10-Q 1 f71327e10vq.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 June 30, 2010
 
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 x
 
Non-accelerated filer (Do not check if a smaller reporting company) o 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 July 23, 2010, there were 649,150,132 shares of the registrant’s common stock outstanding.
 


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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, our current expectations and objectives for our efforts under the MHA Program and other programs to assist the U.S. residential mortgage market, our future business plans, liquidity, capital management, economic and market conditions and trends, market share, the effect of legislative and regulatory developments, implementation of new accounting standards, credit losses, internal control remediation efforts, 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: (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, 2009, or 2009 Annual Report, and our Quarterly Report on Form 10-Q for the first quarter of 2010; and (b) the “BUSINESS” section of our 2009 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, we use certain acronyms and terms 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 and six months ended June 30, 2010 and our 2009 Annual Report.
 
Overview
 
Freddie Mac was chartered by Congress in 1970 with a public mission to stabilize the nation’s residential mortgage markets 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 had a net loss attributable to Freddie Mac of $4.7 billion for the three months ended June 30, 2010, reflecting the ongoing adverse conditions in the U.S. mortgage markets. Total equity (deficit) was $(1.7) billion at June 30, 2010. The $1.7 billion deficit was primarily driven by our net loss of $4.7 billion and the $1.3 billion dividend payment to Treasury on the senior preferred stock during the second quarter of 2010. These items were partially offset by a $4.1 billion decrease in unrealized losses related to available-for-sale securities recorded in AOCI during the second quarter of 2010. To address the deficit in our net worth, FHFA, as Conservator, will submit a draw request, on our behalf, to Treasury for $1.8 billion in funding under our Purchase Agreement with Treasury. Following receipt of the draw, the aggregate liquidation preference on the senior preferred stock owned by Treasury will be $64.1 billion.
 
Our financial results for the six months ended June 30, 2010 were significantly affected by changes in accounting principles, which resulted in a net decrease to total equity (deficit) as of January 1, 2010 of $11.7 billion.
 
Business Objectives
 
We continue to operate under the conservatorship that commenced on September 6, 2008, conducting our business under the direction of FHFA as our Conservator. Conservatorship benefits us by, for example, providing us improved access to the debt markets as a result of the support we received from the Federal Reserve and continue to receive from Treasury. We continue to provide access to funding for mortgage originators and, indirectly, for mortgage borrowers. In addition, through our role in the Obama Administration’s initiatives, including the MHA Program, we continue to work to meet the needs of the mortgage market by making homeownership and rental housing more affordable, reducing the number of foreclosures and helping families keep their homes, where possible.
 
While the conservatorship has benefited us, we are subject to certain constraints on our business activities by Treasury due to the terms of, and Treasury’s rights under, the Purchase Agreement and by FHFA, as our Conservator. There is also significant uncertainty as to whether or when we will emerge from conservatorship, as it has no specified termination date, and as to what changes may occur to our business structure during or following conservatorship, including whether we will continue to exist. While we are not aware of any current plans of our Conservator to significantly change our business structure in the near-term, Treasury and HUD, in consultation with other government agencies, are expected to develop legislative recommendations in the near term for the future of the GSEs. We have no ability to predict the outcome of these deliberations.
 
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In a letter to the Chairmen and Ranking Members of the Senate Banking and House Financial Services Committees dated February 2, 2010, the Acting Director of FHFA stated that minimizing our credit losses is our central goal and that we will be limited to continuing our existing core business activities and taking actions necessary to advance the goals of the conservatorship. The Acting Director stated that permitting us to offer new products is inconsistent with the goals of the conservatorship. The Acting Director also stated that FHFA does not expect we will be a substantial buyer or seller of mortgages for our mortgage-related investments portfolio, except for purchases of delinquent mortgages out of PC pools. These restrictions could adversely affect our business over time. We are also subject to limits on the amount of assets we can sell from our mortgage-related investments portfolio in any calendar month without review and approval by FHFA and, if FHFA determines, Treasury.
 
Government Support for our Business
 
We are dependent upon the continued support of Treasury and FHFA in order to continue operating our business. Our ability to access funds from Treasury under the Purchase Agreement is critical to keeping us solvent and avoiding the appointment of a receiver by FHFA under statutory mandatory receivership provisions.
 
Significant recent developments with respect to the support we receive from the government include the following:
 
  •  On June 30, 2010, we received $10.6 billion in funding from Treasury under the Purchase Agreement relating to our net worth deficit as of March 31, 2010, which increased the aggregate liquidation preference of the senior preferred stock to $62.3 billion as of June 30, 2010.
 
  •  On June 30, 2010, we paid dividends of $1.3 billion in cash on the senior preferred stock to Treasury for the second quarter of 2010 at the direction of the Conservator.
 
To address our deficit in net worth of $1.7 billion as of June 30, 2010, FHFA, as Conservator, will submit a draw request, on our behalf, to Treasury under the Purchase Agreement in the amount of $1.8 billion. We expect to receive these funds by September 30, 2010. Upon funding of the draw request:
 
  •  the aggregate liquidation preference on the senior preferred stock owned by Treasury will increase from $62.3 billion to $64.1 billion; and
 
  •  the corresponding annual cash dividends payable to Treasury will increase to $6.4 billion, which exceeds our annual historical earnings in most periods.
 
We expect to make additional draws under the Purchase Agreement in future periods. We expect our net worth to be negatively impacted by continued large credit-related expenses as we move through this credit cycle. Our net worth will also be negatively impacted by dividend payments on our senior preferred stock. To date, we have paid $6.9 billion in cash dividends on the senior preferred stock. The payment of dividends on our senior preferred stock in cash reduces our net worth. Future payments of senior preferred dividends combined with potentially substantial quarterly commitment fees payable to Treasury beginning in 2011 (the amounts of which must be determined by December 31, 2010), will continue to have an adverse impact on our future financial condition and net worth.
 
For more information on the terms of the conservatorship, the powers of our Conservator and the terms of the Purchase Agreement, see “BUSINESS — Conservatorship and Related Developments” in our 2009 Annual Report.
 
Delisting of Common Stock and Preferred Stock from NYSE
 
On June 16, 2010, we announced that we notified the NYSE of our intent to delist our common stock and our 20 listed classes of preferred stock pursuant to a directive by FHFA, our Conservator, requiring us to delist our common and preferred securities from the NYSE. According to a press release by FHFA, the Acting Director of FHFA issued similar directives to both us and Fannie Mae.
 
On June 28, 2010 and in accordance with SEC rules and regulations, we filed a Form 25 (Notification of Removal from Listing under Section 12(b) of the Securities Exchange Act of 1934) and the delisting of our common and preferred stock from the NYSE was effective on July 8, 2010.
 
After the delisting of our equity securities from the NYSE, our common stock and the classes of preferred stock that were previously listed on the NYSE are traded exclusively in the OTC market. Shares of our common stock now trade under the ticker symbol FMCC. We expect that our common stock and the previously listed classes of preferred stock will continue to trade in the OTC market so long as market makers demonstrate an interest in trading the common and preferred stock. See “RISK FACTORS — There may not be an active, liquid trading market for our equity securities” for additional information.
 
The transition to OTC trading does not affect our obligation to file periodic and certain other reports with the SEC under applicable federal securities laws.
 
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Changes in Accounting Standards Related to Accounting for Transfers of Financial Assets and Consolidation of VIEs
 
In June 2009, the FASB issued two new accounting standards that amended the guidance applicable to the accounting for transfers of financial assets and the consolidation of VIEs. Effective January 1, 2010, we adopted these new accounting standards prospectively for all existing VIEs. The adoption of these two standards had a significant impact on our consolidated financial statements and other financial disclosures beginning in the first quarter of 2010. As a result of the adoption, our consolidated balance sheets reflect the consolidation of our single-family PC trusts and certain of our Structured Transactions. This consolidation resulted in an increase to our assets and liabilities of $1.5 trillion and a net decrease to total equity (deficit) as of January 1, 2010 of $11.7 billion.
 
Because our results of operations for the three and six months ended June 30, 2010 (on both a GAAP and Segment Earnings basis) include the activities of the consolidated VIEs, they are not directly comparable with the results of operations for the three and six months ended June 30, 2009, which reflect the accounting policies in effect during that time (i.e., when the majority of the securitization entities were accounted for off-balance sheet).
 
See “NOTE 2: CHANGE IN ACCOUNTING PRINCIPLES” for detailed discussions regarding the new accounting standards and the impact to our financial statements.
 
Results for the Second Quarter of 2010
 
Financial Results
 
Net income (loss) attributable to Freddie Mac was $(4.7) billion and $0.3 billion for the second quarters of 2010 and 2009, respectively. Key highlights of our financial results for the second quarter of 2010 include:
 
  •  Net interest income for the second quarter of 2010 decreased to $4.1 billion from $4.3 billion during the second quarter of 2009, mainly due to lower mortgage-related securities balances and increased amounts of non-performing mortgage loans on our consolidated balance sheet, partially offset by lower funding costs and accounting changes requiring the inclusion of income which prior to 2010 was classified as management and guarantee fee income.
 
  •  Provision for credit losses was $5.0 billion and $5.7 billion for the second quarters of 2010 and 2009, respectively. The provision for credit losses in the second quarter of 2010 was primarily driven by increased TDR volume during the quarter while the provision for credit losses in the second quarter of 2009 reflects significant increases in non-performing loans and severity rates in that period.
 
  •  Non-interest income (loss) was $(3.6) billion for the second quarter of 2010, compared to $3.2 billion for the second quarter of 2009. This decline was primarily due to a loss in the second quarter of 2010 on derivatives compared to a gain in the second quarter of 2009, partially offset by lower net impairments of available-for-sale securities recognized in earnings in the second quarter of 2010.
 
  •  At June 30, 2010, our liabilities exceeded our assets under GAAP and, accordingly, we must obtain funding from Treasury pursuant to its commitment under the Purchase Agreement in order to avoid being placed into receivership by FHFA.
 
We expect a variety of factors will place downward pressure on our financial results in future periods, and could cause us to incur additional GAAP net losses. For a discussion of factors that could result in additional draws, see “LIQUIDITY AND CAPITAL RESOURCES — Capital Resources.”
 
Out-of-Period Accounting Adjustment
 
During the second quarter of 2010, we identified a backlog related to the processing of certain foreclosure alternatives reported to us by our servicers, principally loan modifications and short sales. This backlog was the result of a significant increase in the volume of foreclosure alternatives executed by servicers beginning in 2009, which placed pressure on our existing loan processing capabilities. This backlog in processing loan modifications and short sales resulted in erroneous loan data within our loan reporting systems, thereby impacting our financial accounting and reporting systems. The resulting error impacts our provision for credit losses, allowance for loan losses, and provision for income taxes and affects our previously reported financial statements for the interim period ended March 31, 2010 and the interim 2009 periods and full year ended December 31, 2009. Based upon our evaluation of all relevant quantitative and qualitative factors related to this error, we concluded that this error is not material to our previously issued consolidated financial statements for any of the periods affected and is not material to our estimated earnings for the full year ending December 31, 2010 or to the trend of earnings. As a result, in accordance with the accounting standard related to accounting changes and correction of errors, we have recorded the cumulative effect of this error as a correction in the second quarter of 2010 as an increase to our provision for credit losses. The cumulative effect, net of taxes, of this error corrected in the second quarter of 2010 was $1.2 billion, of which $0.9 billion related to the year
 
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ended December 31, 2009. We are taking corrective actions to improve our processing of and accounting for foreclosure alternatives by: (a) expanding our foreclosure alternative processing capabilities to be more responsive to changes in volumes; and (b) enhancing our controls related to data inputs used in our accounting for credit losses. For additional information, see “CONTROLS AND PROCEDURES — Changes in Internal Control Over Financial Reporting During the Quarter Ended June 30, 2010.”
 
Investment Activity and Limits Under the Purchase Agreement
 
Under the terms of the Purchase Agreement, the UPB of our mortgage-related investments portfolio calculated as discussed below may not exceed $810 billion as of December 31, 2010 and this limit will be reduced by 10% each year until it reaches $250 billion.
 
Our mortgage-related investments portfolio under the Purchase Agreement is determined without giving effect to any change in accounting standards related to the transfer of financial assets and consolidation of VIEs or any similar accounting standard. Accordingly, for purposes of the portfolio limit, when PCs and certain Structured Transactions are purchased into the mortgage-related investments portfolio, this is considered the acquisition of assets rather than the reduction of debt. We disclose our mortgage assets on this basis monthly under the caption “Mortgage-Related Investments Portfolio — Ending Balance” in our Monthly Volume Summary reports, which are available on our website and in current reports on Form 8-K we file with the SEC.
 
Table 1 presents the UPB of our mortgage-related investments portfolio, for purposes of the limit imposed by the Purchase Agreement and FHFA regulation. The UPB of our mortgage-related investments portfolio declined slightly from December 31, 2009 to June 30, 2010, primarily due to liquidations, partially offset by the purchase of $96.8 billion of delinquent loans from PC trusts.
 
Table 1 — Mortgage-Related Investments Portfolio(1)
 
                 
    June 30, 2010     December 31, 2009  
    (in millions)  
 
Investments segment — Mortgage investments portfolio
  $ 523,017     $ 597,827  
Single-family Guarantee segment — Single-family unsecuritized mortgage loans(2)
    72,479       10,743  
Multifamily segment — Mortgage investments portfolio
    144,013       146,702  
                 
Total UPB of mortgage-related investments portfolio
  $ 739,509     $ 755,272  
                 
(1)  Based on UPB and excludes mortgage loans and mortgage-related securities traded, but not yet settled.
(2)  Represents unsecuritized non-performing single-family loans for which the Single-family Guarantee segment is actively performing loss mitigation.
 
Liquidity
 
We believe that the increased support provided by Treasury pursuant to the December 2009 amendment to the Purchase Agreement will be sufficient to enable us to maintain our access to the debt markets and ensure that we have adequate liquidity to conduct our normal business activities through December 31, 2012, although the costs of our debt funding could vary. For information regarding the Purchase Agreement, see “BUSINESS — Conservatorship and Related Developments — Overview of the Purchase Agreement” in our 2009 Annual Report.
 
Under the December 2009 amendment to the Purchase Agreement, the $200 billion maximum amount of the commitment from Treasury will increase as necessary to eliminate any net worth deficits we may have during 2010, 2011 and 2012. After 2012, Treasury’s remaining funding commitment under the Purchase Agreement will be $149.3 billion ($200 billion maximum amount of the commitment from Treasury reduced by cumulative draws of $50.7 billion for net worth deficits through December 31, 2009), minus the lesser of (a) any positive net worth we may have as of December 31, 2012 and (b) any cumulative amount of any draws that we have taken to eliminate net worth deficits during 2010, 2011 and 2012.
 
Total Mortgage Portfolio
 
Our total mortgage portfolio declined 2.5% on an annualized basis in the first half of 2010 and was $2.2 trillion at June 30, 2010. Our total non-performing assets were approximately 5.9% and 5.2% of our total mortgage portfolio, excluding non-Freddie Mac securities, at June 30, 2010 and December 31, 2009, respectively, and our loan loss reserves totaled 34.1% of our non-performing loans, at both dates.
 
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.
 
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Beginning January 1, 2010, we revised our method for presenting Segment Earnings to reflect changes in how management measures and assesses the financial performance of each segment and the company as a whole. Table 2 presents Segment Earnings by segment and the All Other category and includes a reconciliation of Segment Earnings to net income (loss) attributable to Freddie Mac prepared in accordance with GAAP for the three and six months ended June 30, 2009. We restated Segment Earnings for the three and six months ended June 30, 2009 to reflect the revisions to our method of evaluating the performance of our reportable segments. We did not include in Segment Earnings adjustments related to our adoption of the amendments to the accounting standards for transfers of financial assets and consolidation of VIEs. We applied this change prospectively, consistent with our GAAP financial results. As a result, our Segment Earnings results for the three and six months ended June 30, 2010 are not directly comparable to the results for the three and six months ended June 30, 2009.
 
Table 2 — Summary of Segment Earnings(1)
 
                                 
    Three Months Ended
    Six Months Ended
 
    June 30,     June 30,  
    2010     2009     2010     2009  
    (in millions)  
 
Segment Earnings, net of taxes:
                               
Investments
  $ (411 )   $ 3,108     $ (1,724 )   $ 3,626  
Single-family Guarantee
    (4,505 )     (4,494 )     (10,101 )     (14,785 )
Multifamily
    150       (12 )     371       (4 )
All Other
    53       106       53       (461 )
Reconciliation to GAAP net income (loss) attributable to Freddie Mac:
                               
Credit guarantee-related adjustments(2)
          2,452             3,003  
Tax-related adjustments
          (858 )           (1,052 )
                                 
Total reconciling items, net of taxes
          1,594             1,951  
                                 
Net income (loss) attributable to Freddie Mac   $ (4,713 )   $ 302     $ (11,401 )   $ (9,673 )
                                 
(1)  Beginning January 1, 2010, under our revised method, the sum of Segment Earnings for each segment and the All Other category equals GAAP net income (loss) attributable to Freddie Mac.
(2)  Consists primarily of amortization and valuation adjustments related to the guarantee asset and guarantee obligation which are excluded from Segment Earnings and cash compensation exchanged at the time of securitization, excluding buy-up and buy-down fees, which is amortized into earnings. These reconciling items exist in periods prior to 2010 as the amendment to the accounting standards for transfers of financial assets and consolidation of VIEs was applied prospectively on January 1, 2010.
 
For more information on Segment Earnings, including the revised method we use to present Segment Earnings, see “CONSOLIDATED RESULTS OF OPERATIONS — Segment Earnings” and “NOTE 16: SEGMENT REPORTING.”
 
Mortgage Credit Risk
 
Mortgage and credit market conditions remained challenging in the second quarter of 2010. A number of factors make it difficult to predict when a sustained recovery in the mortgage and credit markets will occur, including, among others, uncertainty concerning the effect of current or future government actions in these markets. We estimate that home prices increased 2.6% nationwide during the first half of 2010, which includes a 3.4% increase in the second quarter of 2010, based on our own index of our single-family credit guarantee portfolio. We believe home prices in the first half of 2010 were positively impacted by seasonal factors as well as availability of the federal homebuyer tax credit. Our expectation for home prices, based on our own index, is that national average home prices will decline over the near term before any sustained turnaround in housing begins, due to, among other factors:
 
  •  negative impact of seasonal slowdown of home purchases in the second half of the year;
 
  •  our expectation for a continued increase in distressed sales, which include short sales and sales by financial institutions of their REO properties. We expect a continued increase in short sales, in part due to implementation of HAFA, which is intended to encourage these transactions. Our expectation of increasing distressed sales reflects, in part, the substantial backlog of delinquent loans accumulated by lenders over recent periods, due to various foreclosure suspensions, extended foreclosure timelines in certain states, servicer capacity constraints, and delays associated with the processing for HAMP. We expect many of these loans will transition to REO and be sold in the remainder of 2010 and 2011. This may have a dampening effect on prices as the market absorbs the additional supply of homes for sale;
 
  •  the expiration of the federal homebuyer tax credit; and
 
  •  the likelihood that unemployment rates will remain high.
 
Even if home prices do not decline in the near term as we expect, our credit losses will likely remain significantly above historical levels for the foreseeable future due to the substantial number of borrowers in our single-family credit
 
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guarantee portfolio that owe more on their mortgage than their home is currently worth as well as the substantial backlog of delinquent loans discussed above.
 
Single-Family Credit Guarantee Portfolio
 
The following table provides certain credit statistics for our single-family credit guarantee portfolio, which consists of unsecuritized single-family mortgage loans held-for-investment and those underlying our issued single-family PCs and Structured Securities and other mortgage-related guarantees. The UPB of our single-family credit guarantee portfolio decreased 2%, from approximately $1.90 trillion at December 31, 2009 to $1.87 trillion at June 30, 2010.
 
Table 3 — Credit Statistics, Single-Family Credit Guarantee Portfolio
 
                                         
    As of
    6/30/2010   3/31/2010   12/31/2009   9/30/2009   6/30/2009
 
Delinquency rate(1)
    3.96 %     4.13 %     3.98 %     3.43 %     2.89 %
Non-performing assets (in millions)(2)
  $ 117,986     $ 115,490     $ 103,350     $ 90,047     $ 75,224  
Single-family loan loss reserve (in millions)(3)
  $ 37,384     $ 35,969     $ 33,026     $ 30,160     $ 25,457  
REO inventory (in units)
    62,178       53,831       45,047       41,133       34,699  
                                         
                                         
    For the Three Months Ended
    6/30/2010   3/31/2010   12/31/2009   9/30/2009   6/30/2009
    (in units, unless noted)
 
Delinquent loan additions(1)(4)
    118,891       145,223       163,764       143,632       133,352  
Loan modifications(5)
    49,492       44,076       15,805       9,013       15,603  
REO acquisitions
    34,662       29,412       24,749       24,373       21,997  
REO disposition severity ratio(6)
    38.0 %     39.0 %     38.5 %     39.2 %     39.8 %
Single-family credit losses (in millions)(7)
  $ 3,851     $ 2,907     $ 2,498     $ 2,138     $ 1,906  
(1)  See “RISK MANAGEMENT — Credit Risks — Mortgage Credit Risk — Credit Performance — Delinquencies” for further information, including information about changes in our method of presenting delinquency rates.
(2)  Consists of the UPB of loans in our single-family credit guarantee portfolio that have undergone a TDR or that are three monthly payments or more past due or in foreclosure and the net carrying value of our single-family REO assets.
(3)  Consists of the combination of: (a) our allowance for loan loss on mortgage loans held for investment; and (b) our reserve for guarantee losses associated with non-consolidated single-family mortgage securitization trusts and other mortgage-related financial guarantees, the latter of which is included within other liabilities on our consolidated balance sheets beginning January 1, 2010.
(4)  Excludes delinquent loans underlying our Structured Transactions.
(5)  Represents the number of completed modifications under agreement with the borrower during the quarter. Excludes forbearance agreements, repayment plans, and loans in the trial period under HAMP.
(6)  Calculated as the amount of our losses recorded on disposition of REO properties during the respective quarterly period divided by the aggregate UPB of the related loans. The amount of losses recognized on disposition of the properties is equal to the amount by which the UPB of the loans exceeds the amount of net sales proceeds from disposition of the properties. Excludes other related expenses, such as property maintenance and costs, as well as related recoveries from credit enhancements, such as mortgage insurance.
(7)  See endnote (3) of “Table 53 — Credit Loss Performance” for information on the composition of our credit losses.
 
As shown in the table above, although the number of delinquent loan additions (those borrowers who became three monthly payments or more past due or in foreclosure) declined in the second quarter of 2010, our single-family credit guarantee portfolio continued to experience a high level of delinquencies. The credit losses of our single-family credit guarantee portfolio continued to increase in the second quarter of 2010 due to several factors, including the following:
 
  •  The prolonged housing and economic downturn continued to affect a broad group of borrowers and we believe that high unemployment rates are contributing to persistently high delinquency rates. The unemployment rate in the U.S. was 9.5% at both June 30, 2009 and June 30, 2010. We continued to experience an increase in the delinquency rate of single-family interest-only, Alt-A, and option ARM loans in the first half of 2010. Delinquency rates for 30-year fixed-rate amortizing loans, a more traditional mortgage product, remained the same at 4.0% at both June 30, 2010 and December 31, 2009.
 
  •  Certain loan groups within the single-family credit guarantee portfolio, such as those underwritten with certain lower documentation standards and interest-only loans, as well as 2006 and 2007 vintage loans, continue to be large contributors to our credit losses.
 
We believe the credit quality of the single-family loans we acquired in the first half of 2010 (excluding those refinance mortgages in the Home Affordable Refinance Program) is strong as compared to loans acquired from 2005 through 2008, as measured by original LTV ratios, FICO scores, and income documentation standards.
 
Multifamily Mortgage Portfolio
 
The following table provides certain credit statistics for our multifamily mortgage portfolio, which consists of loans held by us on our consolidated balance sheets as well as those underlying non-consolidated PCs, Structured Securities and other mortgage-related financial guarantees, but excluding those underlying Structured Transactions and
 
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our guarantees of HFA bonds. The UPB of our multifamily mortgage portfolio decreased approximately 2%, from $98.2 billion at December 31, 2009 to $96.5 billion at June 30, 2010.
 
Table 4 — Credit Statistics, Multifamily Mortgage Portfolio
 
                                         
    As of
    6/30/2010   3/31/2010   12/31/2009   9/30/2009   6/30/2009
 
Delinquency rate(1) — non-credit-enhanced loans
    0.10 %     0.13 %     0.07 %     0.03 %     0.05 %
Delinquency rate(1) — credit-enhanced loans
    1.66 %     1.11 %     1.13 %     1.02 %     0.91 %
Delinquency rate(1) — total
    0.28 %     0.24 %     0.19 %     0.14 %     0.15 %
Non-performing assets, on balance sheet (in millions)(2)
  $ 496     $ 419     $ 351     $ 274     $ 209  
Non-performing assets, off-balance sheet (in millions)(2)
  $ 227     $ 203     $ 218     $ 198     $ 154  
Multifamily loan loss reserve (in millions)(3)
  $ 935     $ 842     $ 831     $ 404     $ 330  
(1)  Based on the UPB of mortgages two monthly payments or more past due. See “RISK MANAGEMENT — Credit Risks — Mortgage Credit Risk — Credit Performance — Delinquencies” for further information, including information about changes in our method of presenting delinquency rates. The delinquency rate for multifamily loans, including Structured Transactions, was 0.28% and 0.20% as of June 30, 2010 and December 31, 2009, respectively.
(2)  Consists of the UPB of loans that: (a) have undergone a TDR; (b) are three monthly payments or more past due; or (c) are deemed credit-impaired based on management’s judgment. Non-performing assets on balance sheet include the net carrying value of our multifamily REO assets.
(3)  Includes our reserve for guarantee losses that beginning January 1, 2010 is presented within other liabilities on our consolidated balance sheets.
 
National multifamily market indicators such as unemployment, effective rents, and vacancies have shown signs of modest improvement in 2010. However, certain markets continue to exhibit weak fundamentals, particularly in the Southeast and West regions, which could adversely affect delinquency rates and credit losses in future periods. Multifamily loans are generally repaid from the cash flows generated by the underlying property. Prolonged periods of high apartment vacancies and negative or flat effective rent growth will adversely impact a multifamily property’s net operating income and related cash flows, which can strain the borrower’s ability to make timely required loan payments and thereby potentially increase our delinquencies and credit losses. Delinquency rates have historically been a lagging indicator and, as a result, we may continue to experience increased delinquencies and credit losses as markets stabilize, reflecting the impact of an extended period of lower property cash flows.
 
The delinquency rates for loans in our multifamily mortgage portfolio are positively impacted to the extent we are successful in working with borrowers to modify their loans prior to their becoming delinquent or providing temporary relief through short term loan extensions. In the first half of 2010, we extended, modified or restructured twenty-five loans totaling $303 million in UPB, compared to nine loans with $36 million in UPB in the first half of 2009.
 
In certain cases, we receive credit enhancement on the multifamily loans we purchase or guarantee, in the form of supplemental collateral or allocation of first losses to holders of subordinate interests, which reduces our risk of credit loss. As of June 30, 2010, approximately two-thirds of the multifamily loans, measured both in terms of number of loans and on a UPB basis, that were two monthly payments or more past due had credit enhancements that we believe will mitigate our expected losses on those loans.
 
Loss Mitigation
 
We continue to devote significant resources to assist our single-family seller/servicers complete loan modifications and support other outreach programs with the objectives of keeping more borrowers in their homes and reducing losses where possible. Our loss mitigation activities included the following:
 
  •  We completed 153,574 and 68,877 single-family foreclosure alternatives during the first half of 2010 and 2009, respectively, including 22,117 and 7,914 short sales, respectively. This included 93,568 and 40,226 completed loan modifications during the first half of 2010 and 2009, respectively. We developed a substantial backlog of delinquent loans during 2009 due to various suspensions of foreclosure transfers and the implementation of HAMP. Foreclosure alternatives completed in the first half of 2010 represent approximately 31% of our single-family loans that were three monthly payments or more past due as of June 30, 2010.
 
  •  Based on information provided by the MHA Program administrator, we assisted approximately 143,000 single-family borrowers through HAMP as of June 30, 2010, of whom approximately 62,000 had made their first payment under the trial period and 81,000 had completed modifications. FHFA reported that approximately 208,000 of our loans were in active trial periods or were modified under HAMP as of March 31, 2010. Unlike the MHA Program administrator’s data, FHFA’s HAMP information includes: (a) loans in the trial period regardless of the first payment date; and (b) modifications that are pending the borrower’s acceptance. While HAFA became effective on April 5, 2010, our version of the program did not become mandatory until August 1, 2010. We expect this program to increase the number of short sales completed during the second half of 2010.
 
Some of our loss mitigation activities create fluctuations in our single-family credit statistics. For example, loans that we report as delinquent before they enter the HAMP trial period remain as delinquent for purposes of our
 
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delinquency reporting until the modifications become effective and the loans are removed from delinquent status. However, under many of our non-HAMP modifications, the borrower would return to a current payment status sooner, because many of these modifications do not have trial periods. Thus, the volume and timing of effective modifications impacts our reported single-family delinquency rate. We do not have sufficient empirical information to estimate whether, or the extent to which, costs incurred in the near term from HAMP or other MHA Program efforts may be offset, if at all, by the prevention or reduction of potential future costs of loan defaults and foreclosures due to these initiatives. However, we believe our overall loss mitigation programs could reduce our ultimate credit losses over the long term.
 
Investments in Non-Agency Mortgage-Related Securities
 
Our investments in non-agency mortgage-related securities continue to be adversely affected by the ongoing weak housing and credit conditions, as reflected in poor underlying collateral performance, limited liquidity and large risk premiums in the non-agency mortgage market.
 
Our estimate of the present value of expected credit losses on our non-agency mortgage-related securities portfolio decreased from $10.9 billion to $9.9 billion during the three months ended June 30, 2010, due mainly to improved home prices and lower forward interest rates. However, as impairment is determined on an individual security basis, we recorded net impairment of available-for-sale securities recognized in earnings of approximately $428 million on non-agency mortgage-related securities during the three months ended June 30, 2010, as our estimate of the present value of expected credit losses on certain of these individual securities increased during the period.
 
The table below presents the gross unrealized losses, present value of expected credit losses, net impairment of available-for-sale securities recognized in earnings, and principal cash shortfalls for our non-agency mortgage-related securities. Additionally, the table shows delinquency rates and cumulative collateral loss for the loans backing our subprime first lien, option ARM, and Alt-A securities.
 
Table 5 — Non-Agency Mortgage-Related Securities and Certain Related Credit Statistics
 
                                         
    As of
    06/30/2010   03/31/2010   12/31/2009   09/30/2009   06/30/2009
    (dollars in millions)
 
Gross unrealized losses, pre-tax(1)
  $ 31,264     $ 35,067     $ 41,526     $ 47,305     $ 56,172  
Present value of expected credit losses
  $ 9,885     $ 10,914     $ 10,805     $ 10,442     $ 9,570  
Net impairment of available-for-sale securities recognized in earnings for the three months ended
  $ 428     $ 510     $ 667     $ 1,187     $ 2,202  
Principal cash shortfalls for the three months ended
  $ 159     $ 69     $ 38     $ 28     $ 25  
Delinquency rates:(2)
                                       
Non-agency mortgage-related securities backed by:
                                       
Subprime first lien
    46 %     49 %     49 %     46 %     44 %
Option ARM
    45       46       45       42       40  
Alt-A(3)
    26       27       26       24       22  
Cumulative collateral loss:(4)
                                       
Non-agency mortgage-related securities backed by:
                                       
Subprime first lien
    16 %     15 %     13 %     12 %     10 %
Option ARM
    10       9       7       6       4  
Alt-A(3)
    5       5       4       3       3  
(1)  Gross unrealized losses, pre-tax, represent the aggregate of the amount by which amortized cost, after other-than-temporary impairments, exceeds fair value measured at the individual lot level.
(2)  Determined based on the number of loans that are two monthly payments or more past due that underlie the securities using information obtained from a third-party data provider.
(3)  Excludes non-agency mortgage-related securities backed by other loans primarily comprised of securities backed by home equity lines of credit.
(4)  Based on the actual losses incurred on the collateral underlying these securities. Actual losses incurred on the securities that we hold are significantly less than the losses on the underlying collateral as presented in this table, as a majority of the securities we hold include significant credit enhancements, particularly through subordination.
 
We held UPB of $94.1 billion of non-agency mortgage-related securities backed by subprime, option ARM, and Alt-A and other loans as of June 30, 2010, compared to $100.7 billion as of December 31, 2009. This decrease is mainly due to the receipt of monthly remittances of principal repayments from both the recoveries of liquidated loans and, to a lesser extent, voluntary repayments of the underlying collateral representing a partial return of our investment in these securities.
 
Pre-tax unrealized losses on securities backed by subprime, option ARM, and Alt-A and other loans reflected in AOCI decreased to $28.0 billion at June 30, 2010. These unrealized losses declined $1.6 billion during the second quarter of 2010 reflecting fair value gains as these securities moved closer to maturity and a decline in market interest rates, partially offset by slightly widening credit spreads on non-agency mortgage-related securities, which we believe is due largely to increased investor concern resulting from the continued European economic crisis.
 
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We continue to try to mitigate our losses as an investor in non-agency mortgage-related securities. However, the documents governing the securities trusts in which we have invested do not provide us with an active role in individual loan loss mitigation activities.
 
On July 12, 2010, FHFA, as Conservator of Freddie Mac and Fannie Mae, announced that it had issued subpoenas to various entities seeking loan files and other transaction documents related to non-agency mortgage-related securities in which the two enterprises invested. FHFA stated that the documents will enable it to determine whether issuers of these securities and others are liable to Freddie Mac and Fannie Mae for certain losses they have suffered on the securities. In its announcement, FHFA noted that, before and during conservatorship, Freddie Mac and Fannie Mae sought to assess and enforce their rights as investors in non-agency mortgage-related securities, in an effort to recoup losses suffered in connection with their portfolios. However, difficulty in obtaining the loan documents has presented a challenge to the companies’ efforts.
 
There is no assurance how the various entities will respond to the subpoenas, or to what extent the information sought will result in loss recoveries. As a result, the effectiveness of our loss mitigation efforts for these securities is uncertain and any potential recoveries may take significant time to realize.
 
Legislative and Regulatory Matters
 
On March 23, 2010, the Secretary of the Treasury stated in congressional testimony that, after reform, the GSEs will not exist in the same form. On April 22, 2010, Treasury and HUD published seven questions soliciting public comment on the future of the housing finance system, including Freddie Mac and Fannie Mae, and the overall role of the federal government in housing policy. The Chairman of the House Financial Services Committee has stated that he intends to begin work on GSE reform legislation in the fall of 2010.
 
Dodd-Frank Wall Street Reform and Consumer Protection Act
 
On July 21, 2010, President Obama signed the Dodd-Frank Wall Street Reform and Consumer Protection Act, or the Dodd-Frank Act, into law. The Dodd-Frank Act will significantly change the regulation of the financial services industry, including by creating new standards related to regulatory oversight of systemically important financial companies, derivatives, capital requirements, asset-backed securitization, mortgage underwriting, and consumer financial protection. The Act will directly affect the business and operations of Freddie Mac by subjecting us to new and additional regulatory oversight and standards, including with respect to our activities and products. We may also be affected by provisions of the Act and implementing regulations that affect the activities of banks, savings institutions, insurance companies, securities dealers, and other regulated entities that are our customers and counterparties.
 
At this time, it is difficult to assess fully the impact of the Dodd-Frank Act on Freddie Mac and the financial services industry. Implementation of the Act will be accomplished through numerous rulemakings. Therefore, it will take some time for the final effects of the legislation to emerge and be understood. The Dodd-Frank Act also mandates the preparation of studies of a wide range of issues, which could lead to additional legislation or regulatory changes.
 
The new Financial Stability Oversight Council, created by the Dodd-Frank Act to identify and address emerging risk throughout the financial system, will have the power to designate certain nonbank financial companies to be subject to supervision and regulation by the Federal Reserve. If Freddie Mac is designated by the Council to be a nonbank financial company subject to supervision by the Federal Reserve, the Federal Reserve will have authority to examine Freddie Mac and the company may be required to meet more stringent standards than those applicable to nonbank financial companies that do not present similar risks to U.S. financial stability. These standards may include risk-based capital requirements and leverage limits, liquidity requirements, overall risk management requirements, stress tests, resolution plan and credit exposure reporting requirements, concentration limits and additional capital requirements and quantitative limits related to proprietary trading activities.
 
The Dodd-Frank Act will have a significant impact on the derivatives market, including by subjecting swap dealers and certain other substantial users of swaps known as “major swap participants,” or MSPs, to extensive new oversight and regulations, including new capital, margin and business conduct standards, and position limits. If Freddie Mac is deemed to be an MSP, FHFA, in consultation with the SEC and the U.S. Commodity Futures Trading Commission, or CFTC, will be required to establish new rules with respect to our activities as an MSP regarding capital requirements and margin requirements for certain derivatives transactions. Even if we are not deemed an MSP, we could become subject to new CFTC rules related to clearing, trading, and reporting requirements for derivatives transactions.
 
The Dodd-Frank Act will create new standards and requirements related to asset-backed securities, including requiring securitizers and potentially originators to retain a portion of the underlying loans’ credit risk. The impact of this provision on the financial services industry, asset-backed securities markets, and Freddie Mac will be difficult to
 
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determine until the regulations are promulgated. The regulatory provisions could weaken or remove incentives for financial institutions to sell mortgage loans to us, which could have an adverse effect on our business results and financial condition.
 
Under the Dodd-Frank Act, new minimum mortgage underwriting standards will be required for residential mortgages, including a requirement that lenders make a reasonable and good faith determination based on “verified and documented information” that the consumer has a “reasonable ability to repay” the mortgage. The Act requires regulators to establish a class of qualified loans that will receive certain protections from legal liability, such as the borrower’s right to rescind the loan and seek damages. Mortgage originators and assignees including Freddie Mac will be subject to increased legal risk for loans that do not meet these requirements.
 
Under the Dodd-Frank Act, federal regulators, including FHFA, are directed to promulgate regulations, to be applicable to financial institutions including Freddie Mac, that will prohibit incentive-based compensation structures that the regulators determine encourage inappropriate risks by providing excessive compensation or benefits or that could lead to material financial loss. It is possible that any such regulations will have an adverse effect on our ability to retain and recruit management and other valuable employees, as we may be at a competitive disadvantage as compared to other potential employers not subject to these or similar regulations.
 
The Dodd-Frank Act does not address the future of the GSEs. However, the Act states that it is the sense of Congress that reform efforts related to residential mortgage credit and the practices related to such credit would be incomplete without enactment of meaningful structural reforms of Freddie Mac and Fannie Mae. In addition, the Act requires the Secretary of the Treasury to conduct a study and develop recommendations regarding the options for ending the conservatorship. The Secretary’s report and recommendations are required to be submitted to Congress not later than January 31, 2011.
 
For more information, see “RISK FACTORS — The Dodd-Frank Act and related regulation may adversely affect our business activities and financial results.”
 
Energy Loan Tax Assessment Programs
 
A number of states have enacted laws allowing localities to create energy loan assessment programs for the purpose of financing energy efficient home improvements. These programs are typically denominated as Property Assessed Clean Energy, or PACE, programs. While the specific terms may vary, these laws generally treat the new energy assessments like property tax assessments, which generally creates a new lien to secure the assessment that is senior to any existing first mortgage lien. These laws could have a negative impact on Freddie Mac’s credit losses, to the extent large numbers of borrowers obtain this type of financing.
 
On July 6, 2010, FHFA announced that it had determined that certain of these programs present significant safety and soundness concerns that must be addressed by the GSEs. The FHFA statement indicates that letters sent by Freddie Mac and Fannie Mae on May 5, 2010 alerting their seller-servicers that PACE programs with first liens run contrary to the Fannie Mae-Freddie Mac uniform mortgage document remain in effect. In addition, FHFA announced that it is directing Freddie Mac and Fannie Mae to undertake the following prudential actions:
 
  •  For any homeowner who obtained a PACE or PACE-like loan with a first priority lien before July 6, 2010, FHFA has directed Freddie Mac and Fannie Mae to waive their uniform mortgage document prohibitions against such senior liens.
 
  •  In addressing PACE programs with first liens, Freddie Mac and Fannie Mae should undertake actions that protect their safe and sound operations.
 
The statement issued by FHFA indicates that it does not affect our normal underwriting programs or our dealings with PACE programs that do not have a senior lien priority. Also, this directive does not affect our underwriting related to traditional tax liens. We are unable to estimate the amount of loans that may have a PACE lien prior to July 6, 2010 in our single-family credit guarantee portfolio since these loans are not identified as such and borrowers may have obtained such a loan subsequent to our purchase of the first lien mortgage. Beginning July 6, 2010, our seller/servicers represent that there are no PACE liens at origination on single-family loans sold to us.
 
We are subject to lawsuits relating to PACE programs in California. See “NOTE 20 — LEGAL CONTINGENCIES.” Legislation has been introduced in the Senate and the House of Representatives that would require Freddie Mac and Fannie Mae to adopt standards that support PACE programs.
 
Proposed Rule on Conservatorship and Receivership Operations
 
On July 9, 2010, FHFA published in the Federal Register a proposed rule to codify certain terms of conservatorship and receivership operations for Fannie Mae, Freddie Mac and the FHLBs. FHFA noted that among the key issues addressed in the proposed rule are the status and priority of claims and the relationships among various
 
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classes of creditors and equity-holders under conservatorships or receiverships. The Acting Director of FHFA stated that publication of this rule for comment has no impact on the current conservatorship operations and is not a reflection of the condition of Freddie Mac, Fannie Mae or the FHLBs.
 
Affordable Housing Goals
 
In March 2010, we reported to FHFA that we did not meet the 2009 underserved areas housing goal, special affordable housing goal, underserved areas home purchase subgoal and multifamily special affordable target. In June 2010, FHFA notified us that it had determined that we failed to achieve these goals. FHFA determined that achievement of the underserved areas housing goal and multifamily special affordable target was infeasible, but that achievement of the special affordable housing goal and underserved areas home purchase subgoal was feasible. FHFA also notified us of its determination that we will not be required to submit a housing plan with regard to any such goals.
 
Our housing goals and results for 2009 are set forth below:
 
Table 6 — Affordable Housing Goals and Reported Results for 2009(1)
 
                 
    Year Ended December 31, 2009  
Housing Goals and Actual Results
  Goal     Result  
 
Low- and moderate-income goal
    43 %     44.7 %
Underserved areas goal(2)
    32       26.8  
Special affordable goal
    18       17.8  
Multifamily special affordable volume target (in billions)(2)
  $ 4.60     $ 3.69  
                 
                 
    Year Ended December 31, 2009  
Home Purchase Subgoals and Actual Results
  Goal     Result  
 
Low- and moderate-income subgoal
    40 %     48.4 %
Underserved areas subgoal
    30       27.9  
Special affordable subgoal
    14       20.6  
(1)  An individual mortgage may qualify for more than one of the goals or subgoals. Each of the goal and subgoal percentages and each of our percentage results is determined independently and cannot be aggregated to determine a percentage of total purchases that qualifies for these goals or subgoals.
(2)  These goals were determined to be infeasible.
 
The Reform Act establishes a duty for Freddie Mac and Fannie Mae to serve three underserved markets (manufactured housing, affordable housing preservation and rural areas) by developing loan products and flexible underwriting guidelines to facilitate a secondary market for mortgages for very low-, low- and moderate-income families in those markets. Effective for 2010, FHFA is required to establish a manner for annually: (1) evaluating whether and to what extent Freddie Mac and Fannie Mae have complied with the duty to serve underserved markets; and (2) rating the extent of compliance. On June 7, 2010, FHFA published in the Federal Register a proposed rule regarding the duty of Freddie Mac and Fannie Mae to serve the underserved markets. Comments were due on July 22, 2010. We provided comments on the proposed rule to FHFA, but we cannot predict the contents of any final rule that FHFA may release, or the impact that the final rule will have on our business or operations.
 
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SELECTED FINANCIAL DATA(1)
 
                                 
    Three Months Ended
    Six Months Ended
 
    June 30,     June 30,  
    2010     2009(2)     2010     2009(2)  
    (dollars in millions, except share related amounts)  
 
Statements of Operations Data
                               
Net interest income
  $ 4,136     $ 4,255     $ 8,261     $ 8,114  
Provision for credit losses
    (5,029 )     (5,665 )     (10,425 )     (14,580 )
Non-interest income (loss)
    (3,627 )     3,215       (8,481 )     127  
Non-interest expense
    (479 )     (1,688 )     (1,146 )     (4,456 )
Net income (loss) attributable to Freddie Mac
    (4,713 )     302       (11,401 )     (9,673 )
Net loss attributable to common stockholders
    (6,009 )     (840 )     (13,989 )     (11,193 )
Total comprehensive income (loss) attributable to Freddie Mac
    (430 )     3,721       (2,310 )     (2,200 )
Per common share data:
                               
Loss:
                               
Basic
    (1.85 )     (0.26 )     (4.30 )     (3.44 )
Diluted
    (1.85 )     (0.26 )     (4.30 )     (3.44 )
Cash common dividends
                       
Weighted average common shares outstanding (in thousands):(3)
                               
Basic
    3,249,198       3,253,716       3,250,241       3,254,815  
Diluted
    3,249,198       3,253,716       3,250,241       3,254,815  
                                 
                                 
                June 30,
    December 31,
 
                2010     2009  
                (dollars in millions)
 
 
Balance Sheets Data
                               
Mortgage loans held-for-investment, at amortized cost by consolidated trusts (net of allowance for loan losses)
                  $ 1,716,026     $  
All other assets
                    627,550       841,784  
Debt securities of consolidated trusts held by third parties
                    1,541,914        
Other debt
                    784,431       780,604  
All other liabilities
                    18,969       56,808  
Total Freddie Mac stockholders’ equity (deficit)
                    (1,738 )     4,278  
Portfolio Balances(4)
                               
Mortgage-related investments portfolio
                    739,509       755,272  
Total PCs and Structured Securities(5)
                    1,770,757       1,854,813  
Non-performing assets(6)
                    118,709       103,919  
                                 
                                 
    Three Months Ended June 30,     Six Months Ended June 30,  
    2010     2009(2)     2010     2009(2)  
 
Ratios(7)
                               
Return on average assets(8)
    (0.8 )%     0.1 %     (1.0 )%     (2.2 )%
Non-performing assets ratio(9)
    5.9       3.8       5.9       3.8  
Equity to assets ratio(10)
    (0.3 )     0.1       0.1       (1.3 )
Preferred stock to core capital ratio(11)
    N/A       N/A       N/A       N/A  
 (1)  See “NOTE 2: CHANGE IN ACCOUNTING PRINCIPLES” for information regarding accounting changes impacting the current period. See “NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES — Recently Adopted Accounting Standards” in our 2009 Annual Report for information regarding accounting changes impacting previously reported results.
 (2)  See “QUARTERLY SELECTED FINANCIAL DATA” in our 2009 Annual Report for an explanation of the changes in the Statements of Operations Data for the three and six months ended June 30, 2009.
 (3)  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 loss per share for both the three and six months ended June 30, 2010 and 2009, because it is unconditionally exercisable by the holder at a cost of $0.00001 per share.
 (4)  Represents the UPB and excludes mortgage loans and mortgage-related securities traded, but not yet settled.
 (5)  For 2009, includes PCs and Structured Securities that we held for investment. See “Table 13 — 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, Structured Securities and principal-only strips. The notional balances of interest-only strips are excluded because this line item is based on UPB.
 (6)  See “Table 51 — Non-Performing Assets” for a description of our non-performing assets.
 (7)  The return on common equity ratio is not presented because the simple average of the beginning and ending balances of total Freddie Mac stockholders’ equity (deficit), net of preferred stock (at redemption value), is less than zero for all periods presented. The dividend payout ratio on common stock is not presented because we are reporting a net loss attributable to common stockholders for all periods presented.
 (8)  Ratio computed as annualized net income (loss) attributable to Freddie Mac divided by the simple average of the beginning and ending balances of total assets. To calculate the simple average for the six months ended June 30, 2010, the beginning balance of total assets is based on the January 1, 2010 total assets included in “NOTE 2: CHANGE IN ACCOUNTING PRINCIPLES — Table 2.1 — Impact of the Change in Accounting for Transfers of Financial Assets and Consolidation of Variable Interest Entities on Our Consolidated Balance Sheet” so that both the beginning and ending balances of total assets reflect the changes in accounting principles.
 (9)  Ratio computed as non-performing assets divided by the total mortgage portfolio, excluding non-Freddie Mac securities.
(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 17: REGULATORY CAPITAL” 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 results of operations.
 
Change in Accounting Principles
 
As discussed in “EXECUTIVE SUMMARY,” our adoption of two new accounting standards that amended the guidance applicable to the accounting for transfers of financial assets and the consolidation of VIEs had a significant impact on our consolidated financial statements and other financial disclosures beginning in the first quarter of 2010.
 
The cumulative effect of these changes in accounting principles was a net decrease of $11.7 billion to total equity (deficit) as of January 1, 2010, which includes changes to the opening balances of retained earnings (accumulated deficit) and AOCI, net of taxes. This net decrease was driven principally by: (a) the elimination of unrealized gains resulting from the extinguishment of PCs held as investment securities upon consolidation of the PC trusts, representing the difference between the UPB of the loans underlying the PC trusts and the fair value of the PCs, including premiums, discounts, and other basis adjustments; (b) the elimination of the guarantee asset and guarantee obligation established for guarantees issued to securitization trusts we consolidated; and (c) the application of our nonaccrual policy to delinquent mortgage loans consolidated as of January 1, 2010.
 
See “NOTE 2: CHANGE IN ACCOUNTING PRINCIPLES,” “NOTE 4: VARIABLE INTEREST ENTITIES” and “NOTE 22: SELECTED FINANCIAL STATEMENT LINE ITEMS” for additional information regarding these changes.
 
As these changes in accounting principles were applied prospectively, our results of operations for the three and six months ended June 30, 2010 (on both a GAAP and Segment Earnings basis), which reflect the consolidation of trusts that issue our single-family PCs and certain Structured Transactions, are not directly comparable with the results of operations for the three and six months ended June 30, 2009, which reflect the accounting policies in effect during that time (i.e., when the majority of the securitization entities were accounted for off-balance sheet).
 
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Consolidated Statements of Operations — GAAP Results
 
Table 7 summarizes the GAAP Consolidated Statements of Operations.
 
Table 7 — Summary Consolidated Statements of Operations — GAAP Results(1)
 
                                 
    Three Months Ended
    Six Months Ended
 
    June 30,     June 30,  
    2010     2009     2010     2009  
    (in millions)  
 
Net interest income
  $ 4,136     $ 4,255     $ 8,261     $ 8,114  
Provision for credit losses
    (5,029 )     (5,665 )     (10,425 )     (14,580 )
                                 
Net interest income (loss) after provision for credit losses
    (893 )     (1,410 )     (2,164 )     (6,466 )
Non-interest income (loss):
                               
Gains (losses) on extinguishment of debt securities of consolidated trusts
    4             (94 )      
Gains (losses) on retirement of other debt
    (141 )     (156 )     (179 )     (260 )
Gains (losses) on debt recorded at fair value
    544       (797 )     891       (330 )
Derivative gains (losses)
    (3,838 )     2,361       (8,523 )     2,542  
Impairment of available-for-sale securities(2):
                               
Total other-than-temporary impairment of available-for-sale securities
    (114 )     (10,473 )     (531 )     (17,603 )
Portion of other-than-temporary impairment recognized in AOCI
    (314 )     8,260       (407 )     8,260  
                                 
Net impairment of available-for-sale securities recognized in earnings
    (428 )     (2,213 )     (938 )     (9,343 )
Other gains (losses) on investment securities recognized in earnings
    (257 )     827       (673 )     3,009  
Other income
    489       3,193       1,035       4,509  
                                 
Total non-interest income (loss)
    (3,627 )     3,215       (8,481 )     127  
                                 
Non-interest expense:
                               
Administrative expenses
    (387 )     (383 )     (782 )     (755 )
REO operations income (expense)
    40       (9 )     (119 )     (315 )
Other expenses
    (132 )     (1,296 )     (245 )     (3,386 )
                                 
Total non-interest expense
    (479 )     (1,688 )     (1,146 )     (4,456 )
                                 
Income (loss) before income tax benefit
    (4,999 )     117       (11,791 )     (10,795 )
Income tax benefit
    286       184       389       1,121  
                                 
Net income (loss)
  $ (4,713 )   $ 301     $ (11,402 )   $ (9,674 )
Less: Net loss attributable to noncontrolling interest
          1       1       1  
                                 
Net income (loss) attributable to Freddie Mac
  $ (4,713 )   $ 302     $ (11,401 )   $ (9,673 )
                                 
(1)  See “NOTE 2: CHANGE IN ACCOUNTING PRINCIPLES” for information regarding accounting changes impacting the current period.
(2)  We adopted an amendment to the accounting standards for investments in debt and equity securities effective April 1, 2009. See “NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES — Recently Adopted Accounting Standards” in our 2009 Annual Report for additional information regarding the impact of this amendment.
 
Net Interest Income
 
Table 8 presents an analysis of net interest income, including average balances and related yields earned on assets and incurred on liabilities.
 
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Table 8 — Net Interest Income/Yield and Average Balance Analysis
 
                                                 
    Three Months Ended June 30,  
    2010     2009  
          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:
                                               
Cash and cash equivalents
  $ 37,391     $ 18       0.19 %   $ 57,401     $ 62       0.42 %
Federal funds sold and securities purchased under agreements to resell
    37,238       16       0.18       29,542       13       0.17  
Mortgage-related securities:
                                               
Mortgage-related securities(3)
    540,380       6,432       4.76       702,693       8,235       4.69  
Extinguishment of PCs held by Freddie Mac
    (220,350 )     (2,913 )     (5.29 )                  
                                                 
Total mortgage-related securities, net
    320,030       3,519       4.40       702,693       8,235       4.69  
                                                 
Non-mortgage-related securities(3)
    32,571       55       0.67       16,594       288       6.96  
Mortgage loans held by consolidated trusts(4)
    1,727,823       22,114       5.12                    
Unsecuritized mortgage loans(4)
    213,704       2,179       4.08       127,863       1,721       5.38  
                                                 
Total interest-earning assets
  $ 2,368,757     $ 27,901       4.71     $ 934,093     $ 10,319       4.42  
                                                 
Interest-bearing liabilities:
                                               
Debt securities of consolidated trusts including PCs held by Freddie Mac
  $ 1,739,519     $ (21,961 )     (5.05 )   $     $        
Extinguishment of PCs held by Freddie Mac
    (220,350 )     2,913       5.29                    
                                                 
Total debt securities of consolidated trusts held by third parties
    1,519,169       (19,048 )     (5.02 )                  
Other debt:
                                               
Short-term debt
    226,624       (137 )     (0.24 )     293,475       (571 )     (0.77 )
Long-term debt(5)
    561,353       (4,331 )     (3.08 )     582,998       (5,211 )     (3.57 )
                                                 
Total other debt
    787,977       (4,468 )     (2.27 )     876,473       (5,782 )     (2.63 )
                                                 
Total interest-bearing liabilities
    2,307,146       (23,516 )     (4.08 )     876,473       (5,782 )     (2.63 )
Income (expense) related to derivatives(6)
          (249 )     (0.04 )           (282 )     (0.13 )
Impact of net non-interest-bearing funding
    61,611             0.11       57,620             0.17  
                                                 
Total funding of interest-earning assets
  $ 2,368,757     $ (23,765 )     (4.01 )   $ 934,093     $ (6,064 )     (2.59 )
                                                 
Net interest income/yield
          $ 4,136       0.70             $ 4,255       1.83  
                                                 
                                                 
                                                 
    Six Months Ended June 30,  
    2010     2009  
          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:
                                               
Cash and cash equivalents
  $ 48,805     $ 35       0.14 %   $ 53,666     $ 138       0.51 %
Federal funds sold and securities purchased under agreements to resell
    44,441       32       0.14       31,574       31       0.20  
Mortgage-related securities:
                                               
Mortgage-related securities(3)
    566,946       13,711       4.84       700,578       16,995       4.85  
Extinguishment of PCs held by Freddie Mac
    (238,651 )     (6,354 )     (5.32 )                  
                                                 
Total mortgage-related securities, net
    328,295       7,357       4.48       700,578       16,995       4.85  
                                                 
Non-mortgage-related securities(3)
    26,380       116       0.88       13,896       499       7.19  
Mortgage loans held by consolidated trusts(4)
    1,757,329       44,846       5.10                    
Unsecuritized mortgage loans(4)
    187,196       4,140       4.42       123,209       3,301       5.36  
                                                 
Total interest-earning assets
  $ 2,392,446     $ 56,526       4.73     $ 922,923     $ 20,964       4.54  
                                                 
Interest-bearing liabilities:
                                               
Debt securities of consolidated trusts including PCs held by Freddie Mac
  $ 1,770,522     $ (45,045 )     (5.09 )   $     $        
Extinguishment of PCs held by Freddie Mac
    (238,651 )     6,354       5.32                    
                                                 
Total debt securities of consolidated trusts held by third parties
    1,531,871       (38,691 )     (5.05 )                  
Other debt:
                                               
Short-term debt
    234,781       (278 )     (0.24 )     328,020       (1,693 )     (1.03 )
Long-term debt(5)
    559,130       (8,789 )     (3.14 )     552,075       (10,575 )     (3.83 )
                                                 
Total other debt
    793,911       (9,067 )     (2.28 )     880,095       (12,268 )     (2.79 )
                                                 
Total interest-bearing liabilities
    2,325,782       (47,758 )     (4.11 )     880,095       (12,268 )     (2.79 )
Income (expense) related to derivatives(6)
          (507 )     (0.04 )           (582 )     (0.13 )
Impact of net non-interest-bearing funding
    66,664             0.11       42,828             0.14  
                                                 
Total funding of interest-earning assets
  $ 2,392,446     $ (48,265 )     (4.04 )   $ 922,923     $ (12,850 )     (2.78 )
                                                 
Net interest income/yield
          $ 8,261       0.69             $ 8,114       1.76  
                                                 
(1)  Excludes mortgage loans and mortgage-related securities traded, but not yet settled.
(2)  For securities, we calculate average balances based on their amortized cost.
(3)  Interest income (expense) includes accretion of the portion of impairment charges recognized in earnings expected to be recovered.
(4)  Non-performing loans, where interest income is generally recognized when collected, are included in average balances.
(5)  Includes current portion of long-term debt.
(6)  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 affects earnings.
 
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Our adoption of the change to the accounting standards for consolidation, as discussed above, had the following impact on net interest income and net interest yield for the three and six months ended June 30, 2010, and will have similar effects on those items in future periods:
 
  •  we now include in net interest income both: (a) the interest income earned on the assets held in our consolidated single-family trusts, comprised primarily of mortgage loans, restricted cash and cash equivalents and investments in securities purchased under agreements to resell (the average balance of such assets was $1.7 trillion and $1.8 trillion for the three and six months ended June 30, 2010, respectively); and (b) the interest expense related to the debt in the form of PCs and Structured Transactions issued by these trusts that are held by third parties (the average balance of such debt was $1.5 trillion for both the three and six months ended June 30, 2010). Prior to January 1, 2010, we reflected the earnings impact of these securitization activities as management and guarantee income, recorded within non-interest income on our consolidated statements of operations, and as interest income on single-family PCs and on certain Structured Transactions held for investment; and
 
  •  we now reverse interest income recognized in prior periods on non-performing loans, where the collection of principal and interest is not reasonably assured, and do not recognize any further interest income associated with these loans upon their placement on nonaccrual status except when cash payments are received. Interest income that we did not recognize, which we refer to as foregone interest income, and reversals of previously recognized interest income related to non-performing loans was $1.3 billion and $2.4 billion during the three and six months ended June 30, 2010, respectively, compared to $69 million and $158 million for the three and six months ended June 30, 2009, respectively. The increase in foregone interest income and the reversal of interest income reduced our net interest yield for the three and six months ended June 30, 2010, compared to the three and six months ended June 30, 2009. Prior to consolidation of these trusts, the foregone interest income on non-performing loans of the trusts did not reduce net interest income or net interest yield, since it was accounted for through a charge to provision for credit losses.
 
See “NOTE 2: CHANGE IN ACCOUNTING PRINCIPLES” for additional information.
 
Net interest income decreased by $119 million during the three months ended June 30, 2010 compared to the three months ended June 30, 2009 due mainly to lower mortgage-related securities balances and larger amounts of non-performing loans, partially offset by lower funding costs and the inclusion of amounts previously classified as management and guarantee income. Net interest income increased by $147 million during the six months ended June 30, 2010 compared to the six months ended June 30, 2009 due mainly to lower funding costs and the inclusion of amounts previously classified as management and guarantee income, partially offset by lower mortgage-related securities balances and larger amounts of non-performing loans. Net interest yield declined substantially during the 2010 periods because the net interest yield of our consolidated single-family trusts was lower than the net interest yield of PCs previously included in net interest income and our balance of non-performing mortgage loans increased.
 
During the three and six months ended June 30, 2010, spreads on our debt and our access to the debt markets remained favorable. For more information, see “LIQUIDITY AND CAPITAL RESOURCES — Liquidity.”
 
Provision for Credit Losses
 
We maintain loan loss reserves at levels we deem adequate to absorb probable incurred losses on mortgage loans held-for-investment and loans underlying our financial guarantees. Increases in our loan loss reserves are reflected in earnings as the provision for credit losses.
 
Our loan loss reserves reflect our best estimate of defaults we believe are likely as a result of loss events that have occurred through June 30, 2010. The ongoing weakness in the national housing market, the uncertainty in other macroeconomic factors, such as trends in unemployment rates, and the uncertainty of the effect of government actions to address the economic and housing crisis, make forecasting default rates and severity of resulting losses inherently imprecise. 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 2009 Annual Report.
 
Our loan loss reserves also reflect: (a) the projected recoveries of losses through credit enhancements; (b) the projected impact of strategic loss mitigation initiatives (such as our efforts under the MHA Program), including an expected higher volume of loan modifications; and (c) the projected recoveries through repurchases by seller/servicers of defaulted loans. An inability to realize the projected benefits of our loss mitigation plans, a lower than projected realized rate of seller/servicer repurchases or default rates that exceed our current projections would cause our losses to be higher than those currently estimated.
 
As discussed in “Net Interest Income,” our provision for credit losses was positively impacted by the changes in accounting standards for transfers of financial assets and consolidation of VIEs effective January 1, 2010 since we no
 
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longer account for foregone interest income on non-performing loans within our provision for credit losses. See “NOTE 2: CHANGE IN ACCOUNTING PRINCIPLES” for further information.
 
The provision for credit losses was $5.0 billion and $5.7 billion for the second quarters of 2010 and 2009, respectively, and was $10.4 billion in the first half of 2010 compared to $14.6 billion in the first half of 2009. During the 2010 periods, we experienced slower increases in the rate of growth in the balance of our non-performing loans than in the 2009 periods. Loss severity rates were relatively stable in the first half of 2010 and improved slightly in the second quarter of 2010 while severity rates worsened in both the second quarter and first half of 2009. These factors moderated the increase in our loan loss reserves and consequently, our provision for credit losses during the three and six months ended June 30, 2010 was less than that recognized during the 2009 periods.
 
During the second quarter of 2010, we identified a backlog related to the processing of certain foreclosure alternatives reported to us by our servicers, principally loan modifications and short sales. This backlog was the result of a significant increase in the volume of foreclosure alternatives executed by servicers beginning in 2009, which placed pressure on our existing loan processing capabilities. Our loan accounting processing activities and our loan loss reserving process are dependent on accurate loan data from our loan reporting systems. Our foreclosure alternative operational processes rely on manual reviews and approvals prior to modifying the corresponding loan data within our loan reporting systems. This backlog in processing loan modifications and short sales resulted in erroneous loan data within our loan reporting systems, thereby impacting our financial accounting and reporting systems. Prior to the second quarter of 2010, while we modified our loan loss reserving processes to consider potential processing lags in foreclosure alternatives data, we failed to fully adjust for the impacts of the resulting erroneous loan data on our financial statements. The resulting error impacts our provision for credit losses, allowance for loan losses, and provision for income taxes and affects our previously reported financial statements for the interim period ended March 31, 2010 and the interim 2009 periods and full year ended December 31, 2009. Based upon our evaluation of all relevant quantitative and qualitative factors related to this error, we concluded that this error is not material to our previously issued consolidated financial statements for any of the periods affected and is not material to our estimated earnings for the full year ending December 31, 2010 or to the trend of earnings. As a result, in accordance with the accounting standard related to accounting changes and correction of errors, we have recorded the cumulative effect of this error as a correction in the second quarter of 2010 as an increase to our provision for credit losses. The pre-tax cumulative effect on our provision for credit losses of this error corrected in the second quarter of 2010 was $1.3 billion, of which $1.0 billion related to the year ended December 31, 2009. We are taking corrective actions to improve our processing of and accounting for foreclosure alternatives by: (a) expanding our foreclosure alternative processing capabilities to be more responsive to changes in volumes; and (b) enhancing our controls related to data inputs used in our accounting for credit losses. For additional information, see “CONTROLS AND PROCEDURES — Changes in Internal Control Over Financial Reporting During the Quarter Ended June 30, 2010.”
 
Our charge-offs, net of recoveries, increased to $3.9 billion in the second quarter of 2010, compared to $1.9 billion in the second quarter of 2009, primarily due to an increase in the volume of foreclosure transfers, short sales, and other foreclosure alternatives associated with single-family loans. Charge-offs, net of recoveries were $6.7 billion in the first half of 2010 compared to $2.9 billion in the first half of 2009. We recognized $1.1 billion and $3.7 billion of provision for credit losses above the level of our charge-offs, net during the three and six months ended June 30, 2010, respectively, primarily as a result of:
 
  •  an increase in the number of single-family loans subject to individual impairment resulting from an increase in the number of TDRs during the first half of 2010. Impairment analysis for TDRs requires giving recognition to the present value of the concession granted to the borrower, which generally resulted in an increase in our allowance for loan losses. We expect a continued increase in the number of loan modifications that qualify as a TDR since the majority of our modifications in 2010 are anticipated to include a significant reduction in the contractual interest rate; and
 
  •  a continued increase in non-performing loans and foreclosures reflecting the combination of the decline in home values that began in 2006 and persistently high rates of unemployment and delinquencies. Single-family non-performing loans were $111.8 billion and $98.7 billion, and multifamily non-performing loans were $653 million and $538 million as of June 30, 2010 and December 31, 2009, respectively. Although still increasing, the rate of growth in the balance of non-performing loans slowed during the first half of 2010.
 
The level of our provision for credit losses in the remainder of 2010 will depend on a number of factors, including the actual level of mortgage defaults, the impact of the MHA Program and our other loss mitigation efforts, changes in property values, regional economic conditions, including unemployment rates, third-party mortgage insurance coverage
 
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and recoveries, and the realized rate of seller/servicer repurchases. See “RISK MANAGEMENT — Credit Risks — Institutional Credit Risk” for additional information on seller/servicer repurchase obligations.
 
Certain multifamily markets in the Southeast and West regions exhibited weaker than average fundamentals and operating performance in the first half of 2010, which increases our risk of future losses related to properties in these areas. The amount of multifamily loans identified as impaired, where we estimate a specific reserve, increased in both the three and six months ended June 30, 2010, compared to the 2009 periods. As a result, the amount of our loan loss reserve associated with multifamily loans increased to $935 million as of June 30, 2010 from $831 million as of December 31, 2009.
 
See “Table 3 — Credit Statistics, Single-Family Credit Guarantee Portfolio” and “Table 4 — Credit Statistics, Multifamily Mortgage Portfolio” for quarterly trends in our mortgage loan credit statistics.
 
Non-Interest Income (Loss)
 
Gains (Losses) on Extinguishment of Debt Securities of Consolidated Trusts
 
Subsequent to January 1, 2010, due to the change in accounting for consolidation of VIEs, when we purchase PCs that have been issued by consolidated PC trusts, we extinguish a pro rata portion of the outstanding debt securities of the related consolidated trust. We recognize a gain (loss) on extinguishment of the debt securities to the extent the amount paid to redeem the debt security differs from its carrying value adjusted for any related purchase commitments accounted for as derivatives. For the three and six months ended June 30, 2010, we extinguished debt securities of consolidated trusts with a UPB of $0.9 billion and $5.3 billion, respectively (representing our purchase of single-family PCs with a corresponding UPB amount), and our gains (losses) on extinguishment of these debt securities of consolidated trusts were $4 million and $(94) million, respectively. See “NOTE 2: CHANGE IN ACCOUNTING PRINCIPLES” for additional information.
 
Gains (Losses) on Retirement of Other Debt
 
Gains (losses) on retirement of other debt were $(141) million and $(179) million during the three and six months ended June 30, 2010, respectively, compared to $(156) million and $(260) million during the three and six months ended June 30, 2009, respectively. During the three and six months ended June 30, 2010, we recognized fewer losses on debt retirement compared to the three and six months ended June 30, 2009 due to gains on debt repurchases, declines in write-offs of concession fees, and declines in write-offs of basis adjustments related to previously discontinued hedging relationships.
 
Derivative Gains (Losses)
 
Table 9 presents derivative gains (losses) reported in our consolidated statements of operations. See “NOTE 11: DERIVATIVES — Table 11.2 — Gains and Losses on Derivatives” for information about gains and losses related to specific categories of derivatives. Changes in fair value and interest accruals on derivatives not in hedge accounting relationships are recorded as derivative gains (losses) in our consolidated statements of operations. At June 30, 2010 and December 31, 2009, we did not have any derivatives in hedge accounting relationships; however, there are amounts recorded in AOCI related to discontinued cash flow hedges. The deferred amounts in AOCI related to closed cash flow hedges are reclassified to earnings when the forecasted transactions affect earnings. Although derivatives are an important aspect of our management of interest-rate risk, they generally increase the volatility of reported net income (loss), because not all of the assets and liabilities being hedged are recorded at fair value with changes reported in net income.
 
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Table 9 — Derivative Gains (Losses)
 
                                 
    Derivative Gains (Losses)  
    Three Months Ended
    Six Months Ended
 
Derivatives not designated as hedging instruments under the
  June 30,     June 30,  
accounting standards for derivatives and hedging
  2010     2009     2010     2009  
    (in millions)  
 
Interest-rate swaps
  $ (7,938 )   $ 8,158     $ (10,272 )   $ 13,248  
Option-based derivatives(1)
    5,864       (5,424 )     5,282       (8,611 )
Other derivatives(2)
    (553 )     474       (973 )     (513 )
Accrual of periodic settlements(3)
    (1,211 )     (847 )     (2,560 )     (1,582 )
                                 
Total
  $ (3,838 )   $ 2,361     $ (8,523 )   $ 2,542  
                                 
(1)  Includes put swaptions, call swaptions, purchased interest rate caps and floors, guarantees of stated final maturity of issued Structured Securities, and written options. The three and six months ended June 30, 2009 also included purchased put options on agency mortgage-related securities.
(2)  Other derivatives include futures, foreign currency swaps, commitments, credit derivatives, and swap guarantee derivatives. Foreign-currency swaps are defined as swaps in which net settlement is based on one leg calculated in a foreign-currency and the other leg calculated in U.S. dollars. Commitments include: (a) our commitments to purchase and sell investments in securities; and (b) our commitments to purchase and extinguish or issue debt securities of our consolidated trusts.
(3)  Includes imputed interest on zero-coupon swaps.
 
Gains (losses) on derivatives are principally driven by changes in: (a) swap interest rates and implied volatility; and (b) the mix and volume of derivatives in our derivative portfolio.
 
During the three and six months ended June 30, 2010, the yield curve flattened, with declining longer-term swap interest rates, resulting in a loss on derivatives of $3.8 billion and $8.5 billion, respectively. Also contributing to these losses was a decline in implied volatility on our options portfolio during the six months ended June 30, 2010. Specifically, for the three and six months ended June 30, 2010, the decrease in longer-term swap interest rates resulted in fair value losses on our pay-fixed swaps of $18.6 billion and $23.4 billion, respectively, partially offset by fair value gains on our receive-fixed swaps of $10.7 billion and $13.0 billion, respectively. We recognized fair value gains for the three and six months ended June 30, 2010 of $5.9 billion and $5.3 billion, respectively, on our option-based derivatives, resulting from gains on our purchased call swaptions primarily due to the declines in forward interest rates during these periods.
 
During the three months ended June 30, 2009, longer-term swap interest rates and implied volatility both increased, resulting in a gain on derivatives of $2.4 billion. During the period, the increasing swap interest rates resulted in fair value gains on our pay-fixed swaps of $18.5 billion, partially offset by losses on our receive-fixed swaps of $10.3 billion. The $5.4 billion decrease in fair value of option-based derivatives resulted from losses on our purchased call swaptions where increases in longer-term swap interest rates more than offset the increase in implied volatility.
 
During the six months ended June 30, 2009, longer-term swap interest rates increased, resulting in a gain on derivatives of $2.5 billion. During the period, the increasing swap interest rates resulted in fair value gains on our pay-fixed swaps, partially offset by losses on our receive-fixed swaps. The $8.6 billion decrease in fair value of option-based derivatives resulted from losses on our purchased call swaptions where increases in longer-term swap interest rates more than offset the increase in implied volatility.
 
Investment Securities-Related Activities
 
Since January 1, 2010, as a result of our adoption of amendments to the accounting standards for transfers of financial assets and consolidation of VIEs, we no longer account for the single-family PCs and certain Structured Transactions we hold as investments in securities. Instead, we now recognize the underlying mortgage loans on our consolidated balance sheets through consolidation of the related trusts. Our adoption of these amendments resulted in a decrease in our investments in securities of $286.5 billion on January 1, 2010. See “NOTE 2: CHANGE IN ACCOUNTING PRINCIPLES” for additional information.
 
Impairments of Available-for-Sale Securities
 
We recorded net impairments of available-for-sale securities recognized in earnings of $428 million and $938 million during the three and six months ended June 30, 2010, respectively. See “CONSOLIDATED BALANCE SHEETS ANALYSIS — Investments in Securities — Mortgage-Related Securities — Other-Than-Temporary Impairments on Available-for-Sale Mortgage-Related Securities” and “NOTE 7: INVESTMENTS IN SECURITIES” for information regarding the accounting principles for investments in debt and equity securities and the other-than-temporary impairments recorded during the three and six months ended June 30, 2010 and 2009. See “NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES — Recently Adopted Accounting Standards — Change in the Impairment Model for Debt Securities” in our 2009 Annual Report for information on how other-than-temporary impairments are recorded on our financial statements commencing in the second quarter of 2009.
 
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Other Gains (Losses) on Investment Securities Recognized in Earnings
 
Other gains (losses) on investment securities recognized in earnings primarily consists of gains (losses) on trading securities. We recognized $(277) million and $(694) million related to gains (losses) on trading securities during the three and six months ended June 30, 2010, respectively, compared to $622 million and $2.8 billion during the three and six months ended June 30, 2009, respectively.
 
The fair value of our securities classified as trading was approximately $66.6 billion at June 30, 2010 compared to approximately $250.7 billion at June 30, 2009. The decline in fair value was primarily due to our adoption of amendments to the accounting standards for transfers of financial assets and consolidation of VIEs on January 1, 2010 together with minimal purchase activity during the first half of 2010 thus changing the mix of our securities classified as trading to a larger percentage of interest-only securities. The net gains on trading securities during the three and six months ended June 30, 2009 related primarily to tightening OAS levels. In addition, during the three and six months ended June 30, 2009, we sold agency securities classified as trading with UPB of approximately $51 billion and $87 billion, respectively, which generated realized gains of $0.2 billion and $1.3 billion, respectively.
 
Other Income
 
Table 10 summarizes the significant components of other income.
 
Table 10 — Other Income
 
                                 
    Three Months Ended
    Six Months Ended
 
    June 30,     June 30,  
   
2010
    2009     2010     2009  
    (in millions)  
 
Other income (losses):
                               
Management and guarantee income
  $ 37     $ 710     $ 72     $ 1,490  
Gains (losses) on guarantee asset
    (13 )     1,817       (25 )     1,661  
Income on guarantee obligation
    36       961       72       1,871  
Gains (losses) on sale of mortgage loans
    121       143       216       294  
Lower-of-cost-or-fair-value adjustments on held-for-sale mortgage loans
          (102 )           (231 )
Gains (losses) on mortgage loans elected at fair value
    5       (71 )     26       (89 )
Recoveries on loans impaired upon purchase
    227       70       396       120  
Low-income housing tax credit partnerships
          (167 )           (273 )
Trust management income (expense)
          (238 )           (445 )
All other
    76       70       278       111  
                                 
Total other income
  $ 489     $ 3,193     $ 1,035     $ 4,509  
                                 
 
Other income includes items associated with our guarantee business activities of non-consolidated trusts, including management and guarantee income, gains (losses) on guarantee asset, income on guarantee obligation, and trust management income (expense). Upon consolidation of our single-family PC trusts and certain Structured Transactions, guarantee-related items no longer have a material impact on our results and are therefore included in other income on our consolidated statements of operations. The management and guarantee income recognized during the first half of 2010 was earned from our non-consolidated securitization trusts and other mortgage credit guarantees which had an aggregate UPB of $40.8 billion as of June 30, 2010 compared to $1.9 trillion as of June 30, 2009. For additional information on the impact of consolidation of our single-family PC trusts and certain Structured Transactions, see “NOTE 2: CHANGE IN ACCOUNTING PRINCIPLES” and “NOTE 22: SELECTED FINANCIAL STATEMENT LINE ITEMS.”
 
Lower-of-Cost-or-Fair-Value Adjustments on Held-for-Sale Mortgage Loans
 
During the three months ended June 30, 2010 and 2009, we recognized lower-of-cost-or-fair-value adjustments of $0 million and $(102) million, respectively. During the six months ended June 30, 2010 and 2009, we recognized lower-of-cost-or-fair-value adjustments of $0 million and $(231) million, respectively. Due to the change in consolidation accounting for VIEs, which we adopted on January 1, 2010, all single-family mortgage loans on our balance sheet were reclassified as held-for-investment. Consequently, beginning in 2010, we no longer record lower-of-cost-or-fair-value adjustments on single-family mortgage loans.
 
Recoveries on Loans Impaired Upon Purchase
 
During the three months ended June 30, 2010 and 2009, we recognized recoveries on loans impaired upon purchase of $227 million and $70 million, respectively, and in the first half of 2010 and 2009 our recoveries were $396 million and $120 million, respectively. Our recoveries on loans impaired upon purchase increased in the 2010 periods due to a higher volume of short sales and foreclosure transfers, combined with improvements in home prices in many geographical areas during the first half of 2010, as compared to the first half of 2009. Our recoveries on these loans may be volatile in the short-term due to the effects of changes in home prices, among other factors. We expect
 
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our recoveries to remain higher in the remainder of 2010, as compared to 2009, due to higher expected volumes of foreclosures in 2010.
 
Low-Income Housing Tax Credit Partnerships
 
We wrote down the carrying value of our LIHTC investments to zero in the fourth quarter of 2009, as we will not be able to realize any value either through reductions to our taxable income and related tax liabilities or through a sale to a third party. See “CONSOLIDATED RESULTS OF OPERATIONS — Non-Interest Income (Loss) — Low-Income Housing Tax Credit Partnerships” in our 2009 Annual Report for more information.
 
Non-Interest Expense
 
Table 11 summarizes the components of non-interest expense.
 
Table 11 — Non-Interest Expense
 
                                 
    Three Months Ended
    Six Months Ended
 
    June 30,     June 30,  
    2010     2009     2010     2009  
    (in millions)  
 
Administrative expenses:
                               
Salaries and employee benefits
  $ 230     $ 221     $ 464     $ 428  
Professional services
    50       64       121       124  
Occupancy expense
    15       15       31       33  
Other administrative expenses
    92       83       166       170  
                                 
Total administrative expenses
    387       383       782       755  
REO operations (income) expense
    (40 )     9       119       315  
Other expenses
    132       1,296       245       3,386  
                                 
Total non-interest expense
  $ 479     $ 1,688     $ 1,146     $ 4,456  
                                 
 
Administrative Expenses
 
Administrative expenses increased for the three and six months ended June 30, 2010, compared to the three and six months ended June 30, 2009, in part due to an increase in the number of full-time employees and to a lesser extent, increased employee compensation.
 
REO Operations (Income) Expense
 
The table below presents the components of our REO operations (income) expense.
 
Table 12 — REO Operations (Income) Expense
 
                                 
    Three Months Ended
    Six Months Ended
 
    June 30,     June 30,  
    2010     2009     2010     2009  
    (dollars in millions)  
 
Single-family:
                               
REO property expenses(1)
  $ 258     $ 160     $ 499     $ 276  
Disposition (gains) losses(2)
    (45 )     304       (41 )     610  
Change in holding period allowance(3)
    (80 )     (283 )     (10 )     (251 )
Recoveries(4)
    (174 )     (180 )     (333 )     (328 )
                                 
Total single-family REO operations (income) expense
    (41 )     1       115       307  
Multifamily REO operations (income) expense
    1       8       4       8  
                                 
Total REO operations (income) expense
  $ (40 )   $ 9     $ 119     $ 315  
                                 
REO inventory (in properties), at June 30:
                               
Single-family
    62,178       34,699       62,178       34,699  
Multifamily
    12       7       12       7  
                                 
Total
    62,190       34,706       62,190       34,706  
                                 
REO property dispositions (in properties)
    26,316       16,443       48,285       30,627  
(1)  Consists of costs incurred to maintain or protect a property after foreclosure acquisition, such as legal fees, insurance, taxes, cleaning and other maintenance charges.
(2)  Represents the difference between the disposition proceeds, net of selling expenses, and the fair value of the property on the date of the foreclosure transfer. Excludes holding period writedowns while in REO inventory.
(3)  Includes both the increase (decrease) in the holding period allowance for properties that remain in inventory at the end of the period as well as any reductions associated with dispositions during the period.
(4)  Includes recoveries from primary mortgage insurance, pool insurance and seller/servicer repurchases.
 
REO operations (income) expense improved to $(40) million for the second quarter of 2010 from $9 million during the second quarter of 2009 and was $119 million and $315 million for the first half of 2010 and 2009, respectively. We recorded net disposition gains during the 2010 periods as compared to net disposition losses during the 2009 periods due to the relative stabilization in national home prices in 2010 that included slight improvements in many geographic areas. Disposition gains resulted from net proceeds on property sales that were in excess of estimated
 
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fair values at acquisition. Improvements in disposition results were partially offset by higher REO property expenses in the 2010 periods as compared to the 2009 periods due to increased property inventory. We recorded reductions in our holding period allowance in both the 2010 and 2009 periods due to the relative stabilization in national home prices. We expect REO property expenses to increase for the remainder of 2010, and our REO property inventory will likely continue to grow.
 
Other Expenses
 
During 2009, other expenses include large losses on loans purchased. Our losses on loans purchased were $3 million and $1.2 billion for the three months ended June 30, 2010 and 2009, respectively, and $20 million and $3.2 billion for the six months ended June 30, 2010 and 2009, respectively. We record losses on loans purchased when the acquisition basis of a loan purchased from our non-consolidated securitization trusts exceeds the estimated fair value of the loan on the date of purchase. When a loan underlying our PCs is modified, we generally exercise our repurchase option and hold the modified loan as an unsecuritized mortgage loan, held-for-investment. See “Recoveries on Loans Impaired Upon Purchase” for additional information about the impacts from these loans on our financial results. Beginning January 1, 2010, our single-family PC trusts are consolidated as a result of the change in accounting for consolidation of VIEs. As a result, we no longer record losses on loans purchased when we purchase loans from these consolidated entities since the loans are already recorded on our consolidated balance sheets. In the first half of 2010, losses on loans purchased were associated solely with single-family loans purchased pursuant to long-term standby agreements. See “NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES — Impaired Loans” and “NOTE 22: SELECTED FINANCIAL STATEMENT LINE ITEMS” for additional information.
 
Income Tax Benefit
 
For the three months ended June 30, 2010 and 2009, we reported an income tax benefit of $286 million and $184 million, respectively. For the six months ended June 30, 2010 and 2009 we reported an income tax benefit of $389 million and $1.1 billion, respectively. See “NOTE 13: INCOME TAXES” for additional information.
 
Segment Earnings
 
Our operations consist of three reportable segments, which are based on the type of business activities each performs — Investments, Single-family Guarantee, and Multifamily. Certain activities that are not part of a reportable segment are included in the All Other category.
 
The Investments segment reflects results from our investment, funding and hedging activities. In our Investments segment, we invest principally in mortgage-related securities and single-family mortgage loans funded by debt issuances and hedged using derivatives. Segment Earnings for this segment consists primarily of the returns on these investments, less the related financing, hedging, and administrative expenses.
 
The Single-family Guarantee segment reflects results from our single-family credit guarantee activities. In our Single-family Guarantee segment, we purchase single-family mortgage loans originated by our lender customers in the primary mortgage market, primarily through our guarantor swap program. We securitize most of the mortgages we purchase. In this segment, we also guarantee the payment of principal and interest on single-family mortgage loans and mortgage-related securities in exchange for management and guarantee fees received over time and other up-front credit-related fees. Segment Earnings for this segment consists primarily of management and guarantee fee revenues, including amortization of upfront fees, less the related credit costs (i.e., provision for credit losses), administrative expenses, allocated funding costs, and amounts related to net float benefits or expenses.
 
The Multifamily segment reflects results from our investments and guarantee activities in multifamily mortgage loans and securities. We primarily purchase multifamily mortgage loans for investment and securitization. We also purchase CMBS for investment; however we have not purchased significant amounts of non-agency CMBS since 2008. These activities support our mission to supply financing for affordable rental housing. Segment Earnings for this segment includes management and guarantee fee revenues and the interest earned on assets related to multifamily guarantee and investment activities, net of allocated funding costs.
 
We evaluate segment performance and allocate resources based on a Segment Earnings approach, subject to the conduct of our business under the direction of the Conservator. Beginning January 1, 2010, we revised our method for presenting Segment Earnings to reflect changes in how management measures and assesses the performance of each segment and the company as a whole. This change in method, in conjunction with our implementation of changes in accounting standards relating to transfers of financial assets and the consolidation of VIEs, resulted in significant changes to our presentation of Segment Earnings. Under the revised method, the financial performance of our segments is measured based on each segment’s contribution to GAAP net income (loss). Beginning January 1, 2010, under the
 
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revised method, the sum of Segment Earnings for each segment and the All Other category will equal GAAP net income (loss) attributable to Freddie Mac.
 
Segment Earnings for periods presented prior to 2010 now include the following items that are included in our GAAP-basis earnings, but were deferred or excluded under the previous method for presenting Segment Earnings:
 
  •  Current period GAAP earnings impact of fair value accounting for investments, debt, and derivatives;
 
  •  Allocation of the valuation allowance established against our net deferred tax assets;
 
  •  Gains and losses on investment sales and debt retirements;
 
  •  Losses on loans purchased and related recoveries;
 
  •  Other-than-temporary impairment of securities recognized in earnings in excess of expected losses; and
 
  •  GAAP-basis accretion income that may result from impairment adjustments.
 
Under the revised method of presenting Segment Earnings, the All Other category consists of material corporate level expenses that are: (a) non-recurring in nature; and (b) based on management decisions outside the control of the management of our reportable segments. By recording these types of activities to the All Other category, we believe the financial results of our three reportable segments are more representative of the decisions and strategies that are executed within the reportable segments and provide greater comparability across time periods. Items included in the All Other category consist of: (a) the write-down of our LIHTC investments; and (b) the deferred tax asset valuation allowance associated with previously recognized income tax credits carried forward. Other items previously recorded in the All Other category prior to the revision to our method for presenting Segment Earnings have been allocated to our three reportable segments.
 
Effective January 1, 2010, we also made significant changes to our GAAP consolidated statements of operations as a result of our adoption of changes in accounting standards for transfers of financial assets and the consolidation of VIEs. These changes make it difficult to view results of our Investments, Single-family Guarantee and Multifamily segments. As a result, in presenting Segment Earnings we make significant reclassifications to line items in order to reflect a measure of net interest income on investments and management and guarantee income on guarantees that is in line with our internal measures of performance.
 
We present Segment Earnings by: (a) reclassifying certain investment-related activities and credit guarantee-related activities between various line items on our GAAP consolidated statements of operations; and (b) allocating certain revenues and expenses, including certain returns on assets and funding costs, and all administrative expenses to our three reportable segments.
 
As a result of these reclassifications and allocations, Segment Earnings for our reportable segments differs significantly from, and should not be used as a substitute for, net income (loss) as determined in accordance with GAAP. Our definition of Segment Earnings may differ from similar measures used by other companies. However, we believe that Segment Earnings provides us with meaningful metrics to assess the financial performance of each segment and our company as a whole.
 
We restated Segment Earnings for the three and six months ended June 30, 2009 to reflect the changes in our method of measuring and assessing the performance of our reportable segments described above. The restated Segment Earnings for the three and six months ended June 30, 2009 do not include changes to the guarantee asset, guarantee obligation or other items that were eliminated or changed as a result of our implementation of the amendments to the accounting standards for transfers of financial assets and consolidation of VIEs adopted on January 1, 2010, as this change was applied prospectively consistent with our GAAP results. See “NOTE 2: CHANGE IN ACCOUNTING PRINCIPLES” for further information regarding the consolidation of certain of our securitization trusts.
 
See “NOTE 16: SEGMENT REPORTING” for further information regarding our segments, including the descriptions and activities of the segments and the reclassifications and allocations used to present Segment Earnings.
 
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Table 13 provides information about our various segment portfolios.
 
Table 13 — Segment Portfolio Composition(1)
 
                 
    June 30, 2010     December 31, 2009  
    (in millions)  
 
Segment portfolios:
               
Investments — Mortgage investments portfolio:
               
Single-family unsecuritized mortgage loans(2)
  $ 61,934     $ 44,135  
Guaranteed PCs and Structured Securities
    304,129       374,362  
Non-Freddie Mac mortgage-related securities
    156,954       179,330  
                 
Total Investments — Mortgage investments portfolio
    523,017       597,827  
                 
Single-family Guarantee — Managed loan portfolio:
               
Single-family unsecuritized mortgage loans(3)
    72,479       10,743  
Single-family PCs and Structured Securities in the mortgage investments portfolio
    285,831       354,439  
Single-family PCs and Structured Securities held by third parties
    1,450,959       1,471,166  
Single-family Structured Transactions in the mortgage investments portfolio
    16,636       18,227  
Single-family Structured Transactions held by third parties
    11,501       8,727  
                 
Total Single-family Guarantee — Managed loan portfolio
    1,837,406       1,863,302  
                 
Multifamily — Guarantee portfolio:
               
Multifamily PCs and Structured Securities
    14,815       14,277  
Multifamily Structured Transactions
    7,592       3,046  
                 
Total Multifamily — Guarantee portfolio
    22,407       17,323  
                 
Multifamily — Mortgage investments portfolio:
               
Multifamily investment securities portfolio
    61,828       62,764  
Multifamily loan portfolio
    82,185       83,938  
                 
Total Multifamily — mortgage investments portfolio
    144,013       146,702  
                 
Total Multifamily portfolio
    166,420       164,025  
                 
Less: Guaranteed PCs, Structured Securities, and certain multifamily securities(4)
    (304,969 )     (374,615 )
                 
Total mortgage portfolio
  $ 2,221,874     $ 2,250,539  
                 
(1)  Based on UPB and excludes mortgage loans and mortgage-related securities traded, but not yet settled.
(2)  Excludes unsecuritized non-performing single-family loans for which the Single-family Guarantee segment is actively performing loss mitigation.
(3)  Represents unsecuritized non-performing single-family loans for which the Single-family Guarantee segment is actively performing loss mitigation.
(4)  Guaranteed PCs and Structured Securities held by us are included in both our Investments segment’s mortgage investments portfolio and our Single-family Guarantee segment’s managed loan portfolio, and certain multifamily securities held by us are included in both the multifamily investment securities portfolio and the multifamily guarantee portfolio. Therefore, these amounts are deducted in order to reconcile to our total mortgage portfolio.
 
Segment Earnings — Results
 
See “NOTE 16: SEGMENT REPORTING — Segments” for information regarding the description and activities of our Investments, Single-family Guarantee, and Multifamily Segments.
 
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Investments
 
Table 14 presents the Segment Earnings of our Investments segment.
 
Table 14 — Segment Earnings and Key Metrics — Investments(1)
 
                                 
    Three Months Ended
    Six Months Ended
 
    June 30,     June 30,  
    2010     2009     2010     2009  
    (dollars in millions)  
 
Segment Earnings:
                               
Net interest income
  $ 1,509     $ 2,529     $ 2,820     $ 4,528  
Non-interest income (loss):
                               
Net impairments of available-for-sale securities
    (327 )     (1,958 )     (703 )     (8,372 )
Derivative gains (losses)
    (2,193 )     3,522       (4,895 )     4,686  
Other non-interest income (loss)
    294       (260 )     272       2,192  
                                 
Total non-interest income (loss)
    (2,226 )     1,304       (5,326 )     (1,494 )
                                 
Non-interest expense:
                               
Administrative expenses
    (111 )     (120 )     (233 )     (241 )
Other non-interest expense
    (6 )     (8 )     (13 )     (15 )
                                 
Total non-interest expense
    (117 )     (128 )     (246 )     (256 )
                                 
Segment adjustments(2)
    294             804        
                                 
Segment Earnings (loss) before income tax benefit (expense)
    (540 )     3,705       (1,948 )     2,778  
Income tax benefit (expense)
    129       (597 )     226       848  
Less: Net (income) loss — noncontrolling interest
                (2 )      
                                 
Segment Earnings (loss), net of taxes
  $ (411 )   $ 3,108     $ (1,724 )   $ 3,626  
                                 
Key metrics — Investments:
                               
Portfolio balances:
                               
Average balances of interest-earning assets:(3)(4)(5)
                               
Mortgage-related securities(6)
  $ 478,043     $ 626,968     $ 504,454     $ 629,186  
Non-mortgage-related investments(7)
    107,200       103,537       119,626       99,136  
Unsecuritized single-family loans
    53,967       50,166       49,217       47,216  
                                 
Total average balances of interest-earning assets
  $ 639,210     $ 780,671     $ 673,297     $ 775,538  
                                 
Return:
                               
Net interest yield — Segment Earnings basis (annualized)
    0.94 %     1.29 %     0.84 %     1.16 %
(1)  Under our revised method of presenting Segment Earnings, Segment Earnings for the Investments segment equals GAAP net income (loss) attributable to Freddie Mac for the Investments segment. For reconciliations of the Segment Earnings line items to the comparable line items in our consolidated financial statements prepared in accordance with GAAP, see “NOTE 16: SEGMENT REPORTING — Table 16.2 — Segment Earnings and Reconciliation to GAAP Results.”
(2)  For a description of our segment adjustments see “NOTE 16: SEGMENT REPORTING — Segment Earnings — Segment Adjustments.”
(3)  Based on UPB and excludes mortgage-related securities traded, but not yet settled.
(4)  Excludes non-performing single-family mortgage loans.
(5)  For securities, we calculate average balances based on their amortized cost.
(6)  Includes our investments in single-family PCs and certain Structured Transactions, which have been consolidated under GAAP on our consolidated balance sheet beginning on January 1, 2010.
(7)  Includes the average balances of interest-earning cash and cash equivalents, non-mortgage-related securities, and federal funds sold and securities purchased under agreements to resell.
 
Segment Earnings (loss) for our Investments segment decreased to $(411) million and $(1.7) billion for the three and six months ended June 30, 2010, respectively, compared to $3.1 billion and $3.6 billion for the three and six months ended June 30, 2009, respectively.
 
Segment Earnings net interest income decreased $1.0 billion and $1.7 billion and Segment Earnings net interest yield decreased 35 basis points and 32 basis points during the three and six months ended June 30, 2010, respectively, compared to the three and six months ended June 30, 2009. The primary drivers underlying the decreases in Segment Earnings net interest income and Segment Earnings net interest yield were: (a) a decrease in the average balance of mortgage-related securities; (b) an increase in the proportion of low-yielding short-term investments during the first half of 2010 in order to facilitate the purchase of $96.8 billion in UPB of loans from PC trusts, which settled during the same time period; and (c) an increase in derivative interest carry on a larger position of net pay-fixed interest-rate swaps, which is recognized within net interest income in Segment Earnings. These items were partially offset by a decrease in funding costs as a result of the replacement of higher cost short- and long-term debt with lower cost debt.
 
Our non-interest income (loss) decreased $3.5 billion and $3.8 billion for the three and six months ended June 30, 2010 to become a loss, compared to the three and six months ended June 30, 2009, respectively, driven primarily by derivative losses, partially offset by reduced other-than-temporary impairments. Derivative gains (losses) for this segment were $(2.2) billion and $(4.9) billion during the three and six months ended June 30, 2010, respectively, primarily due to the impact of declines in longer-term interest rates on our pay-fixed interest-rate swaps and the impact of the decline in implied volatility on our options portfolio. We recorded derivative gains of $3.5 billion and
 
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$4.7 billion for the three and six months ended June 30, 2009, respectively, primarily due to the impact of higher interest rates on our pay-fixed interest-rate swaps. Impairments recorded in our Investments segment decreased by $1.6 billion and $7.7 billion during the three and six months ended June 30, 2010, respectively, compared to the three and six months ended June 30, 2009. Impairments for the six months ended June 30, 2010 and 2009 are not comparable because the adoption of the amendment to the accounting standards for investments in debt and equity securities on April 1, 2009 significantly impacted both the identification and measurement of other-than-temporary impairments. However, the underlying collateral performance of loans supporting our non-agency securities deteriorated to a lesser extent during the three and six months ended June 30, 2010 than during the three and six months ended June 30, 2009. See “Non-Interest Income (Loss) — Derivative Gains (Losses)” and “CONSOLIDATED BALANCE SHEETS ANALYSIS — Investments in Securities — Mortgage-Related Securities — Other-Than-Temporary Impairments on Available-for-Sale Mortgage-Related Securities” for additional information on our derivatives and impairments, respectively.
 
During the three and six months ended June 30, 2010, the UPB of the mortgage investments portfolio of our Investments segment decreased at an annualized rate of (21)% and (25)%, respectively, compared to a (decrease) increase of (22)% and 5% for the three and six months ended June 30, 2009, respectively. The UPB of the mortgage investments portfolio of our Investments segment decreased from $598 billion at December 31, 2009 to $523 billion at June 30, 2010 as a result of ongoing liquidations of our existing holdings outpacing purchases due to a relative lack of favorable investment opportunities. Liquidations during 2010 increased substantially due to purchases of delinquent and modified loans from the mortgage pools underlying both our PCs and other agency securities. We hold the loans that formerly underlay our PCs in the Single-family Guarantee segment. Our security purchase activity has been limited during 2010 due to continued tight spreads on agency mortgage-related assets, which have made investment opportunities less favorable. We believe these tight spreads resulted collectively from Federal Reserve purchases of agency mortgage-related securities during the first quarter of 2010, increased purchases of higher credit quality instruments by investors as a result of concerns related to the European economic crisis, and a low supply of agency mortgage-related securities during the second quarter of 2010.
 
We held $50.8 billion of non-Freddie Mac agency mortgage-related securities and $106.1 billion of non-agency mortgage-related securities as of June 30, 2010 compared to $65.6 billion of non-Freddie Mac agency mortgage-related securities and $113.7 billion of non-agency mortgage-related securities as of December 31, 2009. The decline in the UPB of non-agency mortgage-related securities is due mainly to the receipt of monthly remittances of principal repayments from both the recoveries of liquidated loans and, to a lesser extent, voluntary repayments of the underlying collateral representing a partial return of our investments in these securities. Agency securities comprised approximately 68% and 74% of the UPB of the Investments segment mortgage investments portfolio at June 30, 2010 and December 31, 2009, respectively. See “CONSOLIDATED BALANCE SHEETS ANALYSIS — Investments in Securities” 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 required reduction in our mortgage-related investments portfolio UPB limit to $250 billion, through successive annual 10% declines, commencing in 2010, will likely cause a corresponding reduction in our net interest income from these assets and therefore negatively affect our Investments segment results. FHFA has also stated its expectation that any net additions to our mortgage-related investments portfolio would be related to purchasing delinquent mortgages out of PC pools.
 
For information on the potential impact of the requirement to reduce the mortgage-related investments portfolio limit by 10% annually, commencing in 2010, see “MD&A — LIQUIDITY AND CAPITAL RESOURCES — Liquidity” in our 2009 Annual Report and “NOTE 3: CONSERVATORSHIP AND RELATED DEVELOPMENTS — Impact of the Purchase Agreement and FHFA Regulation on the Mortgage-Related Investments Portfolio.”
 
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Single-Family Guarantee Segment
 
Table 15 presents the Segment Earnings of our Single-family Guarantee segment.
 
Table 15 — Segment Earnings and Key Metrics — Single-Family Guarantee(1)
 
                                 
    Three Months Ended
    Six Months Ended
 
    June 30,     June 30,  
    2010     2009     2010     2009  
    (dollars in millions)  
 
Segment Earnings:
                               
Net interest income
  $ 51     $ 74     $ 110     $ 128  
Provision for credit losses
    (5,294 )     (5,626 )     (11,335 )     (14,589 )
Non-interest income:
                               
Management and guarantee income
    865       888       1,713       1,761  
Other non-interest income
    268       161       478       295  
                                 
Total non-interest income
    1,133       1,049       2,191       2,056  
Non-interest expense:
                               
Administrative expenses
    (225 )     (211 )     (444 )     (412 )
REO operations income (expense)
    41       (1 )     (115 )     (307 )
Other non-interest expense
    (107 )     (1,228 )     (196 )     (3,261 )
                                 
Total non-interest expense
    (291 )     (1,440 )     (755 )     (3,980 )
                                 
Segment adjustments(2)
    (208 )           (421 )      
                                 
Segment Earnings (loss) before income tax benefit
    (4,609 )     (5,943 )     (10,210 )     (16,385 )
Income tax benefit
    104       1,449       109       1,600  
                                 
Segment Earnings (loss), net of taxes
    (4,505 )     (4,494 )     (10,101 )     (14,785 )
Reconciliation to GAAP net income (loss):
                               
Credit guarantee-related adjustments(3)
          2,455             3,001  
Tax-related adjustments
          (859 )           (1,051 )
                                 
Total reconciling items, net of taxes
          1,596             1,950  
                                 
Net income (loss) attributable to Freddie Mac
  $ (4,505 )   $ (2,898 )   $ (10,101 )   $ (12,835 )
                                 
Key metrics — Single-family Guarantee:
                               
Balances and Growth (in billions, except rate):
                               
Average securitized balance of single-family credit guarantee portfolio(4)
  $ 1,737     $ 1,787     $ 1,767     $ 1,783  
Issuance — Single-family credit guarantees(4)
    76       154       170       258  
Fixed-rate products — Percentage of purchases(5)
    94.2 %     99.8 %     96.0 %     99.8 %
Liquidation rate — Single-family credit guarantees (annualized)(6)
    21.7 %     30.7 %     27.8 %     26.0 %
Management and Guarantee Fee Rate (in basis points, annualized):
                               
Contractual management and guarantee fees
    13.6       14.0       13.5       14.2  
Amortization of credit fees
    4.9       5.3       4.8       5.0  
                                 
Segment Earnings management and guarantee income
    18.5       19.3       18.3       19.2  
                                 
Credit:
                               
Delinquency rate(7)
    3.96 %     2.89 %     3.96 %     2.89 %
REO inventory, at end of period (number of units)
    62,178       34,699       62,178       34,699  
Single-family credit losses, in basis points (annualized)(8)
    82.8       41.7       72.5       35.4  
Market:
                               
Single-family mortgage debt outstanding (total U.S. market, in billions)(9)
    N/A     $ 10,453       N/A     $ 10,453  
30-year fixed mortgage rate(10)
    4.6 %     5.4 %     4.6 %     5.4 %
 (1)  Beginning January 1, 2010, under our revised method, Segment Earnings for the Single-family Guarantee segment equals GAAP net income (loss) attributable to Freddie Mac for the Single-family Guarantee segment. For reconciliations of Segment Earnings for the Single-family Guarantee segment in the three and six months ended June 30, 2009 and the Segment Earnings line items to the comparable line items in our consolidated financial statements prepared in accordance with GAAP, see “NOTE 16: SEGMENT REPORTING — Table 16.2 — Segment Earnings and Reconciliation to GAAP Results.”
 (2)  For a description of our segment adjustments see “NOTE 16: SEGMENT REPORTING — Segment Earnings — Segment Adjustments.”
 (3)  Consists primarily of amortization and valuation adjustments pertaining to the guarantee obligation and guarantee asset which are excluded from Segment Earnings and cash compensation exchanged at the time of securitization, excluding buy-up and buy-down fees, which is amortized into earnings. These reconciling items exist in periods prior to 2010 as the amendment to the accounting standards for transfers of financial assets and consolidation of VIEs was applied prospectively on January 1, 2010.
 (4)  Based on UPB.
 (5)  Excludes Structured Transactions, but includes interest-only mortgages with fixed interest rates.
 (6)  Includes our purchases of delinquent loans from PC pools. On February 10, 2010, we announced that we would begin purchasing substantially all 120 days or more delinquent mortgages from our related fixed-rate and ARM PCs. See “CONSOLIDATED BALANCE SHEET ANALYSIS — Mortgage Loans” for more information.
 (7)  Single-family delinquency rate information is based on the number of loans that are three monthly payments or more past due and those in the process of foreclosure at June 30, as reported by our seller/servicers.
 (8)  Credit losses are equal to REO operations expenses plus charge-offs, net of recoveries, associated with single-family mortgage loans. Calculated as the amount of credit losses divided by the average balance of our single-family credit guarantee portfolio.
 (9)  Source: Federal Reserve Flow of Funds Accounts of the United States of America dated June 10, 2010.
(10)  Based on Freddie Mac’s Primary Mortgage Market Survey rate for the last week in the quarter, which represents the national average mortgage commitment rate to a qualified borrower exclusive of any 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 was a loss of $(4.5) billion in both the second quarters of 2010 and 2009, and was $(10.1) billion and $(14.8) billion for the first half of 2010 and 2009, respectively.
 
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Segment Earnings management and guarantee income decreased slightly in the three and six months ended June 30, 2010, as compared to the three and six months ended June 30, 2009, primarily due to a decline in the average rate of contractual management and guarantee fees and lower average securitized balances. Our average contractual management and guarantee fee rates declined since newly issued PCs in the second half of 2009 and the first months of 2010 had lower average rates than PCs that were liquidated during that time, which in part reflects a higher credit quality of the composition of mortgages within our new PC issuances in those periods.
 
Table 16 below provides summary information about the composition of Segment Earnings 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 16 — Segment Earnings Composition — Single-Family Guarantee Segment
 
                                         
    For the Three Months Ended June 30, 2010  
    Segment Earnings
             
    Management and
             
    Guarantee Income(1)     Credit Expenses(2)        
          Average
          Average
    Net
 
    Amount     Rate(3)     Amount     Rate(3)     Amount(4)  
    (dollars in millions, rates in basis points)  
 
Year of origination:
                                       
2010
  $ 71       23.5     $ (21 )     6.8     $ 50  
2009
    193       17.1       (95 )     8.4       98  
2008
    137       27.5       (530 )     106.9       (393 )
2007
    128       21.2       (1,871 )     311.3       (1,743 )
2006
    73       16.1       (1,489 )     328.7       (1,416 )
2005
    80       15.5       (904 )     175.7       (824 )
2004 and prior
    183       15.6       (343 )     29.5       (160 )
                                         
Total
  $ 865       18.5     $ (5,253 )     112.8       (4,388 )
                                         
Administrative expenses
                                    (225 )
Net interest income
                                    51  
Other non-interest income and (expense), net
                                    57  
                                         
Segment Earnings (loss)
                                  $ (4,505 )
                                         
                                         
                                         
    For the Six Months Ended June 30, 2010  
    Segment Earnings
             
    Management and
             
    Guarantee Income(1)     Credit Expenses(2)        
          Average
          Average
    Net
 
    Amount     Rate(3)     Amount     Rate(3)     Amount(4)  
    (dollars in millions, rates in basis points)  
 
Year of origination:
                                       
2010
  $ 96       22.7     $ (28 )     6.6     $ 68  
2009
    390       17.1       (249 )     10.9       141  
2008
    269       26.3       (1,445 )     141.7       (1,176 )
2007
    266       21.5       (4,503 )     364.8       (4,237 )
2006
    153       16.4       (3,476 )     372.7       (3,323 )
2005
    164       15.6       (1,332 )     126.6       (1,168 )
2004 and prior
    375       15.6       (417 )     17.5       (42 )
                                         
Total
  $ 1,713       18.3     $ (11,450 )     122.9       (9,737 )
                                         
Administrative expenses
                                    (444 )
Net interest income
                                    110  
Other non-interest income and (expense), net
                                    (30 )
                                         
Segment Earnings (loss)
                                  $ (10,101 )
                                         
(1)  Includes amortization of credit fees of $230 million and $454 million for the three and six months ended June 30, 2010, respectively.
(2)  Consists of the aggregate of the Segment Earnings provision for credit losses and Segment Earnings REO operations expense.
(3)  Annualized, based on the average securitized balance of the single-family credit guarantee portfolio. Historical rates of average credit expenses may not be representative of future results.
(4)  Calculated as Segment Earnings management and guarantee income less credit expenses, which consist of Segment Earnings provision for credit losses and Segment Earnings REO operations income (expense).
 
The average securitized balance of our single-family credit guarantee portfolio was 3% lower in the second quarter of 2010, as compared to the second quarter of 2009, primarily due to our continued purchases of delinquent single-family loans out of our PCs in the second quarter of 2010. Our issuance volume in the first half of 2010 declined to $170 billion, compared to $258 billion in the first half of 2009. We expect that our new issuance volume in 2010 will be considerably lower than 2009. We continued to experience a high composition of refinance mortgages in our purchase volume during the second quarter of 2010 due to continued low interest rates and the impact of the Freddie Mac Relief Refinance Mortgagesm. We believe the combination of high refinance activity and recent changes in
 
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underwriting standards resulted in overall improvement in the credit risk associated with our mortgage purchases in the second quarter of 2010, as compared to 2005 through 2008.
 
During the first half of 2010, we raised our management and guarantee fee rates with certain of our seller/servicers; however, these increased rates are still lower than the average rates of the PCs that were liquidated during these periods. We believe the increase in management and guarantee fee rates when coupled with the higher credit quality of the mortgages within our new PC issuances will offset any expected losses associated with these newly-issued guarantees. However, the increase in management and guarantee fees on our newly originated business will not be sufficient to offset the credit losses associated with our historical PC issuances since the management and guarantee fees associated with those securities do not change. Consequently, we expect to continue to report a net loss for the Single-family Guarantee segment for the foreseeable future.
 
Our Segment Earnings provision for credit losses for the Single-family Guarantee segment was $5.3 billion for the second quarter of 2010, compared to $5.6 billion for the second quarter of 2009 and $11.3 billion for the first half of 2010, compared to $14.6 billion for the first half of 2009. The provision for credit losses was lower in the first half of 2010 due to slower growth in the rate of delinquencies and non-performing loans in our single-family credit guarantee portfolio, as compared to the first half of 2009. See “RISK MANAGEMENT — Credit Risks — Non-performing assets” for further information on growth of non-performing single-family loans. Our Segment Earnings provision for credit losses is generally higher than that recorded under GAAP primarily due to recognized provision associated with foregone interest income on non-performing loans, which is not recognized under GAAP since the loans are placed on non-accrual status.
 
During the second quarter of 2010, we identified a backlog related to the processing of certain foreclosure alternatives reported to us by our servicers, principally loan modifications and short sales. This backlog in processing loan modifications and short sales resulted in erroneous loan data within our loan reporting systems, thereby impacting our financial accounting and reporting systems. Prior to the second quarter of 2010, while we modified our loan loss reserving processes to consider potential processing lags in foreclosure alternatives data, we failed to fully adjust for the impacts of the resulting erroneous loan data on our financial statements. The cumulative effect, net of taxes, of this error corrected in the Single-family Guarantee segment’s second quarter of 2010 results was $1.2 billion, of which $0.9 billion related to the year ended December 31, 2009. For additional information, see “Note 1: Summary of Significant Accounting Policies — Basis of Presentation — Out-of-Period Accounting Adjustment” and “CONTROLS AND PROCEDURES — Changes in Internal Control Over Financial Reporting During the Quarter Ended June 30, 2010.”
 
The delinquency rate on our single-family credit guarantee portfolio decreased to 3.96% as of June 30, 2010 from 3.98% as of December 31, 2009 due to a slowdown in new delinquencies, largely due to seasonal factors, as well as a higher volume of loan modifications, mortgage loans returning to non-delinquent status, and foreclosure transfers. Gross charge-offs for this segment increased to $4.7 billion in the second quarter of 2010 compared to $2.4 billion in the second quarter of 2009, primarily due to an increase in the volume of foreclosure transfers, short sales and other foreclosure alternatives. Gross single-family charge-offs were $8.0 billion and $3.8 billion in the first half of 2010 and 2009, respectively. We expect growth in foreclosure transfers and alternatives to foreclosure will result in continued increases in charge-offs during the remainder of 2010. See “NOTE 18: CONCENTRATION OF CREDIT AND OTHER RISKS” for additional information about our credit losses.
 
Non-interest expense was $291 million and $1.4 billion in the second quarter of 2010 and 2009, respectively, and was $755 million and $4.0 billion in the first half of 2010 and 2009, respectively. The declines in non-interest expense in the 2010 periods were primarily due to a decline in losses on loans purchased that resulted from changes in accounting standards adopted on January 1, 2010, as well as lower REO operations income (expense) in the 2010 periods. REO operations income (expense) was $41 million and $(1) million in the second quarters of 2010 and 2009, respectively, and was $(115) million and $(307) million in the first half of 2010 and 2009, respectively. We experienced net disposition gains on REO properties of $45 million and $41 million in the three and six months ended June 30, 2010, respectively, compared to net disposition losses on REO properties of $(304) million and $(610) million in the three and six months ended June 30, 2009, respectively, due to the relative stabilization in national home prices in the first half of 2010. The benefit from disposition gains in the 2010 periods was partially offset by increased REO property expenses, compared to the 2009 periods, which was due to higher acquisition volume and balances of REO properties in 2010. Segment Earnings administrative expenses were also higher in the three and six months ended June 30, 2010, compared to the 2009 periods, primarily due to increased administrative costs associated with managing non-performing loans.
 
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Segment Earnings income tax benefit was $104 million and $109 million in the three and six months ended June 30, 2010, compared to $1.4 billion and $1.6 billion in the three and six months ended June 30, 2009, respectively. Income tax benefits primarily result from the benefit of carrying back a portion of our expected current year tax loss to offset prior years’ income. We exhausted our capacity for carrying back net operating losses for tax purposes during the first quarter of 2010; however, the income tax benefit recognized in the second quarter of 2010 relates to the 2009 impact of the error related to foreclosure alternatives discussed above.
 
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Multifamily Segment
 
Table 17 presents the Segment Earnings of our Multifamily segment.
 
Table 17 — Segment Earnings and Key Metrics — Multifamily(1)
 
                                 
    Three Months Ended
    Six Months Ended
 
    June 30,     June 30,  
    2010     2009     2010     2009  
    (dollars in millions)  
 
Segment Earnings:
                               
Net interest income
  $ 278     $ 198     $ 516     $ 393  
Provision for credit losses
    (119 )     (57 )     (148 )     (57 )
Non-interest income (loss):
                               
Management and guarantee income
    25       23       49       44  
Security impairments
    (17 )           (72 )      
Derivative gains (losses)
    (1 )           4       (31 )
Other non-interest income (loss)
    55       (94 )     163       (215 )
                                 
Total non-interest income (loss)
    62       (71 )     144       (202 )
                                 
Non-interest expense:
                               
Administrative expenses
    (51 )     (52 )     (105 )     (102 )
REO operations expense
    (1 )     (8 )     (4 )     (8 )
Other non-interest expense
    (19 )     (7 )     (36 )     (12 )
                                 
Total non-interest expense
    (71 )     (67 )     (145 )     (122 )
                                 
Segment adjustments(2)
                       
                                 
Segment Earnings (loss) before income tax benefit (expense)
    150       3       367       12  
LIHTC partnerships tax benefit
    146       148       293       299  
Income tax benefit (expense)
    (146 )     (164 )     (292 )     (316 )
Less: Net (income) loss — noncontrolling interest
          1       3       1  
                                 
Segment Earnings (loss), net of taxes
    150       (12 )     371       (4 )
                                 
Reconciliation to GAAP net income (loss):
                               
Credit guarantee-related adjustments(3)
          (3 )           2  
Tax-related adjustments
          1             (1 )
                                 
Total reconciling items, net of taxes
          (2 )           1  
                                 
Net income (loss) attributable to Freddie Mac
  $ 150     $ (14 )   $ 371     $ (3 )
                                 
Key metrics — Multifamily:
                               
Balances and Growth:
                               
Average balance of Multifamily loan portfolio
  $ 82,107     $ 77,650     $ 82,782     $ 75,946  
Average balance of Multifamily guarantee portfolio
  $ 21,738     $ 15,819     $ 20,603     $ 15,666  
Average balance of Multifamily investment securities portfolio
  $ 62,017     $ 63,977     $ 62,259     $ 64,367  
Liquidation rate — Multifamily loan portfolio (annualized)
    4.8 %     3.5 %     3.6 %     3.5 %
Growth rate (annualized)
    5 %     15 %     7 %     14 %
Yield and Rate:
                               
Net interest yield — Segment Earnings basis (annualized)(4)
    0.77 %     0.56 %     0.71 %     0.56 %
Average Management and guarantee fee rate, in basis points (annualized)(5)
    49.6       53.0       51.1       52.8  
Credit:
                               
Delinquency rate(6)
    0.28 %     0.15 %     0.28 %     0.15 %
Allowance for loan losses and reserve for guarantee losses, at period end
  $ 935     $ 330     $ 935     $ 330  
Credit losses, in basis points (annualized)(7)
    10.4       4.3       9.2       2.6  
(1)  Beginning January 1, 2010, under our revised method, Segment Earnings for the Multifamily segment equals GAAP net income (loss) attributable to Freddie Mac for the Multifamily segment. For reconciliations of Segment Earnings for the Multifamily segment in the three and six months ended June 30, 2009 and the Segment Earnings line items to the comparable line items in our consolidated financial statements prepared in accordance with GAAP, see “NOTE 16: SEGMENT REPORTING — Table 16.2 — Segment Earnings and Reconciliation to GAAP Results.”
(2)  For a description of our segment adjustments see “NOTE 16: SEGMENT REPORTING — Segment Earnings — Segment Adjustments.”
(3)  Consists primarily of amortization and valuation adjustments pertaining to the guarantee asset and guarantee obligation which were excluded from Segment Earnings in 2009.
(4)  Represents Multifamily Segment Earnings — net interest income divided by the average balance of the multifamily mortgage investments portfolio.
(5)  Represents Multifamily Segment Earnings — management and guarantee income, excluding prepayment and certain other fees, divided by the average balance of the multifamily guarantee portfolio, excluding certain bonds under the New Issuance Bond Initiative.
(6)  Based on UPBs of mortgages two monthly payments or more past due as well as those in the process of foreclosure and excluding Structured Transactions at period end. See “RISK MANAGEMENT — Credit Risks — Mortgage Credit Risk — Credit Performance — Delinquencies” for further information.
(7)  Credit losses are equal to REO operations expenses plus charge-offs, net of recoveries, associated with multifamily mortgage loans. Calculated as the amount of credit losses divided by the combined average balances of our multifamily loan portfolio and multifamily guarantee portfolio, including Structured Transactions.
 
Segment Earnings (loss) for our Multifamily segment was $150 million and $(12) million for the second quarters of 2010 and 2009, respectively, and was $371 million and $(4) million for the first half of 2010 and 2009, respectively.
 
Net interest income increased to $278 million in the second quarter of 2010 from $198 million in the second quarter of 2009, and was $516 million and $393 million in the first half of 2010 and 2009, respectively. We benefited from lower funding costs on allocated debt in the 2010 periods, primarily due to slightly lower interest rates as well as
 
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lower debt levels from the write-down of our LIHTC investments. As a result, net interest yield in the second quarter of 2010 improved by 21 basis points from the second quarter of 2009. Average balances of the multifamily loan portfolio were 6% and 9% higher in the three and six months ended June 30, 2010, respectively, compared to the same periods in 2009.
 
Segment Earnings provision for credit losses was $(119) million and $(57) million in the three months ended June 30, 2010 and 2009, respectively and was $(148) million and $(57) million in the six months ended June 30, 2010 and 2009, respectively. The amount of multifamily loans identified as impaired, for which a specific reserve is estimated on the loan, increased in both the three and six months ended June 30, 2010, compared to the 2009 periods, which resulted in larger provisions during the 2010 periods in order to increase our loan loss reserves.
 
Non-interest income (loss) increased to $62 million in the three months ended June 30, 2010 from $(71) million in the second quarter of 2009 and was $144 million and $(202) million in the six months ended June 30, 2010 and 2009, respectively. The increase in non-interest income in the 2010 periods was primarily due to net gains recognized on the sale of loans and the absence of LIHTC partnership losses. We sold $4.2 billion in UPB of multifamily loans during the first half of 2010, including $4.0 billion in sales through Structured Transactions, which support our efforts to increase our securitization of multifamily loans. In addition, there were no LIHTC partnership losses during the three and six months ended June 30, 2010, due to the write-down of these investments to zero in the fourth quarter of 2009. See “MD&A — CONSOLIDATED RESULTS OF OPERATIONS — Non-Interest Income (Loss) — Low-Income Housing Tax Credit Partnerships” in our 2009 Annual Report for more information.
 
National multifamily market indicators such as unemployment, effective rents, and vacancies have shown signs of modest improvement in 2010. However, certain markets continue to exhibit weak fundamentals, particularly in the Southeast and West regions, which could adversely affect delinquency rates and credit losses in future periods. Multifamily loans are generally repaid from the cash flows generated by the underlying property. Prolonged periods of high apartment vacancies and negative or flat effective rent growth will adversely impact a multifamily property’s net operating income and related cash flows, which can strain the borrower’s ability to make timely required loan payments and thereby potentially increase our delinquencies and credit losses. Delinquency rates have historically been a lagging indicator and, as a result, we may continue to experience increased delinquencies and credit losses as markets stabilize, reflecting the impact of an extended period of lower property cash flows.
 
Our multifamily delinquency rate increased in the first half of 2010, rising from 0.19% at December 31, 2009 to 0.28% at June 30, 2010. We experienced increased volumes of TDRs and REO acquisitions in the second quarter of 2010, compared to the second quarter of 2009. These activities resulted in net charge-offs of $27 million and $45 million in the three and six months ended June 30, 2010, respectively. We expect that our charge-offs will increase in the second half of 2010 driven by REO acquisitions and TDRs as we continue to resolve loans with troubled borrowers. See “NOTE 18: CONCENTRATION OF CREDIT AND OTHER RISKS” and “Table 4 — Credit Statistics, Multifamily Mortgage Portfolio” for further information on delinquencies, including geographical concentrations.
 
The UPB of the multifamily loan portfolio decreased from $83.9 billion at December 31, 2009 to $82.2 billion at June 30, 2010, primarily due to lower purchase volume reflecting market contraction, as well as our sale and securitization of loans during the first half of 2010. Our multifamily loan sales in the first half of 2010 primarily consisted of sales through Structured Transactions which support our efforts to increase securitization of multifamily loans. We expect to continue to make investments in multifamily loans in the remainder of 2010, though our purchases may not exceed liquidations and securitizations.
 
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.
 
Change in Accounting Principles
 
As discussed in “EXECUTIVE SUMMARY,” the adoption of two new accounting standards that amended the guidance applicable to the accounting for transfers of financial assets and the consolidation of VIEs had a significant impact on our consolidated financial statements and other financial disclosures beginning in the first quarter of 2010.
 
As a result of the adoption of these accounting standards, our consolidated balance sheets as of June 30, 2010 reflect the consolidation of our single-family PC trusts and certain of our Structured Transactions. The cumulative effect of these changes in accounting principles was an increase of $1.5 trillion to assets and liabilities, and a net
 
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decrease of $11.7 billion to total equity (deficit) as of January 1, 2010, which included changes to the opening balances of retained earnings (accumulated deficit) and AOCI, net of taxes.
 
See “CONSOLIDATED RESULTS OF OPERATIONS — Change in Accounting Principles,” “NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES — Consolidation and Equity Method of Accounting” and “NOTE 2: CHANGE IN ACCOUNTING PRINCIPLES” for additional information regarding these changes.
 
Cash and Cash Equivalents, Federal Funds Sold and Securities Purchased Under Agreements to Resell
 
Cash and cash equivalents, federal funds sold and securities purchased under agreements to resell, and other liquid assets discussed in “Investments in Securities — Non-Mortgage-Related Securities,” are important to our cash flow and asset and liability management, and our ability to provide liquidity and stability to the mortgage market. We use these assets to help manage recurring cash flows and meet our other cash management needs. We consider federal funds sold to be overnight unsecured trades executed with commercial banks that are members of the Federal Reserve System. As discussed above, commencing January 1, 2010, we consolidated the assets of our single-family PC trusts and certain Structured Transactions. These assets included short-term non-mortgage assets, comprised primarily of restricted cash and cash equivalents and investments in securities purchased under agreements to resell.
 
Excluding amounts related to our consolidated VIEs, we held $77.7 billion and $71.7 billion of cash and cash equivalents and federal funds sold and securities purchased under agreements to resell at June 30, 2010 and December 31, 2009, respectively. The increase in these assets is largely related to anticipated third quarter 2010 debt calls and maturities.
 
Investments in Securities
 
Table 18 provides detail regarding our investments in securities as presented in our consolidated balance sheets. Due to the accounting changes noted above, Table 18 does not include our holdings of single-family PCs and certain Structured Transactions as of June 30, 2010. For information on our holdings of such securities, see “Table 13 — Segment Portfolio Composition.”
 
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Table 18 — Investments in Securities
 
                 
    Fair Value  
    June 30, 2010     December 31, 2009  
    (in millions)  
 
Investments in securities:
               
Available-for-sale:
               
Available-for-sale mortgage-related securities:
               
Freddie Mac(1)(2)
  $ 89,579     $ 223,467  
Subprime
    34,554       35,721  
CMBS
    58,129       54,019  
Option ARM
    6,897       7,236  
Alt-A and other
    12,972       13,407  
Fannie Mae
    29,888       35,546  
Obligations of states and political subdivisions
    10,743       11,477  
Manufactured housing
    892       911  
Ginnie Mae
    321       347  
                 
Total available-for-sale mortgage-related securities
    243,975       382,131  
                 
Available-for-sale non-mortgage-related securities:
               
Asset-backed securities
    1,330       2,553  
                 
Total available-for-sale non-mortgage-related securities
    1,330       2,553  
                 
Total investments in available-for-sale securities
    245,305       384,684  
                 
Trading:
               
Trading mortgage-related securities:
               
Freddie Mac(1)(2)
    13,032       170,955  
Fannie Mae
    25,005       34,364  
Ginnie Mae
    181       185  
Other
    23       28  
                 
Total trading mortgage-related securities
    38,241       205,532  
                 
Trading non-mortgage-related securities:
               
Asset-backed securities
    664       1,492  
Treasury bills
    26,881       14,787  
Treasury notes
    405        
FDIC-guaranteed corporate medium-term notes
    442       439  
                 
Total trading non-mortgage-related securities
    28,392       16,718  
                 
Total investments in trading securities
    66,633       222,250  
                 
Total investments in securities
  $ 311,938     $ 606,934  
                 
(1)  Upon our adoption of amendments to the accounting standards for transfers of financial assets and consolidation of VIEs on January 1, 2010, we no longer account for single-family PCs and certain Structured Transactions we purchase as investments in securities because we now recognize the underlying mortgage loans on our consolidated balance sheets through consolidation of the related trusts. These loans are discussed below in “Mortgage Loans.” For further information, see “NOTE 2: CHANGE IN ACCOUNTING PRINCIPLES.”
 
(2)  For information on the types of instruments that are included, see “NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES — Investments in Securities.”
 
Non-Mortgage-Related Securities
 
Our investments in non-mortgage-related securities provide an additional source of liquidity for us and help us manage the interest-rate risk inherent in mortgage-related assets. We held investments in non-mortgage-related available-for-sale and trading securities of $29.7 billion and $19.3 billion as of June 30, 2010 and December 31, 2009, respectively. Our holdings of non-mortgage-related securities increased during the first half of 2010 as we increased our holdings of Treasury bills to maintain required liquidity and contingency levels.
 
We did not record a net impairment of available-for-sale securities recognized in earnings during the three and six months ended June 30, 2010 on our non-mortgage-related securities. We recorded net impairments of $11 million and $185 million for our non-mortgage-related securities during the three and six months ended June 30, 2009, respectively, as we could not assert that we did not intend to, or will not be required to, sell these securities before a recovery of the unrealized losses. The decision to impair non-mortgage-related securities is consistent with our consideration of these securities as a contingent source of liquidity. We do not expect any contractual cash shortfalls related to these impaired securities. See “NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES — Recently Adopted Accounting Standards — Change in the Impairment Model for Debt Securities” in our 2009 Annual Report for information on how other-than-temporary impairments are recorded on our financial statements commencing in the second quarter of 2009.
 
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Table 19 provides credit ratings of our investments in non-mortgage-related asset-backed securities held at June 30, 2010 based on their ratings as of July 23, 2010. These securities are classified as either available-for-sale or trading on our consolidated balance sheets.
 
Table 19 — Investments in Non-Mortgage-Related Asset-Backed Securities
 
                                         
    June 30, 2010  
                            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
  $ 1,548     $ 1,577       100 %     100 %     100 %
Auto credit
    279       287       100       100       100  
Equipment lease
    57       59       100       100       100  
Student loans
    30       30       100       100       100  
Stranded assets(4)
    40       41       100       100       100  
                                         
Total non-mortgage-related asset-backed securities
  $ 1,954     $ 1,994       100       100       100  
                                         
(1)  Reflects the percentage of our investments that were AAA-rated as of the date of our acquisition of the security, based on UPB and the lowest rating available.
(2)  Reflects the AAA-rated composition of the securities as of July 23, 2010, based on UPB as of June 30, 2010 and the lowest rating available.
(3)  Reflects the composition of these securities with credit ratings BBB– or above as of July 23, 2010, based on UPB as of June 30, 2010 and the lowest rating available.
(4)  Consists of securities backed by liens secured by fixed assets owned by regulated public utilities.
 
Mortgage-Related Securities
 
We are primarily a buy-and-hold investor in mortgage-related securities, which consist of securities issued by Fannie Mae, Ginnie Mae, and other financial institutions. We also invest in our own mortgage-related securities. However, upon our adoption of amendments to the accounting standards for transfers of financial assets and consolidation of VIEs on January 1, 2010, we no longer account for single-family PCs and certain Structured Transactions we purchase as investments in securities because we now recognize the underlying mortgage loans on our consolidated balance sheets through consolidation of the related trusts.
 
We include our investments in mortgage-related securities in the calculation of our mortgage-related investments portfolio. Our mortgage-related investments portfolio also includes: (a) our holdings of single-family PCs and certain Structured Transactions, which are presented in “Table 13 — Segment Portfolio Composition”; and (b) our holdings of unsecuritized single-family and multifamily loans, which are presented in “Table 25 — Characteristics of Mortgage Loans on Our Consolidated Balance Sheets.”
 
Table 20 provides the UPB of our investments in mortgage-related securities classified as either available-for-sale or trading on our consolidated balance sheets. Due to the accounting changes noted above, Table 20 does not include our holdings of single-family PCs and certain Structured Transactions as of June 30, 2010. For information on our holdings of such securities, see “Table 13 — Segment Portfolio Composition.”
 
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Table 20 — Characteristics of Mortgage-Related Securities on Our Consolidated Balance Sheets
 
                                                 
    June 30, 2010     December 31, 2009  
    Fixed Rate     Variable Rate(1)     Total     Fixed Rate     Variable Rate(1)     Total  
    (in millions)  
 
PCs and Structured Securities:(2)
                                               
Single-family
  $ 81,980     $ 8,476     $ 90,456     $ 294,958     $ 77,708     $ 372,666  
Multifamily
    471       2,031       2,502       277       1,672       1,949  
                                                 
Total PCs and Structured Securities
    82,451       10,507       92,958       295,235       79,380       374,615  
                                                 
Non-Freddie Mac mortgage-related securities:
                                               
Agency mortgage-related securities:(3)
                                               
Fannie Mae:
                                               
Single-family
    28,481       21,904       50,385       36,549       28,585       65,134  
Multifamily
    396       90       486       438       90       528  
Ginnie Mae:
                                               
Single-family
    318       125       443       341       133       474  
Multifamily
    29             29       35             35  
                                                 
Total agency mortgage-related securities
    29,224       22,119       51,343       37,363       28,808       66,171  
                                                 
Non-agency mortgage-related securities:
                                               
Single-family:(4)
                                               
Subprime
    377       57,053       57,430       395       61,179       61,574  
Option ARM
          16,603       16,603             17,687       17,687  
Alt-A and other
    2,574       17,506       20,080       2,845       18,594       21,439  
CMBS
    22,380       38,065       60,445       23,476       38,439       61,915  
Obligations of states and political subdivisions(5)
    10,864       38       10,902       11,812       42       11,854  
Manufactured housing(6)
    981       158       1,139       1,034       167       1,201  
                                                 
Total non-agency mortgage-related securities(7)
    37,176       129,423       166,599       39,562       136,108       175,670  
                                                 
Total UPB of mortgage-related securities
  $ 148,851     $ 162,049       310,900     $ 372,160     $ 244,296       616,456  
                                                 
Premiums, discounts, deferred fees, impairments of UPB and other basis adjustments
                    (9,728 )                     (5,897 )
Net unrealized losses on mortgage-related securities, pre-tax
                    (18,956 )                     (22,896 )
                                                 
Total carrying value of mortgage-related securities
                  $ 282,216                     $ 587,663  
                                                 
(1)  Variable-rate mortgage-related securities include those with a contractual coupon rate that, prior to contractual maturity, is either scheduled to change or is subject to change based on changes in the composition of the underlying collateral.
(2)  For our PCs and Structured Securities, we are subject to the credit risk associated with the underlying mortgage loan collateral. On January 1, 2010, we began prospectively recognizing on our consolidated balance sheets the mortgage loans underlying our issued single-family PCs and certain Structured Transactions as held-for-investment mortgage loans, at amortized cost. We do not consolidate our resecuritization trusts since we are not deemed to be the primary beneficiary of such trusts. See “NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES — Investments in Securities” for further information.
(3)  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.
(4)  The majority of the single-family non-agency mortgage-related securities backed by subprime first lien, option ARM, and Alt-A loans we hold include significant credit enhancements, particularly through subordination. For information about how these securities are rated, see “Table 24 — Ratings of Available-for-Sale Non-Agency Mortgage-Related Securities Backed by Subprime, Option ARM, Alt-A and Other Loans, and CMBS.”
(5)  Consists of mortgage revenue bonds. Approximately 53% and 55% of these securities held at June 30, 2010 and December 31, 2009, respectively, were AAA-rated as of those dates, based on the lowest rating available.
(6)  At June 30, 2010 and December 31, 2009, 8% and 17%, respectively, of mortgage-related securities backed by manufactured housing bonds were rated BBB– or above, based on the lowest rating available. At June 30, 2010 and December 31, 2009, 87% and 91%, respectively, of manufactured housing bonds had credit enhancements, including primary monoline insurance, that covered 23% of the manufactured housing bonds based on the UPB for both dates. At both June 30, 2010 and December 31, 2009, we had secondary insurance on 61% of these bonds that were not covered by primary monoline insurance, based on the UPB. Approximately 3% of the mortgage-related securities backed by manufactured housing bonds were AAA-rated at both June 30, 2010 and December 31, 2009, based on the UPB and the lowest rating available.
(7)  Credit ratings for most non-agency mortgage-related securities are designated by no fewer than two nationally recognized statistical rating organizations. Approximately 24% and 26% of total non-agency mortgage-related securities held at June 30, 2010 and December 31, 2009, respectively, were AAA-rated as of those dates, based on the UPB and the lowest rating available.
 
The total UPB of our investments in mortgage-related securities on our consolidated balance sheets decreased from $616.5 billion at December 31, 2009 to $310.9 billion at June 30, 2010 primarily as a result of a decrease of $286.5 billion related to our adoption of the amendments to the accounting standards for the transfer of financial assets and the consolidation of VIEs on January 1, 2010.
 
The UPB of our mortgage-related investments portfolio, for purposes of the limit imposed by the Purchase Agreement and FHFA regulation, was $739.5 billion at June 30, 2010, and may not exceed $810 billion as of December 31, 2010. The UPB of our mortgage-related investments portfolio under the Purchase Agreement is determined without giving effect to any change in accounting standards related to the transfer of financial assets and consolidation of VIEs or any similar accounting standard. Accordingly, for purposes of the portfolio limit, when PCs and certain Structured Transactions are purchased into the mortgage-related investments portfolio, this is considered the acquisition of assets rather than the reduction of debt. FHFA has stated its expectation that we will not be a substantial buyer or seller of mortgages for our mortgage-related investments portfolio, except for purchases of delinquent
 
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mortgages out of PC trusts. We are also subject to limits on the amount of assets we can sell from our mortgage-related investments portfolio in any calendar month without review and approval by FHFA and, if FHFA so determines, Treasury.
 
Table 21 summarizes our mortgage-related securities purchase activity for the three and six months ended June 30, 2010 and 2009. The purchase activity for the three and six months ended June 30, 2010 includes our purchase activity related to the single-family PCs and Structured Transactions issued by trusts that we consolidated. Due to the accounting changes noted above, effective January 1, 2010, purchases of single-family PCs and Structured Transactions issued by trusts that we consolidated are recorded as an extinguishment of debt securities of consolidated trusts held by third parties on our consolidated balance sheets.
 
Table 21 — Total Mortgage-Related Securities Purchase Activity(1)
 
                                 
    Three Months Ended
    Six Months Ended
 
    June 30,     June 30,  
    2010     2009     2010     2009  
    (in millions)  
 
Non-Freddie Mac mortgage-related securities purchased for Structured Securities:
                               
Ginnie Mae Certificates
  $     $ 23     $ 13     $ 34  
Non-agency mortgage-related securities purchased for Structured Transactions(2)
    2,063       5,690       7,684       5,690  
                                 
Total Non-Freddie Mac mortgage-related securities purchased for Structured Securities
    2,063       5,713       7,697       5,724  
                                 
Non-Freddie Mac mortgage-related securities purchased as investments in securities:
                               
Agency securities:
                               
Fannie Mae:
                               
Fixed-rate
          9,418             39,527  
Variable-rate
    117       1,378       164       2,563  
                                 
Total Fannie Mae
    117       10,796       164       42,090  
                                 
Ginnie Mae fixed-rate
                      27  
                                 
Total agency mortgage-related securities
    117       10,796       164       42,117  
                                 
Non-agency securities:
                               
Mortgage revenue bonds fixed-rate
          19             95  
                                 
Total non-agency mortgage-related securities
          19             95  
                                 
Total non-Freddie Mac mortgage-related securities purchased as investments in securities
    117       10,815       164       42,212  
                                 
Total non-Freddie Mac mortgage-related securities purchased
  $ 2,180     $ 16,528     $ 7,861     $ 47,936  
                                 
Freddie Mac mortgage-related securities repurchased:
                               
Single-family:
                               
Fixed-rate
  $ 1,205     $ 46,331     $ 6,045     $ 130,262  
Variable-rate
          268       203       517  
Multifamily:
                               
Fixed-rate
    160             185        
Variable-rate
    10             41        
                                 
Total Freddie Mac mortgage-related securities repurchased
  $ 1,375     $ 46,599     $ 6,474     $ 130,779  
                                 
(1)  Based on UPB. Excludes mortgage-related securities traded but not yet settled.
(2)  Purchases in 2010 primarily include Structured Transactions, and HFA bonds we acquired and resecuritized under the New Issue Bond Initiative. See our 2009 Annual Report for further information on this component of the Housing Finance Agency Initiative.
 
During the first half of 2010, our purchases of mortgage-related securities continued to be very limited because of a relative lack of favorable investment opportunities, as evidenced by tight spreads on agency mortgage-related securities.
 
Higher Risk Components of Our Investments in Mortgage-Related Securities
 
As discussed below, we have exposure to subprime, option ARM, and Alt-A and other loans as part of our investments in mortgage-related securities as follows:
 
  •  Single-family non-agency mortgage-related securities:  We hold non-agency mortgage-related securities backed by subprime, option ARM, and Alt-A and other loans.
 
  •  Structured Transactions:  We hold certain Structured Transactions as part of our investments in securities. There are subprime and option ARM loans underlying some of these Structured Transactions. For more information on certain higher risk categories of single-family loans underlying our Structured Transactions, see “RISK MANAGEMENT — Credit Risks — Mortgage Credit Risk.”
 
Non-Agency Mortgage-Related Securities Backed by Subprime, Option ARM, and Alt-A Loans
 
Since the first quarter of 2008 we have not purchased any non-agency mortgage-related securities backed by subprime, option ARM, or Alt-A loans. As discussed below, we recognized impairment on our holdings of such
 
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securities during the three months ended June 30, 2010 and 2009. See “Table 23 — Net Impairment on Available-for-Sale Mortgage-Related Securities Recognized in Earnings” for more information.
 
We classify our non-agency mortgage-related securities as subprime, option ARM, or Alt-A if the securities were labeled as such when sold to us. Table 22 presents information about our holdings of these securities.
 
Table 22 — Non-Agency Mortgage-Related Securities Backed by Subprime, Option ARM, and Alt-A Loans(1)
 
                                                                 
    June 30, 2010   December 31, 2009
        Present Value
  Collateral
  Average
      Present Value
  Collateral
  Average
        of Expected
  Delinquency
  Credit
      of Expected
  Delinquency
  Credit
    UPB   Credit Losses   Rate(2)   Enhancement(3)   UPB   Credit Losses   Rate(2)   Enhancement(3)
    (dollars in millions)
 
Securities backed by:
                                                               
Subprime first lien
  $ 56,922     $ 3,311       46 %     26 %   $ 61,019     $ 4,263       49 %     29 %
Option ARM
    16,603       3,534       45       13       17,687       3,700       45       16  
Alt-A(4)
    16,909       1,653       26       10       17,998       1,845       26       11  
 
                                 
    Three Months Ended   Six Months Ended
    June 30, 2010   June 30, 2009   June 30, 2010   June 30, 2009
    (in millions)
 
Principal repayments and cash shortfalls:(5)
                               
Subprime — first and second liens:
                               
Principal repayments
  $ 2,001     $ 3,405     $ 4,118     $ 7,256  
Principal cash shortfalls
    12       16       25       20  
Option ARM:
                               
Principal repayments
    435       474       884       860  
Principal cash shortfalls
    80             112        
Alt-A and other:
                               
Principal repayments
    653       989       1,270       1,892  
Principal cash shortfalls
    67       8       89       8  
(1)  See “Ratings of Non-Agency Mortgage-Related Securities” for additional information about these securities.
(2)  Determined based on loans that are two monthly payments or more past due that underlie the securities using information obtained from a third-party data provider.
(3)  Reflects the average current credit enhancement on all such securities we hold provided by subordination of other securities held by third parties. Excludes credit enhancement provided by monoline bond insurance.
(4)  Excludes non-agency mortgage-related securities backed by other loans, which are primarily comprised of securities backed by home equity lines of credit.
(5)  In addition to the contractual interest payments, we receive monthly remittances of principal repayments from both the recoveries of liquidated loans and, to a lesser extent, voluntary repayments of the underlying collateral of these securities representing a partial return of our investment in these securities.
 
We have significant credit enhancements on the majority of the non-agency mortgage-related securities we hold backed by subprime first lien, option ARM, and Alt-A loans, particularly through subordination. These credit enhancements are one of the primary reasons we expect our actual losses, through principal or interest shortfalls, to be less than the underlying collateral losses in aggregate. However, it is difficult to estimate the point at which credit enhancements will be exhausted. In addition, during the second quarter of 2010, we continued to experience depletion of credit enhancements on certain of the securities backed by subprime first lien, option ARM, and Alt-A loans due to poor performance of the underlying collateral.
 
Unrealized Losses on Available-for-Sale Mortgage-Related Securities
 
At June 30, 2010, our gross unrealized losses, pre-tax, on available-for-sale mortgage-related securities were $31.4 billion, compared to $42.7 billion at December 31, 2009. We believe the unrealized losses related to these securities at June 30, 2010 were mainly attributable to poor underlying collateral performance, limited liquidity and large risk premiums in the residential non-agency mortgage market. All securities in an unrealized loss position are evaluated to determine if the impairment is other-than-temporary. See “Total Equity (Deficit)” and “NOTE 7: INVESTMENTS IN SECURITIES” for additional information regarding unrealized losses on our available-for-sale securities.
 
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Other-Than-Temporary Impairments on Available-for-Sale Mortgage-Related Securities
 
Table 23 provides information about the mortgage-related securities for which we recognized other-than-temporary impairments during the three months ended June 30, 2010 and 2009.
 
Table 23 — Net Impairment on Available-for-Sale Mortgage-Related Securities Recognized in Earnings
 
                                 
    Three Months Ended June 30, 2010     Three Months Ended June 30, 2009  
          Net Impairment of
          Net Impairment of
 
          Available-for-Sale Securities
          Available-for-Sale Securities
 
    UPB     Recognized in Earnings     UPB     Recognized in Earnings  
    (in millions)  
 
Subprime:
                               
2006 & 2007 first lien
  $ 606     $ 15     $ 24,899     $ 949  
Other years — first and second liens(1)
    234       2       8,532       342  
                                 
Total subprime — first and second liens
    840       17       33,431       1,291  
                                 
Option ARM:
                               
2006 & 2007
    1,940       34       11,446       301  
Other years
    260       14       5,586       169  
                                 
Total option ARM
    2,200       48       17,032       470  
                                 
Alt-A:
                               
2006 & 2007
    2,860       37       7,004       169  
Other years
    152       2       4,601       131  
                                 
Total Alt-A
    3,012       39       11,605       300  
                                 
Other loans(2)
    2,419       294       2,780       96  
                                 
Total subprime, option ARM, Alt-A, and other loans
    8,471       398       64,848       2,157  
CMBS
    900       17              
Manufactured housing
    424       13       807       45  
                                 
Total available-for-sale mortgage-related securities
  $ 9,795     $ 428     $ 65,655     $ 2,202  
                                 
(1)  Includes all second liens.
(2)  Primarily comprised of securities backed by home equity lines of credit.
 
Our estimate of the present value of expected credit losses on the non-agency mortgage-related securities portfolio decreased from $10.9 billion at March 31, 2010 to $9.9 billion at June 30, 2010, due mainly to improved home prices and lower forward interest rates. We recorded net impairment of available-for-sale mortgage-related securities recognized in earnings of $428 million and $938 million during the three and six months ended June 30, 2010, respectively, as our estimate of the present value of expected credit losses on certain individual securities increased during the periods. The expected deterioration in the performance of the collateral underlying these securities has not changed our conclusion that we do not intend to sell these securities and it is not more likely than not that we will be required to sell such securities. Included in these net impairments are $398 million and $851 million of impairments related to securities backed by subprime, option ARM, and Alt-A and other loans during the three and six months ended June 30, 2010, respectively.
 
As part of our impairment analysis, we identified CMBS with a UPB of $900 million that are expected to incur contractual losses, and thus recorded an other-than-temporary impairment charge in earnings of $17 million during the three months ended June 30, 2010. We view the performance of these securities as significantly worse than the vast majority of our CMBS. While delinquencies for loans underlying the remaining securities have increased, we currently believe the credit enhancement related to these securities is sufficient to cover expected losses.
 
We currently estimate that the future expected principal and interest shortfall on non-agency mortgage-related securities will be significantly less than the fair value declines. Since the beginning of 2007, we have incurred actual principal cash shortfalls of $335 million on impaired securities backed by non-agency mortgage-related securities. However, many of the trusts that issued our non-agency mortgage-related securities were structured so that realized collateral losses in excess of credit enhancements are not passed on to investors until the investment matures.
 
The decline in mortgage credit performance has been particularly severe for subprime, option ARM, and Alt-A and other loans. Many of the same economic factors impacting the performance of our single-family credit guarantee portfolio also impact the performance of our investments in non-agency mortgage-related securities. High unemployment, a large inventory of unsold homes, tight credit conditions, and weak consumer confidence contributed to poor performance during the three and six months ended June 30, 2010. In addition, subprime, option ARM, and 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. As compared to loans in other states, loans in these states undergoing economic stress are more likely to become delinquent and the credit losses associated with such loans are likely to be higher.
 
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Our evaluation of certain credit enhancements covering some of the securities also contributed to the impairments. These credit enhancements are provided by certain primary monoline bond insurers. We have determined that it is likely a principal and interest shortfall will occur on the securities, and that in such a case there is substantial uncertainty surrounding the insurer’s ability to pay all future claims. We rely on monoline bond insurance, including secondary coverage, to provide credit protection on some of our investments in mortgage-related and non-mortgage-related securities. See “NOTE 18: CONCENTRATION OF CREDIT AND OTHER RISKS — Bond Insurers” for additional information.
 
While it is reasonably possible that collateral losses on our available-for-sale mortgage-related securities where we have not recorded an impairment earnings charge could exceed our credit enhancement levels, we do not believe that those conditions were likely at June 30, 2010. Based on our conclusion that we do not intend to sell our remaining available-for-sale mortgage-related securities and it is not more likely than not that we will be required to sell these securities before a sufficient time to recover all unrealized losses and our consideration of other available information, we have concluded that the reduction in fair value of these securities was temporary at June 30, 2010 and as such has been recorded in AOCI.
 
During the three and six months ended June 30, 2009 we recorded net impairment of available-for-sale mortgage-related securities recognized in earnings of $2.2 billion and $9.2 billion, respectively. The impairments recorded during the three months ended June 30, 2009 related primarily to the expected credit losses on our non-agency mortgage-related securities. Of the impairments recorded during the six months ended June 30, 2009, $6.9 billion were recognized in the first quarter, prior to our adoption of the amendment to the accounting standards related to investments in debt and equity securities, and included both credit and non-credit-related other-than-temporary impairments. For further information on our adoption of the amendment to the accounting standards for investments in debt and equity securities and how other-than-temporary impairments are recorded on our financial statements commencing in the second quarter of 2009, see “NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES — Recently Adopted Accounting Standards — Change in the Impairment Model for Debt Securities” in our 2009 Annual Report. See “NOTE 7: INVESTMENTS IN SECURITIES” for additional information regarding the accounting principles for investments in debt and equity securities and the other-than-temporary impairments recorded during the three and six months ended June 30, 2010 and 2009.
 
Our assessments concerning other-than-temporary impairment require significant judgment, the use of models and are subject to change due to the performance of the individual securities and mortgage market conditions. Bankruptcy reform, loan modification programs and other forms of government intervention in the housing market can significantly affect the performance of these securities, including the timing of loss recognition of the underlying loans and thus the timing of losses we recognize on our securities. We use data provided by third-party vendors as an input in our evaluation of our non-agency mortgage-related securities. Given the extent of the housing and economic downturn over the past few years, it is difficult to forecast and estimate the future performance of mortgage loans and mortgage-related securities with any assurance, and actual results could differ materially from our expectations. Furthermore, various market participants could arrive at materially different conclusions regarding estimates of future cash shortfalls.
 
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Ratings of Non-Agency Mortgage-Related Securities
 
Table 24 shows the ratings of available-for-sale non-agency mortgage-related securities backed by subprime, option ARM, Alt-A and other loans, and CMBS held at June 30, 2010 based on their ratings as of June 30, 2010 as well as those held at December 31, 2009 based on their ratings as of December 31, 2009 using the lowest rating available for each security.
 
Table 24 — Ratings of Available-for-Sale Non-Agency Mortgage-Related Securities Backed by Subprime, Option ARM, Alt-A and Other Loans, and CMBS
 
                                 
                Gross
    Monoline
 
          Amortized
    Unrealized
    Insurance
 
Credit Ratings as of June 30, 2010
  UPB     Cost     Losses     Coverage(1)  
    (in millions)  
 
Subprime loans:
                               
AAA-rated
  $ 2,927     $ 2,927     $ (352 )   $ 34  
Other investment grade
    3,808       3,808       (621 )     465  
Below investment grade(2)
    50,687       45,655       (16,866 )     1,896  
                                 
Total
  $ 57,422     $ 52,390     $ (17,839 )   $ 2,395  
                                 
Option ARM loans:
                               
AAA-rated
  $     $     $     $  
Other investment grade
    269       268       (90 )     157  
Below investment grade(2)
    16,334       12,381       (5,680 )     61  
                                 
Total
  $ 16,603     $ 12,649     $ (5,770 )   $ 218  
                                 
Alt-A and other loans:
                               
AAA-rated
  $ 1,558     $ 1,570     $ (170 )   $ 8  
Other investment grade
    3,380       3,388       (617 )     411  
Below investment grade(2)
    15,142       12,373       (3,581 )     2,626  
                                 
Total
  $ 20,080     $ 17,331     $ (4,368 )   $ 3,045  
                                 
CMBS:
                               
AAA-rated
  $ 30,485     $ 30,558     $ (180 )   $ 43  
Other investment grade
    26,241       26,197       (1,518 )     1,656  
Below investment grade(2)
    3,681       3,461       (1,218 )     1,707  
                                 
Total
  $ 60,407     $ 60,216     $ (2,916 )   $ 3,406  
                                 
                                 
                                 
Credit Ratings as of December 31, 2009
                       
 
Subprime loans:
                               
AAA-rated
  $ 4,600     $ 4,597     $ (643 )   $ 34  
Other investment grade
    6,248       6,247       (1,562 )     625  
Below investment grade(2)
    50,716       45,977       (18,897 )     1,895  
                                 
Total
  $ 61,564     $ 56,821     $ (21,102 )   $ 2,554  
                                 
Option ARM loans:
                               
AAA-rated
  $     $     $     $  
Other investment grade
    350       345       (152 )     166  
Below investment grade(2)
    17,337       13,341       (6,323 )     163