency Mortgage-Related Securities backed by Subprime, MTA, Alt-A and Other Loans at March 31, 2009 and December 31, 2008
 
<
                                 
    Unpaid
          Gross
    Monoline
 
    Principal
    Amortized
    Unrealized
    Insurance
 
Credit Ratings as of March 31, 2009
  Balance     Cost     Losses     Coverage(1)  
    (in millions)  
 
Subprime loans:
                               
AAA-rated
  $ 11,546     $ 11,533     $ (2,945 )   $ 39  
Other investment grade
    12,175       11,936       (3,069 )     1,416  
Below investment grade
    47,264       40,224       (11,517 )     1,769  
                                 
Total
  $ 70,985     $ 63,693     $ (17,531 )   $ 3,224  
                                 
MTA loans:
                               
AAA-rated
  $     $     $     $  
Other investment grade
    839       497       (209 )     335  
Below investment grade
    18,381       10,354       (4,119 )     382  
                                 
Total
  $ 19,220     $ 10,851     $ (4,328 )   $ 717  
                                 
Alt-A and other loans:
                               
AAA-rated
  $ 6,010     $ 5,855     $ (2,128 )   $ 179  
Other investment grade
    5,177       3,873       (1,523 )     2,468  
Below investment grade
    12,977       7,754       (1,965 )     1,439  
                                 
Total
  $ 24,164     $ 17,482     $ (5,616 )   $ 4,086  
                                 
                                 
                                 
Credit Ratings as of December 31, 2008
                       
 
Subprime loans: