10-Q 1 f71858e10vq.htm 10-Q e10vq
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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
 
 
FORM 10-Q
 
 
x   QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934.
 
For the quarterly period ended March 31, 2012
 
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: 001-34139
 
 
Federal Home Loan Mortgage Corporation
(Exact name of registrant as specified in its charter)
 
Freddie Mac
 
             
Federally chartered corporation   8200 Jones Branch Drive
McLean, Virginia 22102-3110
   
52-0904874
   
(703) 903-2000
(State or other jurisdiction of
incorporation or organization)
  (Address of principal executive
offices, including zip code)
  (I.R.S. Employer
Identification No.)
  (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).     x Yes  o No
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “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 April 23, 2012, there were 650,033,623 shares of the registrant’s common stock outstanding.
 
 
            


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MD&A TABLE REFERENCE
 
                 
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FINANCIAL STATEMENTS
 
         
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PART I — FINANCIAL INFORMATION
 
We continue to operate under the conservatorship that commenced on September 6, 2008, under the direction of FHFA as our Conservator. The Conservator succeeded to all rights, titles, powers and privileges of Freddie Mac, and of any shareholder, officer or director thereof, with respect to the company and its assets. The Conservator has delegated certain authority to our Board of Directors to oversee, and management to conduct, day-to-day operations. The directors serve on behalf of, and exercise authority as directed by, the Conservator. See “BUSINESS — Conservatorship and Related Matters” in our Annual Report on Form 10-K for the year ended December 31, 2011, or 2011 Annual Report, for information on the terms of the conservatorship, the powers of the Conservator, and related matters, including the terms of our Purchase Agreement with Treasury.
 
This Quarterly Report on Form 10-Q includes forward-looking statements that are based on current expectations and are subject to significant risks and uncertainties. These forward-looking statements are made as of the date of this Form 10-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. Actual results might differ significantly from those described in or implied by such statements due to various factors and uncertainties, including those described in: (a) “MD&A — FORWARD-LOOKING STATEMENTS” in this Form 10-Q and in the comparably captioned section of our 2011 Annual Report; and (b) the “BUSINESS” and “RISK FACTORS” sections of our 2011 Annual Report.
 
Throughout this Form 10-Q, we use certain acronyms and terms that are defined in the “GLOSSARY.”
 
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
 
You should read this MD&A in conjunction with our consolidated financial statements and related notes for the three months ended March 31, 2012 included in “FINANCIAL STATEMENTS,” and our 2011 Annual Report.
 
EXECUTIVE SUMMARY
 
Overview
 
Freddie Mac is a GSE chartered by Congress in 1970 with a public mission to provide liquidity, stability, and affordability to the U.S. housing market. We have maintained a consistent market presence since our inception, providing mortgage liquidity in a wide range of economic environments. We are working to support the recovery of the housing market and the nation’s economy by providing essential liquidity to the mortgage market and helping to stem the rate of foreclosures. We believe our actions are helping communities across the country by providing America’s families with access to mortgage funding at low rates while helping distressed borrowers keep their homes and avoid foreclosure, where feasible.
 
Summary of Financial Results
 
Our financial performance in the first quarter of 2012 was impacted by the ongoing weakness in the economy, including in the mortgage market, and changes in interest rates. Our comprehensive income was $1.8 billion and $2.7 billion for the first quarters of 2012 and 2011, respectively, consisting of: (a) $577 million and $676 million of net income, respectively; and (b) $1.2 billion and $2.1 billion of total other comprehensive income, respectively.
 
Our total equity (deficit) was $(18) million at March 31, 2012, reflecting our comprehensive income of $1.8 billion for the first quarter of 2012 and our dividend payment of $1.8 billion on our senior preferred stock in March 2012. To address our deficit in net worth, FHFA, as Conservator, will submit a draw request on our behalf to Treasury under the Purchase Agreement for $19 million. Following receipt of the draw, the aggregate liquidation preference on the senior preferred stock owned by Treasury will be $72.3 billion.
 
Our Primary Business Objectives
 
We are focused on the following primary business objectives: (a) developing mortgage market enhancements in support of a new infrastructure for the secondary mortgage market; (b) contracting the dominant presence of the GSEs in the marketplace; (c) providing credit availability for new or refinanced mortgages and maintaining foreclosure prevention activities; (d) minimizing our credit losses; (e) maintaining sound credit quality of the loans we purchase or guarantee; and (f) strengthening our infrastructure and improving overall efficiency while also focusing on retention of key employees.
 
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Our business objectives reflect direction we have received from the Conservator. On March 8, 2012, FHFA instituted a scorecard for use by both us and Fannie Mae that established objectives, performance targets and measures for 2012, and provides the implementation roadmap for FHFA’s strategic plan for Freddie Mac and Fannie Mae. We are aligning our resources and internal business plans to meet the goals and objectives laid out in the 2012 conservatorship scorecard. See “LEGISLATIVE AND REGULATORY MATTERS — FHFA’s Strategic Plan for Freddie Mac and Fannie Mae Conservatorships and 2012 Conservatorship Scorecard.” Based on our charter, other legislation, public statements from Treasury and FHFA officials, and other guidance and directives from our Conservator, we have a variety of different, and potentially competing, objectives. For more information, see “BUSINESS — Conservatorship and Related Matters — Impact of Conservatorship and Related Actions on Our Business” in our 2011 Annual Report.
 
Developing Mortgage Market Enhancements in Support of a New Infrastructure for the Secondary Mortgage Market
 
In the first quarter of 2012, we continued our efforts to build value for the industry and build the infrastructure for a future housing finance system. These efforts include the implementation of the Uniform Mortgage Data Program, or UMDP, which provides us with the ability to collect additional data that we believe will improve our risk management practices. The UMDP creates standard terms and definitions to be used throughout the industry and establishes standard reporting protocols. The UMDP is a key building block in developing a future secondary mortgage market. In the first quarter of 2012, we completed a key milestone of the UMDP with the launch of the Uniform Collateral Data Portal for the electronic submission of appraisal reports for conventional mortgages. We are also working with FHFA and others to develop a plan for the design and building of a single securitization platform that can be used in a future secondary mortgage market. FHFA also directed us and Fannie Mae to discuss harmonizing our seller/servicer contracts.
 
Contracting the Dominant Presence of the GSEs in the Marketplace
 
We continue to take steps toward the goal of gradually shifting mortgage credit risk from Freddie Mac to private investors, while simplifying and shrinking certain of our operations. In the case of single-family credit guarantees, we are exploring several ways to accomplish this goal, including increasing guarantee fees, establishing loss-sharing arrangements, and evaluating new risk-sharing transactions beyond the traditional charter-required mortgage insurance coverage. In addition, we are studying the steps necessary for our competitive disposition of certain investment assets, including non-performing loans. To evaluate how to accomplish the goal of contracting our operations in the multifamily business, we are conducting a market analysis of the viability of our multifamily operations without government guarantees.
 
Providing Credit Availability for New or Refinanced Mortgages and Maintaining Foreclosure Prevention Activities
 
We provide liquidity and support to the U.S. mortgage market in a number of important ways:
 
  •  Our support enables borrowers to have access to a variety of conforming mortgage products, including the prepayable 30-year fixed-rate mortgage, which historically has represented the foundation of the mortgage market.
 
  •  Our support provides lenders with a constant source of liquidity for conforming mortgage products. We estimate that we, Fannie Mae, and Ginnie Mae collectively guaranteed more than 90% of the single-family conforming mortgages originated during the first quarter of 2012.
 
  •  Our consistent market presence provides assurance to our customers that there will be a buyer for their conforming loans that meet our credit standards. We believe this liquidity provides our customers with confidence to continue lending in difficult environments.
 
  •  We are an important counter-cyclical influence as we stay in the market even when other sources of capital have withdrawn.
 
During the first quarters of 2012 and 2011, we guaranteed $105.1 billion and $97.6 billion in UPB of single-family conforming mortgage loans, respectively, representing approximately 491,000 and 461,000 loans, respectively.
 
Borrowers typically pay a lower interest rate on loans acquired or guaranteed by Freddie Mac, Fannie Mae, or Ginnie Mae. Mortgage originators are generally able to offer homebuyers and homeowners lower mortgage rates on conforming loan products, including ours, in part because of the value investors place on GSE-guaranteed mortgage-related securities. Prior to 2007, mortgage markets were less volatile, home values were stable or rising, and there were many sources of mortgage funds. We estimate that, for 20 years prior to 2007, the average effective interest rates on conforming, fixed-rate single-family mortgage loans were about 30 basis points lower than on non-conforming loans. Since 2007, this gap has widened, and, we estimate that interest rates on conforming, fixed-rate loans, excluding conforming jumbo loans, have been lower than those on non-conforming loans by as much as 184 basis points. In March 2012, we estimate that
 
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borrowers were paying an average of 54 basis points less on these conforming loans than on non-conforming loans. These estimates are based on data provided by HSH Associates, a third-party provider of mortgage market data.
 
We are focused on reducing the number of foreclosures and helping to keep families in their homes. In addition to our participation in HAMP, we introduced several new initiatives during the last few years to help eligible borrowers keep their homes or avoid foreclosure. Our relief refinance initiative, including HARP (which is the portion of our relief refinance initiative for loans with LTV ratios above 80%), is a significant part of our effort to keep families in their homes. Relief refinance loans have been provided to more than 565,000 borrowers with LTV ratios above 80% since the initiative began in 2009, including approximately 85,000 such loans during the first quarter of 2012.
 
A number of FHFA-directed changes to HARP were announced in late 2011. These changes are intended to allow more borrowers to participate in the program and benefit from refinancing their home mortgages. Since industry participation in HARP is not mandatory, implementation schedules have varied as individual lenders, mortgage insurers, and other market participants modify their processes. It is too early to estimate how many eligible borrowers are likely to refinance under the revised program.
 
We have also implemented the FHFA-directed servicing alignment initiative, which included a new non-HAMP standard loan modification initiative.
 
The table below presents our single-family loan workout activities for the last five quarters.
 
Table 1 — Total Single-Family Loan Workout Volumes(1)
 
                                         
    For the Three Months Ended  
    03/31/2012     12/31/2011     09/30/2011     06/30/2011     03/31/2011  
    (number of loans)  
 
Loan modifications
    13,677       19,048       23,919       31,049       35,158  
Repayment plans
    10,575       8,008       8,333       7,981       9,099  
Forbearance agreements(2)
    3,656       3,867       4,262       3,709       7,678  
Short sales and deed in lieu of foreclosure transactions
    12,245       12,675       11,744       11,038       10,706  
                                         
Total single-family loan workouts
    40,153       43,598       48,258       53,777       62,641  
                                         
(1)  Based on actions completed with borrowers for loans within our single-family credit guarantee portfolio. Excludes those modification, repayment, and forbearance activities for which the borrower has started the required process, but the actions have not been made permanent or effective, such as loans in modification trial periods. Also excludes certain loan workouts where our single-family seller/servicers have executed agreements in the current or prior periods, but these have not been incorporated into certain of our operational systems, due to delays in processing. These categories are not mutually exclusive and a loan in one category may also be included within another category in the same period.
(2)  Excludes loans with long-term forbearance under a completed loan modification. Many borrowers complete a short-term forbearance agreement before another loan workout is pursued or completed. We only report forbearance activity for a single loan once during each quarterly period; however, a single loan may be included under separate forbearance agreements in separate periods.
 
Highlights of our loan workout efforts include the following:
 
  •  We completed approximately 40,000 single-family loan workouts during the first quarter of 2012, including 13,677 loan modifications (HAMP and non-HAMP) and 12,245 short sales and deed in lieu of foreclosure transactions.
 
  •  Based on information provided by the MHA Program administrator, our servicers had completed 158,688 loan modifications under HAMP from the introduction of the initiative in 2009 through March 31, 2012.
 
  •  As of March 31, 2012, approximately 16,000 borrowers were in modification trial periods, consisting of approximately 5,000 borrowers in trial periods for our non-HAMP standard modification and approximately 11,000 borrowers in HAMP trial periods.
 
For more information about HAMP, the servicing alignment initiative and our non-HAMP standard loan modification, other loan workout programs, our relief refinance mortgage initiative (including HARP), and other initiatives to help eligible borrowers keep their homes or avoid foreclosure, see “RISK MANAGEMENT — Credit Risk — Mortgage Credit Risk — Single-Family Mortgage Credit Risk — Single-Family Loan Workouts and the MHA Program.”
 
Minimizing Our Credit Losses
 
To help minimize the credit losses related to our guarantee activities, we are focused on:
 
  •  pursuing a variety of loan workouts, including foreclosure alternatives, in an effort to reduce the severity of losses we experience over time;
 
  •  managing foreclosure timelines to the extent possible, given the prolonged foreclosure process in many states;
 
  •  managing our inventory of foreclosed properties to reduce costs and maximize proceeds; and
 
  •  pursuing contractual remedies against originators, lenders, servicers, and insurers, as appropriate.
 
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We establish guidelines for our servicers to follow and provide them default management tools to use, in part, in determining which type of loan workout would be expected to provide the best opportunity for minimizing our credit losses. We require our single-family seller/servicers to first evaluate problem loans for a repayment or forbearance plan before considering modification. If a borrower is not eligible for a modification, our seller/servicers pursue other workout options before considering foreclosure.
 
We have contractual arrangements with our seller/servicers under which they agree to sell us mortgage loans, and represent and warrant that those loans have been originated under specified underwriting standards. If we subsequently discover that the representations and warranties were breached (i.e., contractual standards were not followed), we can exercise certain contractual remedies to mitigate our actual or potential credit losses. These contractual remedies include the ability to require the seller/servicer to repurchase the loan at its current UPB or make us whole for any credit losses realized with respect to the loan. The amount we expect to collect on outstanding repurchase requests is significantly less than the UPB of the loans subject to the repurchase requests primarily because many of these requests will likely be satisfied by the seller/servicers reimbursing us for realized credit losses. Some of these requests also may be rescinded in the course of the contractual appeals process. As of March 31, 2012, the UPB of loans subject to repurchase requests issued to our single-family seller/servicers was approximately $3.2 billion, and approximately 38% of these requests were outstanding for more than four months since issuance of our initial repurchase request (this figure includes repurchase requests for which appeals were pending). Of the total amount of repurchase requests outstanding at March 31, 2012, approximately $1.2 billion were issued due to mortgage insurance rescission or mortgage insurance claim denial.
 
Our credit loss exposure is also partially mitigated by mortgage insurance, which is a form of credit enhancement. Primary mortgage insurance is required to be purchased, typically at the borrower’s expense, for certain mortgages with higher LTV ratios. We received payments under primary and other mortgage insurance of $491 million and $587 million in the first quarters of 2012 and 2011, respectively, which helped to mitigate our credit losses. The financial condition of many of our mortgage insurers remained weak in the first quarter of 2012. We expect to receive substantially less than full payment of our claims from Triad Guaranty Insurance Corp., Republic Mortgage Insurance Company, and PMI Mortgage Insurance Co., which are three of our mortgage insurance counterparties. We believe that certain other of our mortgage insurance counterparties may lack sufficient ability to meet all their expected lifetime claims paying obligations to us as those claims emerge. Our loan loss reserves reflect our estimates of expected insurance recoveries related to probable incurred losses.
 
See “RISK MANAGEMENT — Credit Risk — Institutional Credit Risk” for further information on our agreements with our seller/servicers and our exposure to mortgage insurers.
 
Maintaining Sound Credit Quality of the Loans We Purchase or Guarantee
 
We continue to focus on maintaining credit policies, including our underwriting standards, that allow us to purchase and guarantee loans made to qualified borrowers that we believe will provide management and guarantee fee income (excluding the amounts associated with the Temporary Payroll Tax Cut Continuation Act of 2011), over the long-term, that exceeds our expected credit-related and administrative expenses on such loans.
 
Approximately 95% of our single-family purchase volume in the first quarter of 2012 consisted of fixed-rate, first lien, amortizing mortgages. Approximately 87% and 85% of our single-family purchase volumes in the first quarters of 2012 and 2011, respectively, were refinance mortgages, and approximately 31% and 36%, respectively, of these refinance loans were relief refinance mortgages, based on UPB.
 
The credit quality of the single-family loans we acquired in the first quarter of 2012 (excluding relief refinance mortgages, which represented approximately 26% of our single-family purchase volume during the first quarter of 2012) is significantly better than that of loans we acquired from 2005 through 2008, as measured by original LTV ratios, FICO scores, and the proportion of loans underwritten with fully documented income. The improvement in credit quality of loans we have purchased since 2008 (excluding relief refinance mortgages) is primarily the result of: (a) changes in our credit policies, including changes in our underwriting standards; (b) fewer purchases of loans with higher risk characteristics; and (c) changes in mortgage insurers’ and lenders’ underwriting practices.
 
Our underwriting procedures for relief refinance mortgages are limited in many cases, and such procedures generally do not include all of the changes in underwriting standards we have implemented in the last several years. As a result, relief refinance mortgages generally reflect many of the credit risk attributes of the original loans. However, borrower participation in our relief refinance mortgage initiative may help reduce our exposure to credit risk in cases where borrower payments under their mortgages are reduced, thereby strengthening the borrower’s potential to make their mortgage payments.
 
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Over time, relief refinance mortgages with LTV ratios above 80% (i.e., HARP loans) may not perform as well as other refinance mortgages because the continued high LTV ratios of these loans increases the probability of default. In addition, relief refinance mortgages may not be covered by mortgage insurance for the full excess of their UPB over 80%. Approximately 16% and 15% of our single-family purchase volume in the first quarters of 2012 and 2011, respectively, was relief refinance mortgages with LTV ratios above 80%. Relief refinance mortgages of all LTV ratios comprised approximately 13% and 11% of the UPB in our total single-family credit guarantee portfolio at March 31, 2012 and December 31, 2011, respectively.
 
The table below presents the composition, loan characteristics, and serious delinquency rates of loans in our single-family credit guarantee portfolio, by year of origination at March 31, 2012.
 
Table 2 — Single-Family Credit Guarantee Portfolio Data by Year of Origination(1)
 
                                                 
    At March 31, 2012  
          Average
                Current
    Serious
 
    % of
    Credit
    Original
    Current
    LTV Ratio
    Delinquency
 
    Portfolio     Score(2)     LTV Ratio(3)     LTV Ratio(4)     >100%(4)(5)     Rate(6)  
 
Year of Origination
                                               
2012
    4 %     758       72 %     71 %     8 %     %
2011
    16       755       72       70       5       0.09  
2010
    18       754       71       72       6       0.32  
2009
    16       753       69       73       7       0.60  
2008
    6       724       74       93       37       5.94  
2007
    9       704       77       114       62       11.72  
2006
    7       709       75       112       57       10.92  
2005
    8       715       73       96       39       6.66  
2004 and prior
    16       718       71       61       9       2.88  
                                                 
Total
    100 %     736       72       80       20       3.51  
                                                 
(1)  Based on the loans remaining in the portfolio at March 31, 2012, which totaled $1.7 trillion, rather than all loans originally guaranteed by us and originated in the respective year. Includes loans acquired under our relief refinance initiative, which began in 2009.
(2)  Based on FICO score of the borrower as of the date of loan origination and may not be indicative of the borrowers’ creditworthiness at March 31, 2012. Excludes less than 1% of loans in the portfolio because the FICO scores at origination were not available at March 31, 2012. As of March 31, 2011, average credit score for all relief refinance loans was 743, compared to an average of 735 for all other loans in the portfolio.
(3)  See endnote (4) to “Table 34 — Characteristics of the Single-Family Credit Guarantee Portfolio” for information on our calculation of original LTV ratios.
(4)  We estimate current market values by adjusting the value of the property at origination based on changes in the market value of homes in the same geographical area since origination. See endnote (5) to “Table 34 — Characteristics of the Single-Family Credit Guarantee Portfolio” for information on our calculation of current LTV ratios. As of March 31, 2011, the average current LTV ratio for all relief refinance loans was 80%.
(5)  Calculated as a percentage of the aggregate UPB of loans with LTV ratios greater than 100% in relation to the total UPB of loans in the category.
(6)  See “RISK MANAGEMENT— Credit Risk — Mortgage Credit Risk — Single-family Mortgage Credit Risk — Delinquencies” for further information about our reported serious delinquency rates.
 
As of March 31, 2012 and December 31, 2011, approximately 54% and 51%, respectively, of our single-family credit guarantee portfolio consisted of mortgage loans originated after 2008, which have experienced lower serious delinquency trends in the early years of their terms than loans originated in 2005 through 2008.
 
Strengthening Our Infrastructure and Improving Overall Efficiency While Also Focusing On Retention of Key Employees
 
We are working to both enhance the quality of our infrastructure and improve our efficiency in order to preserve the taxpayers’ investment. We are focusing our resources primarily on key projects, many of which will likely take several years to fully implement, and on making significant improvements to our systems infrastructure in order to: (a) implement mandatory initiatives from FHFA or other governmental bodies; (b) replace legacy hardware or software systems at the end of their lives and to strengthen our disaster recovery capabilities; and (c) improve our data collection and administration as well as our ability to oversee the servicing of loans.
 
We continue to actively manage our general and administrative expenses, while also continuing to focus on retaining key talent. Our general and administrative expenses declined in the first quarter of 2012 compared to the first quarter of 2011, largely due to a reduction in the number of our employees and changes in our compensation plans. We currently expect that our general and administrative expenses for the full-year 2012 will be approximately equivalent to those we experienced in the full-year 2011, with lower salaries and employee benefits expense offset by increased professional services expense, in part due to: (a) the continually changing mortgage market; (b) an environment in which we are subject to increased regulatory oversight and mandates; and (c) strategic arrangements that we may enter into with outside firms to provide operational capability and staffing for key functions, if needed. We believe the initiatives we are pursuing under the 2012 conservatorship scorecard and other FHFA-mandated initiatives may require additional resources and affect our level of administrative expenses going forward.
 
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We believe our risks related to employee turnover and low employee engagement remain elevated. Uncertainty surrounding our future business model, organizational structure, and compensation has contributed to elevated levels of voluntary employee turnover and low employee engagement. Disruptive levels of turnover at both the executive and non-executive levels and low employee engagement have contributed to a deterioration in our control environment and may lead to breakdowns in many of our operations. To help mitigate the uncertainty surrounding compensation, we introduced a new compensation program for employees. We continue to explore various strategic arrangements with outside firms to provide operational capability and staffing for key functions, if needed. However, these or other efforts to manage this risk to the enterprise may not be successful. For more information on the risks related to employee turnover, see “CONTROLS AND PROCEDURES,” and for recent legislative and regulatory developments affecting these risks, see “LEGISLATIVE AND REGULATORY MATTERS — Legislative and Regulatory Developments Concerning Executive Compensation.”
 
Single-Family Credit Guarantee Portfolio
 
The UPB of our single-family credit guarantee portfolio declined approximately 1% during the first quarter of 2012, as the amount of single-family loan liquidations exceeded new loan purchase and guarantee activity. We believe this is due, in part, to declines in the amount of single-family mortgage debt outstanding in the market and our competitive position compared to other market participants. The table below provides certain credit statistics for our single-family credit guarantee portfolio.
 
Table 3 — Credit Statistics, Single-Family Credit Guarantee Portfolio
 
                                         
    As of
    3/31/2012   12/31/2011   9/30/2011   6/30/2011   3/31/2011
 
Payment status —
                                       
One month past due
    1.63 %     2.02 %     1.94 %     1.92 %     1.75 %
Two months past due
    0.57 %     0.70 %     0.70 %     0.67 %     0.65 %
Seriously delinquent(1)
    3.51 %     3.58 %     3.51 %     3.50 %     3.63 %
Non-performing loans (in millions)(2)
  $ 119,599     $ 120,514     $ 119,081     $ 114,819     $ 115,083  
Single-family loan loss reserve (in millions)(3)
  $ 37,771     $ 38,916     $ 39,088     $ 38,390     $ 38,558  
REO inventory (in properties)
    59,307       60,535       59,596       60,599       65,159  
REO assets, net carrying value (in millions)
  $ 5,333     $ 5,548     $ 5,539     $ 5,834     $ 6,261  
                                         
                                         
    For the Three Months Ended
    3/31/2012   12/31/2011   9/30/2011   6/30/2011   3/31/2011
    (in units, unless noted)
 
Seriously delinquent loan additions(1)
    80,815       95,661       93,850       87,813       97,646  
Loan modifications(4)
    13,677       19,048       23,919       31,049       35,158  
Foreclosure starts ratio(5)
    0.53 %     0.54 %     0.56 %     0.55 %     0.58 %
REO acquisitions
    23,805       24,758       24,378       24,788       24,707  
REO disposition severity ratio:(6)
                                       
California
    44.2 %     44.6 %     45.5 %     44.9 %     44.5 %
Arizona
    45.0 %     46.7 %     48.7 %     51.3 %     50.8 %
Florida
    48.6 %     50.1 %     53.3 %     52.7 %     54.8 %
Nevada
    56.5 %     54.2 %     53.2 %     55.4 %     53.1 %
Illinois
    49.3 %     51.2 %     50.5 %     49.4 %     49.5 %
Total U.S.
    40.3 %     41.2 %     41.9 %     41.7 %     43.0 %
Single-family credit losses (in millions)
  $ 3,435     $ 3,209     $ 3,440     $ 3,106     $ 3,226  
(1)  See “RISK MANAGEMENT — Credit Risk — Mortgage Credit Risk — Single-Family Mortgage Credit Risk — Delinquencies” for further information about our reported serious delinquency rates.
(2)  Consists of the UPB of loans in our single-family credit guarantee portfolio that have undergone a TDR or that are seriously delinquent. As of March 31, 2012 and December 31, 2011, approximately $46.1 billion and $44.4 billion in UPB of TDR loans, respectively, were no longer seriously delinquent.
(3)  Consists of the combination of: (a) our allowance for loan losses on mortgage loans held for investment; and (b) our reserve for guarantee losses associated with non-consolidated single-family mortgage securitization trusts and other guarantee commitments.
(4)  Represents the number of modification agreements with borrowers completed during the quarter. Excludes forbearance agreements, repayment plans, and loans in modification trial periods.
(5)  Represents the ratio of the number of loans that entered the foreclosure process during the respective quarter divided by the number of loans in the single-family credit guarantee portfolio at the end of the quarter. Excludes Other Guarantee Transactions and mortgages covered under other guarantee commitments.
(6)  States presented represent the five states where our credit losses were greatest during 2011 and the first quarter of 2012. Calculated as the amount of our losses recorded on disposition of REO properties during the respective quarterly period, excluding those subject to repurchase requests made to our seller/servicers, divided by the aggregate UPB of the related loans. The amount of losses recognized on disposition of the properties is equal to the amount by which the UPB of the loans exceeds the amount of sales proceeds from disposition of the properties. Excludes sales commissions and other expenses, such as property maintenance and costs, as well as applicable recoveries from credit enhancements, such as mortgage insurance.
 
In discussing our credit performance, we often use the terms “credit losses” and “credit-related expenses.” These terms are significantly different. Our “credit losses” consist of charge-offs and REO operations income (expense), while our “credit-related expenses” consist of our provision for credit losses and REO operations income (expense).
 
Since the beginning of 2008, on an aggregate basis, we have recorded provision for credit losses associated with single-family loans of approximately $75.0 billion, and have recorded an additional $4.2 billion in losses on loans
 
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purchased from PC trusts, net of recoveries. The majority of these losses are associated with loans originated in 2005 through 2008. While loans originated in 2005 through 2008 will give rise to additional credit losses that have not yet been incurred and, thus, have not yet been provisioned for, we believe that, as of March 31, 2012, we have reserved for or charged-off the majority of the total expected credit losses for these loans. Nevertheless, various factors, such as continued high unemployment rates or further declines in home prices, could require us to provide for losses on these loans beyond our current expectations.
 
Borrower payment performance (for all early stages of delinquency) improved at March 31, 2012, compared to December 31, 2011. In addition, the number of seriously delinquent loan additions declined during the first quarter of 2012. However, several factors, including delays in the foreclosure process, have resulted in loans remaining in serious delinquency for longer periods than prior to 2008, particularly in states that require a judicial foreclosure process. As of March 31, 2012 and December 31, 2011, the percentage of seriously delinquent loans that have been delinquent for more than six months was 73% and 70%, respectively.
 
The credit losses and loan loss reserves associated with our single-family credit guarantee portfolio remained elevated in the first quarter of 2012, due in part to:
 
  •  Losses associated with the continued high volume of foreclosures and foreclosure alternatives. These actions relate to the continued efforts of our servicers to resolve our large inventory of seriously delinquent loans. Due to the length of time necessary for servicers either to complete the foreclosure process or pursue foreclosure alternatives on seriously delinquent loans in our portfolio, we expect our credit losses will continue to remain high even if the volume of new serious delinquencies continues to decline.
 
  •  Continued negative impact of certain loan groups within the single-family credit guarantee portfolio, such as those underwritten with certain lower documentation standards and interest-only loans, as well as 2005 through 2008 vintage loans. These groups continue to be large contributors to our credit losses. Loans originated in 2005 through 2008 comprised approximately 30% and 36% of our single-family credit guarantee portfolio, based on UPB at March 31, 2012 and 2011, respectively; however, these loans accounted for approximately 88% and 91% of our credit losses during the three months ended March 31, 2012 and 2011, respectively.
 
  •  Cumulative decline in national home prices of 28% since June 2006, based on our own index. As a result of this price decline, approximately 20% of loans in our single-family credit guarantee portfolio, based on UPB, had estimated current LTV ratios in excess of 100% (i.e., underwater loans) as of March 31, 2012.
 
  •  Weak financial condition of many of our mortgage insurers, which has reduced our estimates of expected recoveries from these counterparties.
 
Some of our loss mitigation activities create fluctuations in our delinquency statistics. For example, loans that we report as seriously delinquent before they enter a modification trial period continue to be reported as seriously delinquent until the modifications become effective and the loans are removed from delinquent status by our servicers. See “RISK MANAGEMENT — Credit Risk — Mortgage Credit Risk — Single-family Mortgage Credit Risk — Credit Performance — Delinquencies” for further information about factors affecting our reported delinquency rates.
 
Conservatorship and Government Support for our Business
 
We have been operating under conservatorship, with FHFA acting as our conservator, since September 6, 2008. The conservatorship and related matters have had a wide-ranging impact on us, including our regulatory supervision, management, business, financial condition, and results of operations.
 
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.
 
While the conservatorship has benefited us, we are subject to certain constraints on our business activities imposed by Treasury due to the terms of, and Treasury’s rights under, the Purchase Agreement and by FHFA, as our Conservator.
 
Under the Purchase Agreement, Treasury made a commitment to provide funding, under certain conditions, to eliminate deficits in our net worth. The $200 billion cap on Treasury’s funding commitment will increase as necessary to eliminate any net worth deficits we may have during 2010, 2011, and 2012. We believe that the support provided by Treasury pursuant to the Purchase Agreement currently enables us to maintain our access to the debt markets and to have adequate liquidity to conduct our normal business activities, although the costs of our debt funding could vary.
 
We received cash proceeds of $146 million from our draw under Treasury’s funding commitment during the first quarter of 2012 related to a quarterly deficit in equity at December 31, 2011. To address our net worth deficit of
 
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$18 million at March 31, 2012, FHFA, as Conservator, will submit a draw request on our behalf to Treasury under the Purchase Agreement in the amount of $19 million. FHFA will request that we receive these funds by June 30, 2012. Upon funding of the draw request: (a) our aggregate liquidation preference on the senior preferred stock owned by Treasury will be $72.3 billion; and (b) the corresponding annual cash dividend owed to Treasury will be $7.23 billion.
 
We pay cash dividends to Treasury at an annual rate of 10%. Through March 31, 2012, we paid aggregate cash dividends to Treasury of $18.3 billion, an amount equal to 26% of our aggregate draws received under the Purchase Agreement. As of March 31, 2012, our annual cash dividend obligation to Treasury on the senior preferred stock exceeded our annual historical earnings in all but one period. As a result, we expect to make additional draws in future periods, even if our operating performance generates net income or comprehensive income.
 
Neither the U.S. government nor any other agency or instrumentality of the U.S. government is obligated to fund our mortgage purchase or financing activities or to guarantee our securities or other obligations.
 
For more information on conservatorship and the Purchase Agreement, see “BUSINESS — Conservatorship and Related Matters” in our 2011 Annual Report.
 
Consolidated Financial Results
 
Net income was $577 million and $676 million for the first quarters of 2012 and 2011, respectively. Key highlights of our financial results include:
 
  •  Net interest income was $4.5 billion for both the first quarters of 2012 and 2011, reflecting the impact of a reduction in the average balances of our higher-yielding mortgage-related assets offset by lower funding costs in the first quarter of 2012 compared to the first quarter of 2011.
 
  •  Provision for credit losses for the first quarter of 2012 declined to $1.8 billion, compared to $2.0 billion for the first quarter of 2011. The provision for credit losses for the first quarter of 2012 reflects stabilizing expected loss severity on single-family loans and a decline in the number of seriously delinquent loan additions.
 
  •  Non-interest income (loss) was $(1.5) billion for the first quarter of 2012, compared to $(1.3) billion for the first quarter of 2011, largely driven by an increase in derivative losses, partially offset by a decline in net impairments of available-for-sale securities recognized in earnings during the first quarter of 2012 compared to the first quarter of 2011.
 
  •  Non-interest expense declined to $596 million in the first quarter of 2012, from $697 million in the first quarter of 2011, primarily due to a reduction in REO operations expense.
 
  •  Comprehensive income was $1.8 billion for the first quarter of 2012 compared to $2.7 billion for the first quarter of 2011. Comprehensive income for the first quarter of 2012 was driven by the $577 million net income and a reduction in net unrealized losses related to our available-for-sale securities.
 
Mortgage Market and Economic Conditions
 
Overview
 
The U.S. real gross domestic product rose by 2.2% on an annualized basis during the first quarter of 2012, compared to 1.6% during 2011, according to the Bureau of Economic Analysis. The national unemployment rate was 8.2% in March 2012, compared to 8.5% in December 2011, based on data from the U.S. Bureau of Labor Statistics. In the data underlying the unemployment rate, an average of over 210,000 monthly net new jobs were added to the economy during the first quarter of 2012, which shows evidence of a slow, but steady positive trend for the economy and the labor market.
 
Single-Family Housing Market
 
The single-family housing market continued to experience challenges in the first quarter of 2012 primarily due to continued weakness in the employment market and a significant inventory of seriously delinquent loans and REO properties in the market.
 
Based on data from the National Association of Realtors, sales of existing homes in the first quarter of 2012 averaged 4.57 million (at a seasonally adjusted annual rate), increasing from 4.37 million in the fourth quarter of 2011. Based on data from the U.S. Census Bureau and HUD, new home sales in the first quarter of 2012 averaged 337,000 (at a seasonally adjusted annual rate) increasing approximately 4% from approximately 325,000 in the fourth quarter of 2011. We estimate that home prices remained relatively stable during the first quarter of 2012, with our nationwide index registering approximately a 0.3% decline from December 2011 through March 2012 without adjustment for seasonality. This estimate was based on our own price index of mortgage loans on one-family homes funded by us or Fannie Mae.
 
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Other indices of home prices may have different results, as they are determined using different pools of mortgage loans and calculated under different conventions than our own.
 
The foreclosure process continues to experience delays, due to a number of factors, but particularly in states that require a judicial foreclosure process. Delays in the foreclosure process (and in certain cases the removal of such delays) may also adversely affect trends in home prices in certain geographic areas. There have been a number of regulatory developments in recent periods impacting single-family mortgage servicing and foreclosure practices. It is possible that these developments will result in significant changes to mortgage servicing and foreclosure practices that could adversely affect our business. For information on these matters, see “RISK FACTORS — Operational Risks — We have incurred, and will continue to incur, expenses and we may otherwise be adversely affected by delays and deficiencies in the foreclosure process” in our 2011 Annual Report and “LEGISLATIVE AND REGULATORY MATTERS — Developments Concerning Single-Family Servicing Practices.”
 
Multifamily Housing Market
 
Multifamily market fundamentals continued to improve on a national level during the first quarter of 2012. This improvement continues a trend of favorable movements in key indicators such as vacancy rates and effective rents that generally began in early 2010. Vacancy rates and effective rents are important to loan performance because multifamily loans are generally repaid from the cash flows generated by the underlying property and these factors significantly influence those cash flows. These improving fundamentals and perceived optimism in recent periods about demand for multifamily housing have contributed to improvement in property values in most markets.
 
Mortgage Market and Business Outlook
 
Forward-looking statements involve known and unknown risks and uncertainties, some of which are beyond our control. These statements are not historical facts, but rather represent our expectations based on current information, plans, judgments, assumptions, estimates, and projections. Actual results may differ significantly from those described in or implied by such forward-looking statements due to various factors and uncertainties. For example, a number of factors could cause the actual performance of the housing and mortgage markets and the U.S. economy during the remainder of 2012 to be significantly worse than we expect, including adverse changes in consumer confidence, national or international economic conditions and changes in the federal government’s fiscal policies. See “FORWARD-LOOKING STATEMENTS” for additional information.
 
Overview
 
We continue to expect key macroeconomic drivers of the economy — such as income growth, employment, and inflation — will affect the performance of the housing and mortgage markets in the remainder of 2012. Since we expect that economic and job growth will likely be stronger in 2012 than in 2011, we believe that housing affordability will remain relatively high in 2012 for potential home buyers. We also expect that the volume of home sales will likely increase in 2012, compared to the volume in 2011, but still remain relatively weak compared to historical levels. Important factors that we believe will continue to negatively impact single-family housing demand are the relatively high unemployment rate and relatively low consumer confidence measures. Consumer confidence measures, while up from recession lows, remain below long-term averages and suggest that households will likely continue to be cautious in home buying. We also expect interest rates on fixed-rate single-family mortgages to remain historically low in 2012, which may extend the recent high level of refinancing activity (relative to new purchase lending activity). The recently expanded and streamlined HARP initiative may result in a high level of refinancing, particularly for borrowers that are underwater on their current loans. For information on this initiative, see “RISK MANAGEMENT — Credit Risk — Mortgage Credit Risk — Single-Family Mortgage Credit Risk — Single-Family Loan Workouts and the MHA Program.”
 
While home prices remain at significantly lower levels from their peak in most areas, estimates of the inventory of unsold homes, including those held by financial institutions and financially distressed borrowers, remain high. To the extent a large volume of loans complete the foreclosure process in a short time period the resulting REO inventory could have a negative impact on the housing market. Due to these and other factors, our expectation for home prices, based on our own index, is that national average home prices will continue to remain weak and may decline on a seasonally adjusted basis over the near term before a long-term recovery in housing begins.
 
Single-Family
 
Our provision for credit losses and charge-offs were elevated during the first quarter of 2012, and we expect they will likely remain elevated during the remainder of 2012. This is in part due to the substantial number of underwater mortgage
 
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loans in our single-family credit guarantee portfolio, as well as the substantial inventory of seriously delinquent loans. For the near term, we also expect:
 
  •  REO disposition severity ratios to remain near their historical highs, as market conditions, such as home prices and the rate of home sales continue to remain weak;
 
  •  non-performing assets, which include loans, deemed TDRs, to continue to remain high;
 
  •  the volume of loan workouts to remain high; and
 
  •  continued high volume of loans in the foreclosure process as well as prolonged foreclosure timelines.
 
Multifamily
 
The most recent market data available continues to reflect improving national apartment fundamentals, including decreasing vacancy rates and increasing effective rents. As a result, we expect our multifamily delinquency rate to remain relatively low during the remainder of 2012.
 
Our purchase and guarantee of multifamily loans increased to $5.8 billion for the first quarter of 2012, compared to $3.0 billion during the same period in 2011, as strong volumes from late in 2011 carried into the first quarter of 2012. However, we anticipate the growth in our purchase and guarantee volumes will slow for the remainder of the year, ultimately reflecting a more modest increase in 2012, compared to 2011.
 
Long-Term Financial Sustainability
 
There is significant uncertainty as to our long-term financial sustainability. The Acting Director of FHFA stated on September 19, 2011 that “it ought to be clear to everyone at this point, given [Freddie Mac and Fannie Mae’s] losses since being placed into conservatorship and the terms of the Treasury’s financial support agreements, that [Freddie Mac and Fannie Mae] will not be able to earn their way back to a condition that allows them to emerge from conservatorship.”
 
We expect to request additional draws under the Purchase Agreement in future periods. Over time, our dividend obligation to Treasury will increasingly drive future draws. Although we may experience period-to-period variability in earnings and comprehensive income, it is unlikely that we will generate net income or comprehensive income in excess of our annual dividends payable to Treasury over the long term.
 
There continues to be significant uncertainty in the current mortgage market environment, and continued high levels of unemployment, weakness in home prices, and adverse changes in interest rates, mortgage security prices, and spreads could lead to additional draws. For discussion of other factors that could result in additional draws, see “RISK FACTORS — Conservatorship and Related Matters — We expect to make additional draws under the Purchase Agreement in future periods, which will adversely affect our future results of operations and financial condition” in our 2011 Annual Report.
 
There is significant uncertainty as to whether or when we will emerge from conservatorship, as it has no specified termination date, and as to what changes may occur to our business structure during or following conservatorship, including whether we will continue to exist. We are not aware of any current plans of our Conservator to significantly change our business model or capital structure in the near-term. Our future structure and role will be determined by the Administration and Congress, and there are likely to be significant changes beyond the near-term. We have no ability to predict the outcome of these deliberations. For a discussion of FHFA’s strategic plan for us, see “LEGISLATIVE AND REGULATORY MATTERS — FHFA’s Strategic Plan for Freddie Mac and Fannie Mae Conservatorships and 2012 Conservatorship Scorecard.”
 
Limits on Investment Activity and Our Mortgage-Related Investments Portfolio
 
The conservatorship has significantly impacted our investment activity. Under the terms of the Purchase Agreement and FHFA regulation, our mortgage-related investments portfolio is subject to a cap that decreases by 10% each year until the portfolio reaches $250 billion. As a result, the UPB of our mortgage-related investments portfolio could not exceed $729 billion as of December 31, 2011 and may not exceed $656.1 billion as of December 31, 2012. FHFA has indicated that such portfolio reduction targets should be viewed as minimum reductions and has encouraged us to reduce the mortgage-related investments portfolio at a faster rate than required, consistent with FHFA guidance, safety and soundness and the goal of conserving and preserving assets. We are also subject to limits on the amount of mortgage assets we can sell in any calendar month without review and approval by FHFA and, if FHFA so determines, Treasury. We are working with FHFA to identify ways to prudently accelerate the rate of contraction of the portfolio.
 
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The table below presents the UPB of our mortgage-related investments portfolio, for purposes of the limit imposed by the Purchase Agreement and FHFA regulation.
 
Table 4 — Mortgage-Related Investments Portfolio(1)
 
                 
    March 31, 2012     December 31, 2011  
    (in millions)  
 
Investments segment — Mortgage investments portfolio
  $ 417,015     $ 449,273  
Single-family Guarantee segment — Single-family unsecuritized mortgage loans(2)
    61,903       62,469  
Multifamily segment — Mortgage investments portfolio
    139,380       141,571  
                 
Total mortgage-related investments portfolio
  $ 618,298     $ 653,313  
                 
(1)  Based on UPB and excludes mortgage loans and mortgage-related securities traded, but not yet settled.
(2)  Represents unsecuritized seriously delinquent single-family loans managed by the Single-family Guarantee segment.
 
FHFA has stated that we will not be a substantial buyer or seller of mortgages for our mortgage-related investments portfolio. FHFA also stated that, given the size of our current mortgage-related investments portfolio and the potential volume of delinquent mortgages to be removed from PC pools, it expects that any net additions to our mortgage-related investments portfolio would be related to that activity. We expect that our holdings of unsecuritized single-family loans could increase in the remainder of 2012.
 
We consider the liquidity of our assets in our mortgage-related investments portfolio based on three categories: (a) agency securities; (b) assets that are less liquid than agency securities; and (c) illiquid assets. Assets that are less liquid than agency securities include unsecuritized performing single-family mortgage loans, multifamily mortgage loans, CMBS, and housing revenue bonds. Our less liquid assets collectively represented approximately 33% of the UPB of the portfolio at March 31, 2012, as compared to 32% as of December 31, 2011. Illiquid assets include unsecuritized seriously delinquent and modified single-family mortgage loans which we removed from PC trusts, and our investments in non-agency mortgage-related securities backed by subprime, option ARM, and Alt-A and other loans. Our illiquid assets collectively represented approximately 30% of the UPB of the portfolio at March 31, 2012, as compared to 29% as of December 31, 2011. The changing composition of our mortgage-related investments portfolio to a greater proportion of illiquid assets may influence our decisions regarding funding and hedging. The description above of the liquidity of our assets is based on our own internal expectations given current market conditions. Changes in market conditions could adversely affect the liquidity of our assets at any given time.
 
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SELECTED FINANCIAL DATA(1)
 
The selected financial data presented below should be reviewed in conjunction with MD&A and our consolidated financial statements and related notes for the three months ended March 31, 2012.
 
                 
    For the Three Months Ended
    March 31,
    2012   2011
    (dollars in millions,
    except share-related amounts)
 
Statements of Comprehensive Income Data
               
Net interest income
  $ 4,500     $ 4,540  
Provision for credit losses
    (1,825 )     (1,989 )
Non-interest income (loss)
    (1,516 )     (1,252 )
Non-interest expense
    (596 )     (697 )
Net income
    577       676  
Comprehensive income
    1,789       2,740  
Net loss attributable to common stockholders
    (1,227 )     (929 )
Net loss per common share:
               
Basic
    (0.38 )     (0.29 )
Diluted
    (0.38 )     (0.29 )
Cash dividends per common share
           
Weighted average common shares outstanding (in thousands):(2)
               
Basic
    3,241,502       3,246,985  
Diluted
    3,241,502       3,246,985  
                 
                 
    March 31, 2012   December 31, 2011
    (dollars in millions)
 
Balance Sheets Data
               
Mortgage loans held-for-investment, at amortized cost by consolidated trusts (net of allowances for loan losses)
  $ 1,555,067     $ 1,564,131  
Total assets
    2,114,944       2,147,216  
Debt securities of consolidated trusts held by third parties
    1,481,622       1,471,437  
Other debt
    618,629       660,546  
All other liabilities
    14,711       15,379  
Total Freddie Mac stockholders’ equity (deficit)
    (18 )     (146 )
Portfolio Balances(3)
               
Mortgage-related investments portfolio
  $ 618,298     $ 653,313  
Total Freddie Mac mortgage-related securities(4)
    1,617,595       1,624,684  
Total mortgage portfolio(5)
    2,056,501       2,075,394  
Non-performing assets(6)
    127,951       129,152  
                 
                 
    For the Three Months Ended
    March 31,
    2012   2011
 
Ratios(7)
               
Return on average assets(8)
    0.1 %     0.1 %
Non-performing assets ratio(9)
    6.8       6.4  
Equity to assets ratio(10)
           
 (1)  See “NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES” in our 2011 Annual Report for information regarding our accounting policies and the impact of new accounting policies on our consolidated financial statements.
 (2)  Includes the weighted average number of shares that are associated with the warrant for our common stock issued to Treasury as part of the Purchase Agreement. This warrant is included in basic loss per share, because it is unconditionally exercisable by the holder at a cost of $0.00001 per share.
 (3)  Represents the UPB and excludes mortgage loans and mortgage-related securities traded, but not yet settled.
 (4)  See “Table 27 — Freddie Mac Mortgage-Related Securities” for the composition of this line item.
 (5)  See “Table 11 — Composition of Segment Mortgage Portfolios and Credit Risk Portfolios” for the composition of our total mortgage portfolio.
 (6)  See “Table 45 — Non-Performing Assets” for a description of our non-performing assets.
 (7)  The dividend payout ratio on common stock is not presented because we are reporting a net loss attributable to common stockholders for all periods presented.
 (8)  Ratio computed as net income divided by the simple average of the beginning and ending balances of total assets.
 (9)  Ratio computed as non-performing assets divided by the ending UPB of our total mortgage portfolio, excluding non-Freddie Mac mortgage-related securities.
(10)  Ratio computed as 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.
 
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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 information concerning certain significant accounting policies and estimates applied in determining our reported results of operations.
 
Impact of Legislated Increase to Guarantee Fees
 
Effective April 1, 2012, the guarantee fee on all single-family residential mortgages sold to Freddie Mac was increased by 10 basis points. Guarantee fees related to mortgage loans held by our consolidated trusts, including those attributable to the 10 basis point increase, will continue to be reported within our GAAP consolidated statements of comprehensive income in net interest income and the remittance of the additional fees to Treasury will be reported in non-interest expense. For additional information, see “LEGISLATIVE AND REGULATORY MATTERS — Legislated Increase to Guarantee Fees.”
 
Table 5 — Summary Consolidated Statements of Comprehensive Income
 
                 
    Three Months Ended March 31,  
    2012     2011  
    (in millions)  
 
Net interest income
  $ 4,500     $ 4,540  
Provision for credit losses
    (1,825 )     (1,989 )
                 
Net interest income after provision for credit losses
    2,675       2,551  
                 
Non-interest income (loss):
               
Gains (losses) on extinguishment of debt securities of consolidated trusts
    (4 )     223  
Gains (losses) on retirement of other debt
    (21 )     12  
Gains (losses) on debt recorded at fair value
    (17 )     (81 )
Derivative gains (losses)
    (1,056 )     (427 )
Impairment of available-for-sale securities:
               
Total other-than-temporary impairment of available-for-sale securities
    (475 )     (1,054 )
Portion of other-than-temporary impairment recognized in AOCI
    (89 )     (139 )
                 
Net impairment of available-for-sale securities recognized in earnings
    (564 )     (1,193 )
Other gains (losses) on investment securities recognized in earnings
    (288 )     (120 )
Other income
    434       334  
                 
Total non-interest income (loss)
    (1,516 )     (1,252 )
                 
Non-interest expense:
               
Administrative expenses
    (337 )     (361 )
REO operations expense
    (171 )     (257 )
Other expenses
    (88 )     (79 )
                 
Total non-interest expense
    (596 )     (697 )
                 
Income before income tax benefit
    563       602  
Income tax benefit
    14       74  
                 
Net income
    577       676  
                 
Other comprehensive income, net of taxes and reclassification adjustments:
               
Changes in unrealized gains (losses) related to available-for-sale securities
    1,147       1,941  
Changes in unrealized gains (losses) related to cash flow hedge relationships
    111       132  
Changes in defined benefit plans
    (46 )     (9 )
                 
Total other comprehensive income, net of taxes and reclassification adjustments
    1,212       2,064  
                 
Comprehensive income
  $ 1,789     $ 2,740  
                 
 
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Net Interest Income
 
The table below presents an analysis of net interest income, including average balances and related yields earned on assets and incurred on liabilities.
 
Table 6 — Net Interest Income/Yield and Average Balance Analysis
 
                                                 
    Three Months Ended March 31,  
    2012     2011  
          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
  $ 51,029     $ 4       0.03 %   $ 37,561     $ 16       0.17 %
Federal funds sold and securities purchased under agreements to resell
    26,057       9       0.14       47,861       18       0.15  
Mortgage-related securities:
                                               
Mortgage-related securities(3)
    383,227       4,363       4.55       456,972       5,316       4.65  
Extinguishment of PCs held by Freddie Mac
    (125,363 )     (1,441 )     (4.60 )     (167,528 )     (2,063 )     (4.93 )
                                                 
Total mortgage-related securities, net
    257,864       2,922       4.53       289,444       3,253       4.50  
                                                 
Non-mortgage-related securities(3)
    28,464       16       0.23       29,309       30       0.41  
Mortgage loans held by consolidated trusts(4)
    1,559,823       17,468       4.48       1,650,567       20,064       4.86  
Unsecuritized mortgage loans(4)
    254,877       2,312       3.63       240,557       2,334       3.88  
                                                 
Total interest-earning assets
  $ 2,178,114     $ 22,731       4.18     $ 2,295,299     $ 25,715       4.48  
                                                 
Interest-bearing liabilities:
                                               
Debt securities of consolidated trusts including PCs held by Freddie Mac
  $ 1,580,749     $ (16,694 )     (4.22 )   $ 1,665,608     $ (19,466 )     (4.67 )
Extinguishment of PCs held by Freddie Mac
    (125,363 )     1,441       4.60       (167,528 )     2,063       4.93  
                                                 
Total debt securities of consolidated trusts held by third parties
    1,455,386       (15,253 )     (4.19 )     1,498,080       (17,403 )     (4.65 )
Other debt:
                                               
Short-term debt
    149,130       (40 )     (0.11 )     194,822       (115 )     (0.24 )
Long-term debt(5)
    496,644       (2,776 )     (2.23 )     518,034       (3,450 )     (2.66 )
                                                 
Total other debt
    645,774       (2,816 )     (1.74 )     712,856       (3,565 )     (2.00 )
                                                 
Total interest-bearing liabilities
    2,101,160       (18,069 )     (3.44 )     2,210,936       (20,968 )     (3.79 )
Expense related to derivatives(6)
          (162 )     (0.03 )           (207 )     (0.04 )
Impact of net non-interest-bearing funding
    76,954             0.12       84,363             0.14  
                                                 
Total funding of interest-earning assets
  $ 2,178,114     $ (18,231 )     (3.35 )   $ 2,295,299     $ (21,175 )     (3.69 )
                                                 
Net interest income/yield
          $ 4,500       0.83             $ 4,540       0.79  
                                                 
(1)  Excludes mortgage loans and mortgage-related securities traded, but not yet settled.
(2)  We calculate average balances based on amortized cost.
(3)  Interest income (expense) includes accretion of the portion of impairment charges recognized in earnings where we expect a significant improvement in cash flows.
(4)  Non-performing loans, where interest income is generally recognized when collected, are included in average balances.
(5)  Includes current portion of long-term debt.
(6)  Represents changes in fair value of derivatives in closed cash flow hedge relationships that were previously deferred in AOCI and have been reclassified to earnings as the associated hedged forecasted issuance of debt affects earnings.
 
Net interest income decreased by $40 million and net interest yield increased by 4 basis points during the three months ended March 31, 2012, compared to the three months ended March 31, 2011. The primary driver underlying the decrease in net interest income was the reduction in the average balance of higher-yielding mortgage-related assets due to continued liquidations and limited purchase activity, partially offset by lower funding costs from the replacement of debt at lower rates. The increase in net interest yield was primarily due to the benefits of lower funding costs, partially offset by the negative impact of the reduction in the average balance of higher-yielding mortgage assets.
 
We do not recognize interest income on non-performing loans that have been placed on non-accrual status, except when cash payments are received. We refer to this interest income that we do not recognize as foregone interest income. Foregone interest income and reversals of previously recognized interest income, net of cash received, related to non-performing loans was $0.9 billion and $1.0 billion during the three months ended March 31, 2012 and 2011, respectively. This reduction was primarily due to the decreased volume of non-performing loans on non-accrual status.
 
During the three months ended March 31, 2012, spreads on our debt and our access to the debt markets remained favorable relative to historical levels. For more information, see “LIQUIDITY AND CAPITAL RESOURCES — Liquidity.”
 
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Provision for Credit Losses
 
We maintain loan loss reserves at levels we believe are appropriate to absorb probable incurred losses on mortgage loans held-for-investment and loans underlying our financial guarantees. Our loan loss reserves are increased through the provision for credit losses and are reduced by net charge-offs.
 
Our provision for credit losses declined to $1.8 billion in the first quarter of 2012, compared to $2.0 billion in the first quarter of 2011. The provision for credit losses for the first quarter of 2012 reflects stabilizing expected loss severity on single-family loans and a decline in the number of seriously delinquent loan additions, while the first quarter of 2011 reflects worsening expected loss severity and higher modification volumes offset by a decline in the rate at which seriously delinquent loans ultimately transition to a loss event.
 
During the first quarter of 2012, our charge-offs, net of recoveries for single-family loans, exceeded the amount of our provision for credit losses. Our charge-offs in the first quarter of 2012 were less than they otherwise would have been because of the suppression of loan and collateral resolution activity due to delays in the foreclosure process. We believe the level of our charge-offs will continue to remain high and may increase in the remainder of 2012.
 
As of March 31, 2012 and December 31, 2011, the UPB of our single-family non-performing loans was $119.6 billion and $120.5 billion, respectively. These amounts include $46.1 billion and $44.4 billion, respectively, of single-family TDRs that are reperforming (i.e., less than three months past due). TDRs remain categorized as non-performing throughout the remaining life of the loan regardless of whether the borrower makes payments which return the loan to a current payment status after modification. See “RISK MANAGEMENT — Credit Risk — Mortgage Credit Risk” for further information on our single-family credit guarantee portfolio, including credit performance, charge-offs, our loan loss reserves balance, and our non-performing assets.
 
The total number of seriously delinquent loans declined approximately 3% and 6% during the first quarters of 2012 and 2011, respectively. However, our serious delinquency rate remains high compared to historical levels due to the continued weakness in home prices, persistently high unemployment, extended foreclosure timelines, and continued challenges faced by servicers processing large volumes of problem loans. Our seller/servicers have an active role in our loan workout activities, including under the servicing alignment initiative and the MHA Program, and a decline in their performance could result in a failure to realize the anticipated benefits of our loss mitigation plans.
 
Since the beginning of 2008, on an aggregate basis, we have recorded provision for credit losses associated with single-family loans of approximately $75.0 billion, and have recorded an additional $4.2 billion in losses on loans purchased from our PCs, net of recoveries. The majority of these losses are associated with loans originated in 2005 through 2008. While loans originated in 2005 through 2008 will give rise to additional credit losses that have not yet been incurred, and thus have not been provisioned for, we believe that, as of March 31, 2012, we have reserved for or charged-off the majority of the total expected credit losses for these loans. Nevertheless, various factors, such as continued high unemployment rates or further declines in home prices, could require us to provide for losses on these loans beyond our current expectations. See “Table 3 — Credit Statistics, Single-Family Credit Guarantee Portfolio” for certain quarterly credit statistics for our single-family credit guarantee portfolio.
 
Our provision for credit losses and amount of charge-offs in the future will be affected by a number of factors, including: (a) the actual level of mortgage defaults; (b) the impact of the MHA Program and other loss mitigation efforts, including any requirement to utilize principal forgiveness in our loan modification initiatives; (c) any government actions or programs that impact the ability of troubled borrowers to obtain modifications, including legislative changes to bankruptcy laws; (d) changes in property values; (e) regional economic conditions, including unemployment rates; (f) delays in the foreclosure process, including those related to the concerns about deficiencies in foreclosure documentation practices; (g) third-party mortgage insurance coverage and recoveries; and (h) the realized rate of seller/servicer repurchases. In addition, in April 2012, FHFA issued an advisory bulletin that could have an impact on our provision for credit losses in the future; however, we are still assessing the operational and accounting impacts of the bulletin. See “LEGISLATIVE AND REGULATORY DEVELOPMENTS — FHFA Advisory Bulletin” for additional information. See “RISK MANAGEMENT — Credit Risk — Institutional Credit Risk” for information on mortgage insurers and seller/servicer repurchase obligations.
 
We recognized a benefit for credit losses associated with our multifamily mortgage portfolio of $19 million and $60 million for the first quarters of 2012 and 2011, respectively. Our loan loss reserves associated with our multifamily mortgage portfolio were $525 million and $545 million as of March 31, 2012 and December 31, 2011, respectively. The decline in loan loss reserves for multifamily loans in the first quarter of 2012 was driven primarily by the increased seasoning of our portfolio and the lower level of estimated incurred credit losses based on our historical experience.
 
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Non-Interest Income (Loss)
 
Gains (Losses) on Extinguishment of Debt Securities of Consolidated Trusts
 
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 trusts. We recognize a gain (loss) on extinguishment of the debt securities to the extent the amount paid to extinguish the debt security differs from its carrying value. Gains (losses) on extinguishment of debt securities of consolidated trusts were $(4) million and $223 million for the three months ended March 31, 2012 and 2011, respectively. For the three months ended March 31, 2012 and 2011, we extinguished debt securities of consolidated trusts with a UPB of $692 million and $24.8 billion, respectively (representing our purchase of single-family PCs with a corresponding UPB amount). The decrease in purchases of single-family PCs was primarily due to a lower volume of dollar roll transactions to support the market and pricing of our single-family PCs. See “Table 19 — Mortgage-Related Securities Purchase Activity” for additional information regarding purchases of mortgage-related securities, including those issued by consolidated PC trusts.
 
Gains (Losses) on Retirement of Other Debt
 
Gains (losses) on retirement of other debt were $(21) million and $12 million during the three months ended March 31, 2012 and 2011, respectively. We recognized losses on debt retirements in the first quarter of 2012 primarily due to write-offs of unamortized deferred issuance costs. We recognized gains on debt retirements in the first quarter of 2011 primarily due to the repurchase of other debt securities at a discount. For more information, see “LIQUIDITY AND CAPITAL RESOURCES — Liquidity — Other Debt Securities — Other Debt Retirement Activities.”
 
Gains (Losses) on Debt Recorded at Fair Value
 
Gains (losses) on debt recorded at fair value primarily relate to changes in the fair value of our foreign-currency denominated debt. During the first three months of 2012 and 2011, we recognized losses on debt recorded at fair value of $17 million and $81 million, respectively, primarily due to a combination of the U.S. dollar weakening relative to the Euro and changes in interest rates. We mitigate changes in the fair value of our foreign-currency denominated debt by using foreign currency swaps and foreign-currency denominated interest-rate swaps.
 
Derivative Gains (Losses)
 
The table below presents derivative gains (losses) reported in our consolidated statements of comprehensive income. See “NOTE 10: DERIVATIVES — Table 10.2 — 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 comprehensive income. At March 31, 2012 and December 31, 2011, we did not have any derivatives in hedge accounting relationships; however, there are amounts recorded in AOCI related to discontinued cash flow hedges. Amounts recorded in AOCI associated with these closed cash flow hedges are reclassified to earnings when the forecasted transactions affect earnings. If it is probable that the forecasted transaction will not occur, then the deferred gain or loss associated with the forecasted transaction is reclassified into earnings immediately.
 
While derivatives are an important aspect of our strategy to manage interest-rate risk, they generally increase the volatility of reported net income because, while fair value changes in derivatives affect net income, fair value changes in several of the types of assets and liabilities being hedged do not affect net income. Beginning in the fourth quarter of 2011, we started issuing a higher percentage of long-term debt. This allows us to take advantage of attractive long-term rates while decreasing our reliance on interest-rate swaps.
 
Table 7 — Derivative Gains (Losses)
 
                 
    Derivative Gains (Losses)  
    Three Months Ended
 
    March 31,  
    2012     2011  
    (in millions)  
 
Interest-rate swaps
  $ 1,208     $ 1,723  
Option-based derivatives(1)
    (1,077 )     (807 )
Other derivatives(2)
    (111 )     (94 )
Accrual of periodic settlements(3)
    (1,076 )     (1,249 )
                 
Total
  $ (1,056 )   $ (427 )
                 
(1)  Primarily includes purchased call and put swaptions and purchased interest-rate caps and floors.
(2)  Includes futures, foreign-currency swaps, commitments, swap guarantee derivatives, and credit derivatives.
(3)  Includes imputed interest on zero-coupon swaps.
 
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Gains (losses) on derivatives not accounted for in hedge accounting relationships are principally driven by changes in: (a) interest rates and implied volatility; and (b) the mix and volume of derivatives in our derivative portfolio.
 
During the three months ended March 31, 2012, we recognized losses on derivatives of $1.1 billion primarily due to losses related to the accrual of periodic settlements on interest-rate swaps as we were in a net pay-fixed swap position. We recognized fair value gains on our pay-fixed swaps of $3.8 billion, which were largely offset by: (a) fair value losses on our receive-fixed swaps of $2.6 billion; and (b) fair value losses on our option-based derivatives of $1.1 billion resulting from losses on our purchased call swaptions due to an increase in long-term interest rates. The fair value of derivatives during the three months ended March 31, 2012 reflects a decline in short-term interest rates and an increase in long-term interest rates compared to the three months ended March 31, 2011, when both short-term and long-term interest rates increased.
 
During the three months ended March 31, 2011, we recognized losses on derivatives of $0.4 billion primarily due to $1.2 billion of losses related to the accrual of periodic settlements on interest-rate swaps as we were in a net pay-fixed swap position, partially offset by the improvement in derivative fair values as interest rates increased. As a result, we recognized fair value gains of $4.0 billion on our pay-fixed swaps, partially offset by fair value losses on our receive-fixed swaps of $2.2 billion. We recognized fair value losses of $0.8 billion on our option-based derivatives, resulting from losses on our purchased call swaptions primarily due to the increase in interest rates.
 
Investment Securities-Related Activities
 
Impairments of Available-For-Sale Securities
 
We recorded net impairments of available-for-sale securities recognized in earnings, which were related to non-agency mortgage-related securities, of $564 million and $1.2 billion during the three months ended March 31, 2012 and 2011, 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 months ended March 31, 2012 and 2011.
 
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. Trading securities mainly include Treasury securities, agency fixed-rate and variable-rate pass-through mortgage-related securities, and agency REMICs, including inverse floating-rate, interest-only and principal-only securities. We recognized $(377) million and $(200) million related to gains (losses) on trading securities during the three months ended March 31, 2012 and 2011, respectively.
 
Losses in both periods are primarily due to the movement of securities with unrealized gains towards maturity. The losses during the three months ended March 31, 2011 were partially offset by larger fair value gains, compared to the three months ended March 31, 2012, due to a tightening of OAS levels on agency securities.
 
Other Income
 
The table below summarizes the significant components of other income.
 
Table 8 — Other Income
 
                 
    Three Months Ended March 31,  
    2012     2011  
    (in millions)  
 
Other income:
               
Gains (losses) on sale of mortgage loans
  $ 40     $ 95  
Gains (losses) on mortgage loans recorded at fair value
    139       (33 )
Recoveries on loans impaired upon purchase
    89       125  
Guarantee-related income, net(1)
    70       54  
All other
    96       93  
                 
Total other income
  $ 434     $ 334  
                 
(1)  Most of our guarantee-related income relates to securitized multifamily mortgage loans where we have not consolidated the securitization trusts on our consolidated balance sheets.
 
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Gains (Losses) on Sale of Mortgage Loans
 
In the first quarters of 2012 and 2011, we recognized $40 million and $95 million, respectively, of gains on sale of mortgage loans with associated UPB of $3.7 billion and $3.4 billion, respectively. All such amounts relate to our securitizations of multifamily loans which we had elected to carry at fair value while they were held on our consolidated balance sheet. We had lower gains on sale of mortgage loans in the first quarter of 2012, compared to the first quarter of 2011, as a significant portion of the improved fair value of the loans was instead recognized within gains (losses) on mortgage loans recorded at fair value during periods prior to the loans’ securitization.
 
Gains (Losses) on Mortgage Loans Recorded at Fair Value
 
In the first quarters of 2012 and 2011, we recognized $139 million and $(33) million, respectively, of gains (losses) on mortgage loans recorded at fair value. We held higher balances of multifamily loans on our consolidated balance sheets that were designated for subsequent securitization during the first quarter of 2012, compared to the first quarter of 2011 which, when combined with improving fair values on those loans, resulted in gains during the first quarter of 2012.
 
Recoveries on Loans Impaired upon Purchase
 
Recoveries on loans impaired upon purchase represent the recapture into income of previously recognized losses associated with purchases of delinquent loans from our PCs in conjunction with our guarantee activities. Recoveries occur when a non-performing loan is repaid in full or when at the time of foreclosure the estimated fair value of the acquired property, less costs to sell, exceeds the carrying value of the loan. For impaired loans where the borrower has made required payments that return the loan to less than three months past due, the recovery amounts are instead recognized as interest income over time as periodic payments are received.
 
During the first quarters of 2012 and 2011, we recognized recoveries on loans impaired upon purchase of $89 million and $125 million, respectively. Our recoveries on loans impaired upon purchase declined in the first quarter of 2012, compared to the first quarter of 2011, due to a lower volume of foreclosure transfers and payoffs associated with loans impaired upon purchase.
 
All Other
 
All other income consists primarily of transactional fees, fees assessed to our servicers, such as for technology use and late fees or other penalties, and other miscellaneous income.
 
Non-Interest Expense
 
The table below summarizes the components of non-interest expense.
 
Table 9 — Non-Interest Expense
 
                 
    Three Months Ended March 31,  
    2012     2011  
    (in millions)  
 
Administrative expenses:
               
Salaries and employee benefits
  $ 176     $ 207  
Professional services
    71       56  
Occupancy expense
    14       15  
Other administrative expense
    76       83  
                 
Total administrative expenses
    337       361  
REO operations expense
    171       257  
Other expenses
    88       79  
                 
Total non-interest expense
  $ 596     $ 697  
                 
 
Administrative Expenses
 
Administrative expenses decreased during the three months ended March 31, 2012 compared to the three months ended March 31, 2011, largely due to a reduction in salaries and employee benefits expense. We currently expect that our general and administrative expenses for the full-year 2012 will be approximately equivalent to those we experienced in the full-year 2011, with lower salaries and employee benefits expense offset by increased professional services expense, in part due to: (a) the continually changing mortgage market; (b) an environment in which we are subject to increased regulatory oversight and mandates; and (c) strategic arrangements that we may enter into with outside firms to provide operational capability and staffing for key functions, if needed. We believe the initiatives we are pursuing under the 2012
 
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conservatorship scorecard and other FHFA-mandated initiatives may require additional resources and affect our level of administrative expenses going forward.
 
REO Operations Expense
 
The table below presents the components of our REO operations expense, and REO inventory and disposition information.
 
Table 10 — REO Operations Expense, REO Inventory, and REO Dispositions
 
                 
    Three Months Ended March 31,  
    2012     2011  
    (dollars in millions)  
 
REO operations expense:
               
Single-family:
               
REO property expenses(1)
  $ 378     $ 308  
Disposition (gains) losses, net(2)
    (78 )     126  
Change in holding period allowance, dispositions
    (57 )     (155 )
Change in holding period allowance, inventory(3)
    1       151  
Recoveries(4)
    (72 )     (173 )
                 
Total single-family REO operations expense
    172       257  
Multifamily REO operations expense (income)
    (1 )      
                 
Total REO operations expense
  $ 171     $ 257  
                 
REO inventory (in properties), at March 31:
               
Single-family
    59,307       65,159  
Multifamily
    16       15  
                 
Total
    59,323       65,174  
                 
REO property dispositions (in properties):
               
Single-family
    25,033       31,627  
Multifamily
    4       1  
                 
Total
    25,037       31,628  
                 
(1)  Consists of costs incurred to acquire, maintain or protect a property after it is acquired in a foreclosure transfer, such as legal fees, insurance, taxes, and cleaning and other maintenance charges.
(2)  Represents the difference between the disposition proceeds, net of selling expenses, and the fair value of the property on the date of the foreclosure transfer.
(3)  Represents the (increase) decrease in the estimated fair value of properties that were in inventory during the period.
(4)  Includes recoveries from primary mortgage insurance, pool insurance and seller/servicer repurchases.
 
REO operations expense declined to $171 million in the first quarter of 2012, as compared to $257 million in the first quarter of 2011, primarily due to stabilizing home prices in certain geographical areas with significant REO activity, which resulted in gains on disposition of properties as well as lower write-downs of single-family REO inventory during the first quarter of 2012. However, we also experienced lower recoveries on REO properties during the first quarter of 2012, compared to the first quarter of 2011, primarily due to reduced recoveries from mortgage insurers, in part due to the continued weakness in the financial condition of our mortgage insurance counterparties, and a decline in reimbursements of losses from seller/servicers associated with repurchase requests.
 
Although our servicers have resumed the foreclosure process in most areas, we believe the volume of our single-family REO acquisitions during the first quarter of 2012 was less than it otherwise would have been due to delays in the foreclosure process, particularly in states that require a judicial foreclosure process. The lower acquisition rate, coupled with high disposition levels, led to a lower REO property inventory level at March 31, 2012, compared to March 31, 2011. We expect that the length of the foreclosure process will continue to remain above historical levels. See “RISK MANAGEMENT— Credit Risk — Mortgage Credit Risk — Non-Performing Assets” for additional information about our REO activity.
 
Other Expenses
 
Other expenses were $88 million and $79 million in the first quarters of 2012 and 2011, respectively. Other expenses consist primarily of HAMP servicer incentive fees, costs related to terminations and transfers of mortgage servicing, and other miscellaneous expenses.
 
Income Tax Benefit
 
For the three months ended March 31, 2012 and 2011, we reported an income tax benefit of $14 million and $74 million, respectively. See “NOTE 12: INCOME TAXES” for additional information.
 
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Comprehensive Income
 
Our comprehensive income was $1.8 billion and $2.7 billion for the three months ended March 31, 2012 and 2011, respectively, consisting of: (a) $577 million and $676 million of net income, respectively; and (b) $1.2 billion and $2.1 billion of total other comprehensive income, respectively, primarily due to a reduction in net unrealized losses related to our available-for-sale securities. See “CONSOLIDATED BALANCE SHEETS ANALYSIS — Total Equity (Deficit)” for additional information regarding total other comprehensive income.
 
Segment Earnings
 
Our operations consist of three reportable segments, which are based on the type of business activities each performs — Investments, Single-family Guarantee, and Multifamily. Certain activities that are not part of a reportable segment are included in the All Other category.
 
The Investments segment reflects results from our investment, funding and hedging activities. In our Investments segment, we invest principally in mortgage-related securities and single-family performing mortgage loans, which are funded by other debt issuances and hedged using derivatives. In our Investments segment, we also provide funding and hedging management services to the Single-family Guarantee and Multifamily segments. The Investments segment reflects changes in the fair value of the Multifamily segment assets that are associated with changes in interest rates. Segment Earnings for this segment consist primarily of the returns on these investments, less the related funding, hedging, and administrative expenses.
 
The Single-family Guarantee segment reflects results from our single-family credit guarantee activities. In our Single-family Guarantee segment, we purchase single-family mortgage loans originated by our seller/servicers in the primary mortgage market. In most instances, we use the mortgage securitization process to package the purchased mortgage loans into guaranteed mortgage-related securities. We guarantee the payment of principal and interest on the mortgage-related securities in exchange for management and guarantee fees. Segment Earnings for this segment consist primarily of management and guarantee fee revenues, including amortization of upfront fees, less credit-related expenses, administrative expenses, allocated funding costs, and amounts related to net float benefits or expenses.
 
The Multifamily segment reflects results from our investment (both purchases and sales), securitization, and guarantee activities in multifamily mortgage loans and securities. Although we hold multifamily mortgage loans and non-agency CMBS that we purchased for investment, our purchases of such multifamily mortgage loans for investment have declined significantly since 2010, and our purchases of CMBS have declined significantly since 2008. The only CMBS that we have purchased since 2008 have been senior, mezzanine, and interest-only tranches related to certain of our securitization transactions, and these purchases have not been significant. Currently, our primary business strategy is to purchase multifamily mortgage loans for aggregation and then securitization. We guarantee the senior tranches of these securitizations in Other Guarantee Transactions. Our Multifamily segment also issues Other Structured Securities, but does not issue REMIC securities. Our Multifamily segment also enters into other guarantee commitments for multifamily HFA bonds and housing revenue bonds held by third parties. Segment Earnings for this segment consist primarily of the interest earned on assets related to multifamily investment activities and management and guarantee fee income, less credit-related expenses, administrative expenses, and allocated funding costs. In addition, the Multifamily segment reflects gains on sale of mortgages and the impact of changes in fair value of CMBS and held-for-sale loans associated only with market factors other than changes in interest rates, such as liquidity and credit.
 
We evaluate segment performance and allocate resources based on a Segment Earnings approach, subject to the conduct of our business under the direction of the Conservator. The financial performance of our Single-family Guarantee segment and Multifamily segment are measured based on each segment’s contribution to GAAP net income (loss). Our Investments segment is measured on its contribution to GAAP comprehensive income (loss), which consists of the sum of its contribution to: (a) GAAP net income (loss); and (b) GAAP total other comprehensive income (loss), net of taxes. The sum of Segment Earnings for each segment and the All Other category equals GAAP net income (loss). Likewise, the sum of comprehensive income (loss) for each segment and the All Other category equals GAAP comprehensive income (loss).
 
The All Other category consists of material corporate level expenses that are: (a) infrequent in nature; and (b) based on management decisions outside the control of the management of our reportable segments. By recording these types of activities to the All Other category, we believe the financial results of our three reportable segments reflect the decisions and strategies that are executed within the reportable segments and provide greater comparability across time periods. The All Other category also includes the deferred tax asset valuation allowance associated with previously recognized income tax credits carried forward.
 
            20 Freddie Mac


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In presenting Segment Earnings, we make significant reclassifications to certain financial statement line items in order to reflect a measure of net interest income on investments and a measure of management and guarantee income on guarantees that is in line with how we manage our business. We present Segment Earnings by: (a) reclassifying certain investment-related activities and credit guarantee-related activities between various line items on our GAAP consolidated statements of comprehensive income; and (b) allocating certain revenues and expenses, including certain returns on assets and funding costs, and all administrative expenses to our three reportable segments.
 
As a result of these reclassifications and allocations, Segment Earnings for our reportable segments differs significantly from, and should not be used as a substitute for, net income (loss) as determined in accordance with GAAP. Our definition of Segment Earnings may differ from similar measures used by other companies. However, we believe that Segment Earnings provides us with meaningful metrics to assess the financial performance of each segment and our company as a whole.
 
See “NOTE 14: SEGMENT REPORTING” in our 2011 Annual Report for further information regarding our segments, including the descriptions and activities of the segments and the reclassifications and allocations used to present Segment Earnings.
 
Beginning in 2012, under guidance from FHFA we began to curtail mortgage-related investments portfolio purchase and retention activities that are undertaken for the primary purpose of supporting the price performance of our PCs, which may result in a significant decline in the market share of our single-family guarantee business, lower comprehensive income, and a more rapid decline in the size of our total mortgage portfolio.
 
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The table below provides information about our various segment mortgage portfolios at March 31, 2012 and December 31, 2011. For a discussion of each segment’s portfolios, see “Segment Earnings — Results.”
 
Table 11 — Composition of Segment Mortgage Portfolios and Credit Risk Portfolios(1)
 
                 
    March 31, 2012     December 31, 2011  
    (in millions)  
 
Segment mortgage portfolios:
               
Investments — Mortgage investments portfolio:
               
Single-family unsecuritized mortgage loans(2)
  $ 103,593     $ 109,190  
Freddie Mac mortgage-related securities
    199,132       220,659  
Non-agency mortgage-related securities
    84,180       86,526  
Non-Freddie Mac agency securities
    30,110       32,898  
                 
Total Investments — Mortgage investments portfolio
    417,015       449,273  
                 
Single-family Guarantee — Managed loan portfolio:(3)
               
Single-family unsecuritized mortgage loans(4)
    61,903       62,469  
Single-family Freddie Mac mortgage-related securities held by us
    199,132       220,659  
Single-family Freddie Mac mortgage-related securities held by third parties
    1,390,328       1,378,881  
Single-family other guarantee commitments(5)
    12,498       11,120  
                 
Total Single-family Guarantee — Managed loan portfolio
    1,663,861       1,673,129  
                 
Multifamily — Guarantee portfolio:
               
Multifamily Freddie Mac mortgage related securities held by us
    2,614       3,008  
Multifamily Freddie Mac mortgage related securities held by third parties
    25,521       22,136  
Multifamily other guarantee commitments(5)
    9,856       9,944  
                 
Total Multifamily — Guarantee portfolio
    37,991       35,088  
                 
Multifamily — Mortgage investments portfolio
               
Multifamily investment securities portfolio
    56,891       59,260  
Multifamily loan portfolio
    82,489       82,311  
                 
Total Multifamily — Mortgage investments portfolio
    139,380       141,571  
                 
Total Multifamily portfolio
    177,371       176,659  
                 
Less: Freddie Mac single-family and certain multifamily securities(6)
    (201,746 )     (223,667 )
                 
Total mortgage portfolio
  $ 2,056,501     $ 2,075,394  
                 
Credit risk portfolios:(7)
               
Single-family credit guarantee portfolio:(3)
               
Single-family mortgage loans, on-balance sheet
  $ 1,714,182     $ 1,733,215  
Non-consolidated Freddie Mac mortgage-related securities
    10,437       10,735  
Other guarantee commitments
    12,498       11,120  
Less: HFA-related guarantees(8)
    (8,142 )     (8,637 )
Less: Freddie Mac mortgage-related securities backed by Ginnie Mae certificates(8)
    (748 )     (779 )
                 
Total single-family credit guarantee portfolio
  $ 1,728,227     $ 1,745,654  
                 
Multifamily mortgage portfolio:
               
Multifamily mortgage loans, on-balance sheet
  $ 82,489     $ 82,311  
Non-consolidated Freddie Mac mortgage-related securities
    28,135       25,144  
Other guarantee commitments
    9,856       9,944  
Less: HFA-related guarantees(8)
    (1,235 )     (1,331 )
                 
Total multifamily mortgage portfolio
  $ 119,245     $ 116,068  
                 
(1)  Based on UPB and excludes mortgage loans and mortgage-related securities traded, but not yet settled.
(2)  Excludes unsecuritized seriously delinquent single-family loans managed by the Single-family Guarantee segment. However, the Single-family Guarantee segment continues to earn management and guarantee fees associated with unsecuritized single-family loans in the Investments segment’s mortgage investments portfolio.
(3)  The balances of the mortgage-related securities in the Single-family Guarantee managed loan portfolio are based on the UPB of the security, whereas the balances of our single-family credit guarantee portfolio presented in this report are based on the UPB of the mortgage loans underlying the related security. The differences in the loan and security balances result from the timing of remittances to security holders, which is typically 45 or 75 days after the mortgage payment cycle of fixed-rate and ARM PCs, respectively.
(4)  Represents unsecuritized seriously delinquent single-family loans managed by the Single-family Guarantee segment.
(5)  Represents the UPB of mortgage-related assets held by third parties for which we provide our guarantee without our securitization of the related assets.
(6)  Freddie Mac single-family mortgage-related securities held by us are included in both our Investments segment’s mortgage investments portfolio and our Single-family Guarantee segment’s managed loan portfolio, and Freddie Mac multifamily mortgage-related securities held by us are included in both the multifamily investment securities portfolio and the multifamily guarantee portfolio. Therefore, these amounts are deducted in order to reconcile to our total mortgage portfolio.
(7)  Represents the UPB of loans for which we present characteristics, delinquency data, and certain other statistics in this report. See “GLOSSARY” for further description.
(8)  We exclude HFA-related guarantees and our resecuritizations of Ginnie Mae certificates from our credit risk portfolios and most related statistics because these guarantees do not expose us to meaningful amounts of credit risk due to the credit enhancement provided on them by the U.S. government.
 
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Segment Earnings — Results
 
Investments
 
The table below presents the Segment Earnings of our Investments segment.
 
Table 12 — Segment Earnings and Key Metrics — Investments(1)
 
                 
    Three Months Ended
 
    March 31,  
    2012     2011  
    (dollars in millions)  
 
Segment Earnings:
               
Net interest income
  $ 1,763     $ 1,653  
Non-interest income (loss):
               
Net impairment of available-for-sale securities recognized in earnings
    (496 )     (1,029 )
Derivative gains (losses)
    200       1,103  
Gains (losses) on trading securities
    (398 )     (234 )
Gains (losses) on sale of mortgage loans
    (14 )     12  
Gains (losses) on mortgage loans recorded at fair value
    (38 )     (83 )
Other non-interest income
    513       541  
                 
Total non-interest income (loss)
    (233 )     310  
                 
Non-interest expense:
               
Administrative expenses
    (92 )     (95 )
                 
Total non-interest expense
    (92 )     (95 )
                 
Segment adjustments(2)
    155       203  
                 
Segment Earnings before income tax benefit
    1,593       2,071  
Income tax benefit
    35       66  
                 
Segment Earnings, net of taxes
    1,628       2,137  
Total other comprehensive income, net of taxes
    335       1,126  
                 
Comprehensive income
  $ 1,963     $ 3,263  
                 
Key metrics:
               
Portfolio balances:
               
Average balances of interest-earning assets:(3)(4)
               
Mortgage-related securities(5)
  $ 330,593     $ 399,113  
Non-mortgage-related investments(6)
    105,539       114,732  
Unsecuritized single-family loans(7)
    109,306       85,515  
                 
Total average balances of interest-earning assets
  $ 545,438     $ 599,360  
                 
Return:
               
Net interest yield — Segment Earnings basis (annualized)
    1.29 %     1.10 %
(1)  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 13: SEGMENT REPORTING — Table 13.2 — Segment Earnings and Reconciliation to GAAP Results.”
(2)  For a description of our segment adjustments, see “NOTE 14: SEGMENT REPORTING — Segment Earnings” in our 2011 Annual Report.
(3)  Excludes mortgage loans and mortgage-related securities traded, but not yet settled.
(4)  We calculate average balances based on amortized cost.
(5)  Includes our investments in single-family PCs and certain Other Guarantee Transactions, which have been consolidated under GAAP on our consolidated balance sheet since January 1, 2010.
(6)  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.
(7)  Excludes unsecuritized seriously delinquent single-family mortgage loans.
 
Segment Earnings for our Investments segment decreased by $509 million to $1.6 billion during the three months ended March 31, 2012, compared to $2.1 billion during the three months ended March 31, 2011, primarily due to decreased derivative gains, partially offset by a decrease in net impairments of available-for-sale securities recognized in earnings. Comprehensive income for our Investments segment decreased by $1.3 billion to $2.0 billion during the three months ended March 31, 2012, compared to $3.3 billion during the three months ended March 31, 2011, primarily due to a smaller improvement in the fair value of available-for-sale securities.
 
During the three months ended March 31, 2012, the UPB of the Investments segment mortgage investments portfolio decreased at an annualized rate of 28.7%. We held $229.2 billion of agency securities and $84.2 billion of non-agency mortgage-related securities as of March 31, 2012, compared to $253.6 billion of agency securities and $86.5 billion of non-agency mortgage-related securities as of December 31, 2011. The decline in UPB of agency securities is due mainly to liquidations, including prepayments and selected sales. The decline in UPB of non-agency mortgage-related securities is due mainly to the receipt of monthly remittances of principal repayments from both the recoveries of liquidated loans and, to a lesser extent, voluntary repayments of the underlying collateral, representing a partial return of our investments in these securities. Since the beginning of 2007, we have incurred actual principal cash shortfalls of $1.8 billion on impaired non-agency mortgage-related securities in the Investments segment. See “CONSOLIDATED BALANCE SHEETS ANALYSIS — Investments in Securities” for additional information regarding our mortgage-related securities.
 
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Segment Earnings net interest income and net interest yield increased by $110 million and 19 basis points, respectively, during the three months ended March 31, 2012, compared to the three months ended March 31, 2011. The primary driver was lower funding costs, primarily due to the replacement of debt at lower rates. These lower funding costs were partially offset by the reduction in the average balance of higher-yielding mortgage-related assets due to continued liquidations and limited purchase activity.
 
Segment Earnings non-interest income (loss) was $(233) million during the three months ended March 31, 2012, compared to $310 million during the three months ended March 31, 2011. This change was mainly due to decreased derivative gains, partially offset by a decrease in net impairments of available-for-sale securities recognized in earnings.
 
Impairments recorded in our Investments segment were $496 million during the three months ended March 31, 2012, compared to $1.0 billion during the three months ended March 31, 2011. Impairments recorded in both periods were primarily due to our expectation of slower prepayments, which resulted in higher credit losses, on our non-agency mortgage-related securities. Increasing interest rates also contributed to the impairments recorded during the three months ended March 31, 2011, while lower interest rates during the three months ended March 31, 2012 resulted in a slight benefit from expected structural credit enhancements on the available-for-sale securities. See “CONSOLIDATED BALANCE SHEETS ANALYSIS — Investments in Securities — Mortgage-Related Securities — Other-Than-Temporary Impairments on Available-For-Sale Mortgage-Related Securities” for additional information on our impairments.
 
We recorded losses on trading securities of $398 million during the three months ended March 31, 2012, compared to $234 million during the three months ended March 31, 2011. Losses in both periods were primarily due to the movement of securities with unrealized gains towards maturity. The losses during the three months ended March 31, 2011 were partially offset by larger fair value gains compared to the three months ended March 31, 2012, due to a tightening of OAS levels on agency securities.
 
We recorded derivative gains for this segment of $200 million during the three months ended March 31, 2012, compared to $1.1 billion during the three months ended March 31, 2011. While derivatives are an important aspect of our strategy to manage interest-rate risk, they generally increase the volatility of reported Segment Earnings, because while fair value changes in derivatives affect Segment Earnings, fair value changes in several of the types of assets and liabilities being hedged do not affect Segment Earnings. During both the three months ended March 31, 2012 and 2011, swap interest rate changes resulted in fair value gains on our pay-fixed swaps, largely offset by: (a) fair value losses on our receive-fixed swaps; and (b) fair value losses on our option-based derivatives resulting from losses on our purchased call swaptions, due to an increase in long-term interest rates. The fair value of derivatives during the three months ended March 31, 2012 reflects a decline in short-term interest rates and an increase in longer-term interest rates compared to the three months ended March 31, 2011, when both short-term and longer-term interest rates increased. See “Non-Interest Income (Loss) — Derivative Gains (Losses)” for additional information on our derivatives.
 
Our Investments segment’s total other comprehensive income was $335 million during the three months ended March 31, 2012, compared to $1.1 billion during the three months ended March 31, 2011. Net unrealized losses in AOCI on our available-for-sale securities decreased by $242 million during the three months ended March 31, 2012, primarily due to the impact of fair value gains related to the movement of non-agency mortgage-related securities with unrealized losses towards maturity and the recognition in earnings of other-than-temporary impairments on our non-agency mortgage-related securities, partially offset by fair value losses related to the movement of agency securities with unrealized gains towards maturity. Net unrealized losses in AOCI on our available-for-sale securities decreased by $1.0 billion during the three months ended March 31, 2011, primarily attributable to the recognition in earnings of other-than-temporary impairments on our non-agency mortgage-related securities. The changes in fair value of CMBS, excluding impacts from the changes in interest rates, are reflected in the Multifamily segment.
 
For a discussion of items that may impact our Investments segment net interest income over time, see “EXECUTIVE SUMMARY — Limits on Investment Activity and Our Mortgage-Related Investments Portfolio.”
 
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Single-Family Guarantee
 
The table below presents the Segment Earnings of our Single-family Guarantee segment.
 
Table 13 — Segment Earnings and Key Metrics — Single-Family Guarantee(1)
 
                 
    Three Months Ended March 31,  
    2012     2011  
    (dollars in millions)  
 
Segment Earnings:
               
Net interest income (expense)
  $ (32 )   $ 100  
Provision for credit losses
    (2,184 )     (2,284 )
Non-interest income:
               
Management and guarantee income
    1,011       870  
Other non-interest income
    181       211  
                 
Total non-interest income
    1,192       1,081  
                 
Non-interest expense:
               
Administrative expenses
    (193 )     (215 )
REO operations expense
    (172 )     (257 )
Other non-interest expense
    (73 )     (66 )
                 
Total non-interest expense
    (438 )     (538 )
                 
Segment adjustments(2)
    (196 )     (185 )
                 
Segment Earnings (loss) before income tax (expense) benefit
    (1,658 )     (1,826 )
Income tax (expense) benefit
    (17 )     6  
                 
Segment Earnings (loss), net of taxes
    (1,675 )     (1,820 )
Total other comprehensive income (loss), net of taxes
    (23 )     (4 )
                 
Comprehensive income (loss)
  $ (1,698 )   $ (1,824 )
                 
Key metrics:
               
Balances and Volume (in billions, except rate):
               
Average balance of single-family credit guarantee portfolio and HFA guarantees
  $ 1,741     $ 1,819  
Issuance — Single-family credit guarantees(3)
  $ 111     $ 96  
Fixed-rate products — Percentage of purchases(4)
    95 %     94 %
Liquidation rate — Single-family credit guarantees (annualized)(5)
    30 %     28 %
                 
Management and Guarantee Fee Rate (in bps, annualized):
               
Contractual management and guarantee fees
    14.3       13.6  
Amortization of delivery fees
    8.9       5.5  
                 
Segment Earnings management and guarantee income
    23.2       19.1  
                 
Credit:
               
Serious delinquency rate, at end of period
    3.51 %     3.63 %
REO inventory, at end of period (number of properties)
    59,307       65,159  
Single-family credit losses, in bps (annualized)(6)
    78.6       71.0  
Market:
               
Single-family mortgage debt outstanding (total U.S. market, in billions)(7)
  $ 10,291     $ 10,453  
30-year fixed mortgage rate(8)
    4.0 %     4.9 %
(1)  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 13: SEGMENT REPORTING — Table 13.2 — Segment Earnings and Reconciliation to GAAP Results.”
(2)  For a description of our segment adjustments, see “NOTE 14: SEGMENT REPORTING — Segment Earnings” in our 2011 Annual Report.
(3)  Based on UPB.
(4)  Excludes Other Guarantee Transactions.
(5)  Represents principal repayments relating to loans underlying Freddie Mac mortgage-related securities and other guarantee commitments, including those related to our removal of seriously delinquent and modified mortgage loans and balloon/reset mortgage loans out of PC pools.
(6)  Calculated as the amount of single-family credit losses divided by the sum of the average carrying value of our single-family credit guarantee portfolio and the average balance of our single-family HFA initiative guarantees.
(7)  Source: Federal Reserve Flow of Funds Accounts of the United States of America dated March 8, 2012. The outstanding amount for March 31, 2012 reflects the balance as of December 31, 2011.
(8)  Based on Freddie Mac’s Primary Mortgage Market Survey rate for the last week in the period, 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 financing on conforming mortgages with LTV ratios of 80%.
 
Segment Earnings (loss) for our Single-family Guarantee segment improved to $(1.7) billion in the first quarter of 2012 compared to $(1.8) billion in the first quarter of 2011, primarily due to an increase in management and guarantee income and a decline in Segment Earnings provision for credit losses.
 
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The table below provides summary information about the composition of Segment Earnings (loss) for this segment for the three months ended March 31, 2012 and 2011.
 
Table 14 — Segment Earnings Composition — Single-Family Guarantee Segment
 
                                         
    Three Months Ended March 31, 2012  
    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 bps)  
 
Year of origination:(5)
                                       
2012
  $ 17       13.9     $ (4 )     2.6     $ 13  
2011
    185       25.3       (53 )     7.4       132  
2010
    195       26.1       (103 )     13.4       92  
2009
    199       27.4       (106 )     14.7       93  
2008
    86       25.1       (204 )     73.5       (118 )
2007
    83       19.0       (791 )     200.3       (708 )
2006
    53       18.9       (463 )     157.2       (410 )
2005
    61       19.1       (451 )     135.3       (390 )
2004 and prior
    132       20.4       (181 )     25.4       (49 )
                                         
Total
  $ 1,011       23.2     $ (2,356 )     53.9     $ (1,345 )
                                         
Administrative expenses
                                    (193 )
Net interest income (expense)
                                    (32 )
Other non-interest income and expenses, net
                                    (105 )
                                         
Segment Earnings (loss), net of taxes
                                  $ (1,675 )
                                         
                                         
                                         
    Three Months Ended March 31, 2011  
    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 bps)  
 
Year of origination:(5)
                                       
2011
  $ 26       15.0     $ (3 )     3.2     $ 23  
2010
    184       20.6       (52 )     5.6       132  
2009
    170       18.5       (56 )     6.0       114  
2008
    110       24.6       (228 )     61.6       (118 )
2007
    101       18.8       (888 )     181.1       (787 )
2006
    59       17.0       (788 )     215.2       (729 )
2005
    66       16.6       (418 )     100.2       (352 )
2004 and prior
    154       18.4       (108 )     11.7       46  
                                         
Total
  $ 870       19.1     $ (2,541 )     55.9     $ (1,671 )
                                         
Administrative expenses
                                    (215 )
Net interest income (expense)
                                    100  
Other non-interest income and expenses, net
                                    (34 )
                                         
Segment Earnings (loss), net of taxes
                                  $ (1,820 )
                                         
(1)  Includes amortization of delivery fees of $388 million and $252 million for first quarters of 2012 and 2011, respectively.
(2)  Consists of the aggregate of the Segment Earnings provision for credit losses and Segment Earnings REO operations expense. Historical rates of average credit expenses may not be representative of future results. In the first quarter of 2012, we enhanced our method of allocating credit expenses by loan origination year. Prior period amounts have been revised to conform to the current period presentation.
(3)  Calculated as the annualized amount of Segment Earnings management and guarantee income or credit expenses, respectively, divided by the sum of the average carrying values of the single-family credit guarantee portfolio and the average balance of our single-family HFA initiative guarantees.
(4)  Calculated as Segment Earnings management and guarantee income less credit expenses.
(5)  Segment Earnings management and guarantee income is presented by year of guarantee origination, whereas credit expenses are presented based on year of loan origination.
 
As of March 31, 2012, loans originated after 2008 have, on a cumulative basis, provided management and guarantee fee income that has exceeded the credit-related and administrative expenses associated with these loans. We currently believe our management and guarantee fee rates for guarantee issuances after 2008, when coupled with the higher credit quality of the mortgages within these new guarantee issuances, will provide management and guarantee fee income, over the long term, that exceeds our expected credit-related and administrative expenses associated with the underlying loans. Nevertheless, various factors, such as continued high unemployment rates, further declines in home prices, or negative impacts of HARP loans originated in recent years (which may not perform as well as other refinance mortgages, due in part to the high LTV ratios of the loans), could require us to incur expenses on these loans beyond our current expectations.
 
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Based on our historical experience, we expect that the performance of the loans in an individual origination year will vary over time. The aggregate UPB of the loans from an origination year will decline over time due to repayments, refinancing, and other liquidation events, resulting in declining management and guarantee fee income from the loans in that origination year in future periods. In addition, we expect that the credit-related expenses related to the remaining loans in the origination year will increase over time, as some borrowers experience financial difficulties and default on their loans. As a result, there will likely be periods when an origination year is not profitable, though it may remain profitable on a cumulative basis.
 
Our management and guarantee fee income associated with guarantee issuances in 2005 through 2008 has not been adequate to cover the credit and administrative expenses associated with such loans, primarily due to the high rate of defaults on the loans originated in those years coupled with a high volume of refinancing since 2008. High levels of refinancing and delinquency since 2008 have significantly reduced the balance of performing loans from those years that remain in our portfolio and consequently reduced management and guarantee income associated with loans originated in 2005 through 2008 (we do not recognize Segment Earnings management and guarantee income on non-accrual mortgage loans). We also believe that the management and guarantee fees associated with originations after 2008 will not be sufficient to offset the future expenses associated with our 2005 to 2008 guarantee issuances for the foreseeable future. Consequently, we expect to continue reporting net losses for the Single-family Guarantee segment throughout 2012.
 
Segment Earnings management and guarantee income increased in the first quarter of 2012, as compared to the first quarter of 2011, primarily due to an increase in amortization of delivery fees. This was driven by a higher volume of delivery fees and the lower interest rate environment during the first quarter of 2012, which increased refinance activity.
 
The UPB of the Single-family Guarantee managed loan portfolio was $1.7 trillion at both March 31, 2012 and December 31, 2011. The annualized liquidation rate on our securitized single-family credit guarantees was approximately 30% and 28% for the first quarters of 2012 and 2011, respectively, and remained high in the first quarter of 2012 due to significant refinancing activity. We expect the size of our Single-family Guarantee managed loan portfolio will continue to decline during 2012.
 
Refinance volumes were high during the first quarter of 2012 due to continued low interest rates, and represented 87% of our single-family mortgage purchase volume during the first quarter of 2012, compared to 85% of our single-family mortgage purchase volume during the first quarter of 2011, based on UPB. Relief refinance mortgages comprised approximately 31% and 36% of our total refinance volume during the first quarters of 2012 and 2011, respectively. Over time, relief refinance mortgages with LTV ratios above 80% (i.e., HARP loans) may not perform as well as other refinance mortgages because the continued high LTV ratios of these loans increases the probability of default. Based on our historical experience, there is an increase in borrower default risk as LTV ratios increase, particularly for loans with LTV ratios above 80%. In addition, relief refinance mortgages may not be covered by mortgage insurance for the full excess of their UPB over 80%. Approximately 16% and 15% of our single-family purchase volume in the first quarters of 2012 and 2011, respectively, was relief refinance mortgages with LTV ratios above 80%. Relief refinance mortgages of all LTV ratios comprised approximately 13% and 11% of the UPB in our total single-family credit guarantee portfolio at March 31, 2012 and December 31, 2011, respectively.
 
On October 24, 2011, FHFA, Freddie Mac, and Fannie Mae announced a series of FHFA-directed changes to HARP in an effort to attract more eligible borrowers whose monthly payments are current and who can benefit from refinancing their home mortgages. For more information about our relief refinance mortgage initiative, see “RISK MANAGEMENT — Credit Risk — Mortgage Credit Risk — Single-Family Mortgage Credit Risk — Single-Family Loan Workouts and the MHA Program.”
 
Similar to our purchases in 2009 through 2011, the credit quality of the single-family loans we acquired in the first quarter of 2012 (excluding relief refinance mortgages) is significantly better than that of loans we acquired from 2005 through 2008, as measured by original LTV ratios, FICO scores, and the proportion of loans underwritten with fully documented income. Mortgages originated after 2008, including relief refinance mortgages, represent more than half of the UPB of our single-family credit guarantee portfolio as of March 31, 2012, and their composition of that portfolio continues to grow.
 
Provision for credit losses for the Single-family Guarantee segment declined to $2.2 billion in the first quarter of 2012, compared to $2.3 billion in the first quarter of 2011. The provision for credit losses for the first quarter of 2012 reflects stabilizing expected loss severity and a decline in the number of seriously delinquent loan additions, while the first quarter of 2011 reflects worsening expected loss severity and higher modification volumes offset by a decline in the rate at which seriously delinquent loans ultimately transition to a loss event.
 
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Single-family credit losses as a percentage of the average balance of the single-family credit guarantee portfolio and HFA-related guarantees were 79 basis points and 71 basis points for the first quarters of 2012 and 2011, respectively. Charge-offs, net of recoveries, associated with single-family loans were $3.3 billion and $3.0 billion in the first quarters of 2012 and 2011, respectively. See “RISK MANAGEMENT — Credit Risk — Mortgage Credit Risk — Single-Family Mortgage Credit Risk” for further information on our single-family credit guarantee portfolio, including credit performance, charge-offs, and our non-performing assets.
 
The serious delinquency rate on our single-family credit guarantee portfolio was 3.51% and 3.58% as of March 31, 2012 and December 31, 2011, respectively, and declined during the first quarter of 2012 primarily due to a high volume of foreclosure transfers and a slowdown in new serious delinquencies. Our serious delinquency rate remains high compared to historical levels due to the continued weakness in home prices, persistently high unemployment, extended foreclosure timelines, and continued challenges faced by servicers processing large volumes of problem loans. In addition, our serious delinquency rate was adversely impacted by the decline in the size of our single-family credit guarantee portfolio in the first quarter of 2012 because this rate is calculated on a smaller number of loans at the end of the period.
 
Segment Earnings REO operations expense was $172 million and $257 million in the first quarters of 2012, and 2011, respectively. The decrease in the first quarter of 2012, compared to the first quarter of 2011, was primarily due to stabilizing home prices in certain geographical areas with significant REO activity, which resulted in gains on disposition of properties as well as lower write-downs of single-family REO inventory during the first quarter of 2012. However, we experienced lower recoveries on REO properties during the first quarter of 2012, compared to the first quarter of 2011, primarily due to reduced recoveries from mortgage insurers due, in part to the continued weakness in the financial condition of our mortgage insurance counterparties, and a decline in reimbursements of losses from seller/servicers associated with repurchase requests.
 
Our REO inventory (measured in number of properties) declined 2% from December 31, 2011 to March 31, 2012 as the volume of single-family REO dispositions exceeded the volume of single-family REO acquisitions. We continued to experience high REO disposition severity ratios on sales of our REO inventory during the first quarter of 2012. We believe our single-family REO acquisition volume and single-family credit losses in the first quarter of 2012 have been less than they otherwise would have been due to delays in the single-family foreclosure process, particularly in states that require a judicial foreclosure process.
 
Multifamily
 
The table below presents the Segment Earnings of our Multifamily segment.
 
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Table 15 — Segment Earnings and Key Metrics — Multifamily(1)
 
                 
    Three Months Ended March 31,  
    2012     2011  
    (dollars in millions)  
 
Segment Earnings:
               
Net interest income
  $ 318     $ 279  
(Provision) benefit for credit losses
    19       60  
Non-interest income (loss):
               
Management and guarantee income
    33       28  
Net impairment of available-for-sale securities recognized in earnings
    (16 )     (135 )
Gains (losses) on sale of mortgage loans
    54       83  
Gains (losses) on mortgage loans recorded at fair value
    177       50  
Other non-interest income (loss)
    109       56  
                 
Total non-interest income (loss)
    357       82  
                 
Non-interest expense:
               
Administrative expenses
    (52 )     (51 )
REO operations income (expense)
    1        
Other non-interest expense
    (15 )     (13 )
                 
Total non-interest expense
    (66 )     (64 )
                 
Segment Earnings before income tax benefit (expense)
    628       357  
Income tax benefit (expense)
    (4 )     2  
                 
Segment Earnings, net of taxes
    624       359  
Total other comprehensive income, net of taxes
    900       942  
                 
Comprehensive income
  $ 1,524     $ 1,301  
                 
Key metrics:
               
Balances and Volume:
               
Average balance of Multifamily loan portfolio
  $ 83,130     $ 85,779  
Average balance of Multifamily guarantee portfolio
  $ 36,645     $ 25,312  
Average balance of Multifamily investment securities portfolio
  $ 58,028     $ 62,842  
Multifamily new loan purchase and other guarantee commitment volume
  $ 5,751     $ 3,049  
Multifamily units financed from new volume activity
    86,431       52,641  
Multifamily Other Guarantee Transaction issuance
  $ 3,139     $ 2,906  
Yield and Rate:
               
Net interest yield — Segment Earnings basis (annualized)
    0.90 %     0.75 %
Average Management and guarantee fee rate, in bps (annualized)(2)
    38.7       46.8  
Credit:
               
Delinquency rate:
               
Credit-enhanced loans, at period end
    0.39 %     0.75 %
Non-credit-enhanced loans, at period end
    0.16 %     0.25 %
Total delinquency rate, at period end(3)
    0.23 %     0.36 %
Allowance for loan losses and reserve for guarantee losses, at period end
  $ 525     $ 747  
Allowance for loan losses and reserve for guarantee losses, in bps
    43.6       67.4  
Credit losses, in bps (annualized)(4)
          4.2  
REO inventory, at net carrying value
  $ 121     $ 115  
REO inventory, at period end (number of properties)
    16       15  
(1)  For reconciliations of Segment Earnings line items to the comparable line items in our consolidated financial statements prepared in accordance with GAAP, see “NOTE 13: SEGMENT REPORTING — Table 13.2 — Segment Earnings and Reconciliation to GAAP Results.”
(2)  Represents Multifamily Segment Earnings — management and guarantee income, excluding prepayment and certain other fees, divided by the sum of the average balance of the multifamily guarantee portfolio and the average balance of guarantees associated with the HFA initiative, excluding certain bonds under the NIBP.
(3)  See “RISK MANAGEMENT — Credit Risk — Mortgage Credit Risk — Multifamily Mortgage Credit Risk” for information on our reported multifamily delinquency rate.
(4)  Calculated as the amount of multifamily credit losses divided by the sum of the average carrying value of our multifamily loan portfolio and the average balance of the multifamily guarantee portfolio, including multifamily HFA initiative guarantees.
 
Segment Earnings for our Multifamily segment increased to $624 million in the first quarter of 2012, compared to $359 million in the first quarter of 2011, primarily due to lower impairment associated with available-for-sale CMBS and higher gains on mortgage loans recorded at fair value in the first quarter of 2012. Our comprehensive income for our Multifamily segment was $1.5 billion in the first quarter of 2012, consisting of: (a) Segment Earnings of $0.6 billion; and (b) $0.9 billion of total other comprehensive income, which was mainly attributable to favorable changes in fair value of available-for-sale CMBS in the first quarter of 2012.
 
Our multifamily loan purchase and guarantee volume increased to $5.8 billion for first quarter of 2012, compared to $3.0 billion during the first quarter of 2011, as strong volumes from late in 2011 carried into the first quarter of 2012. However, we anticipate the growth in our purchase and guarantee volumes will slow for the remainder of the year, ultimately reflecting a more modest increase in 2012, compared to 2011. We completed Other Guarantee Transactions of $3.1 billion and $2.9 billion in UPB of multifamily loans in the first quarters of 2012 and 2011, respectively. The UPB of the total multifamily portfolio increased slightly to $177.4 billion at March 31, 2012 from $176.7 billion at December 31, 2011.
 
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Segment Earnings net interest income increased by $39 million, or 14%, to $318 million, in the first quarter of 2012 from $279 million in the first quarter of 2011, primarily due to the cumulative effect of new business volumes since 2008 which have higher yields relative to allocated funding costs. Net interest yield was 90 and 75 basis points in the first quarters of 2012 and 2011, respectively.
 
Segment Earnings non-interest income (loss) was $357 million and $82 million in the first quarters of 2012 and 2011, respectively. The increase in the first quarter of 2012 was primarily driven by lower security impairments on CMBS and increased gains recognized on mortgage loans recorded at fair value, reflecting favorable market spread movements and higher amounts of loans held for subsequent securitization. Segment Earnings gains (losses) on mortgage loans recorded at fair value are presented net of changes in fair value due to changes in interest rates.
 
While our Multifamily Segment Earnings management and guarantee income increased 18% in the first quarter of 2012 compared to the first quarter of 2011, the average management and guarantee fee rate on our guarantee portfolio declined to 39 basis points in the first quarter of 2012 from 47 basis points in the first quarter of 2011. The decline in our average management and guarantee fee rate in the first quarter of 2012 reflects the impact from our increased volume of Other Guarantee Transactions, which have lower credit risk associated with our guarantee (and thus we charge a lower rate) relative to other issued guarantees because these transactions contain significant levels of credit enhancement through subordination.
 
Multifamily credit losses as a percentage of the combined average balance of our multifamily loan and guarantee portfolios were 0 and 4 basis points in the first quarters of 2012 and 2011, respectively. Our Multifamily segment recognized a benefit for credit losses of $19 million and $60 million in the first quarters of 2012 and 2011, respectively. Our loan loss reserves associated with our multifamily mortgage portfolio were $525 million and $545 million as of March 31, 2012 and December 31, 2011, respectively. The decline in our loan loss reserves in the first quarter of 2012 was primarily driven by the increased seasoning of our portfolio and the lower level of estimated incurred credit losses based on our historical experience.
 
The credit quality of the multifamily mortgage portfolio remains strong, as evidenced by low delinquency rates and credit losses, which we believe reflects prudent underwriting practices. The delinquency rate for loans in the multifamily mortgage portfolio was 0.23% and 0.22%, as of March 31, 2012 and December 31, 2011, respectively. As of March 31, 2012, approximately half of the multifamily loans that were two or more monthly payments past due, measured on a UPB basis, had credit enhancements that we currently believe will mitigate our expected losses on those loans. We expect our multifamily delinquency rate to remain relatively low during the remainder of 2012. See “RISK MANAGEMENT — Credit Risk — Mortgage Credit Risk — Multifamily Mortgage Credit Risk” for further information about our reported multifamily delinquency rates and credit enhancements on multifamily loans. For further information on delinquencies, including geographical and other concentrations, see “NOTE 15: CONCENTRATION OF CREDIT AND OTHER RISKS.”
 
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 information concerning certain significant accounting policies and estimates applied in determining our reported financial position.
 
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. Securities purchased under agreements to resell principally consist of short-term contractual agreements such as reverse repurchase agreements involving Treasury and agency securities.
 
The short-term assets on our consolidated balance sheets also include those related to our consolidated VIEs, which are comprised primarily of restricted cash and cash equivalents at March 31, 2012. These short-term assets, related to our consolidated VIEs, increased by $2.7 billion from December 31, 2011 to March 31, 2012, primarily due to an increase in the level of refinancing activity.
 
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Excluding amounts related to our consolidated VIEs, we held $8.6 billion and $28.4 billion of cash and cash equivalents, no federal funds sold, and $21.3 billion and $12.0 billion of securities purchased under agreements to resell at March 31, 2012 and December 31, 2011, respectively. The aggregate decrease in these assets was primarily driven by a decline in funding needs for debt redemptions. In addition, excluding amounts related to our consolidated VIEs, we held on average $27.6 billion of cash and cash equivalents and $24.4 billion of federal funds sold and securities purchased under agreements to resell during the three months ended March 31, 2012.
 
For information regarding our liquidity management practices and policies, see “LIQUIDITY AND CAPITAL RESOURCES.”
 
Investments in Securities
 
The table below provides detail regarding our investments in securities as of March 31, 2012 and December 31, 2011. The table does not include our holdings of single-family PCs and certain Other Guarantee Transactions as of March 31, 2012 and December 31, 2011. For information on our holdings of such securities, see “Table 11 — Composition of Segment Mortgage Portfolios and Credit Risk Portfolios.”
 
Table 16 — Investments in Securities
 
                 
    Fair Value  
    March 31, 2012     December 31, 2011  
    (in millions)  
 
Investments in securities:
               
Available-for-sale:
               
Mortgage-related securities:
               
Freddie Mac(1)
  $ 76,163     $ 81,092  
Subprime
    27,145       27,999  
CMBS
    54,753       55,663  
Option ARM
    5,818       5,865  
Alt-A and other
    11,094       10,879  
Fannie Mae
    18,897       20,322  
Obligations of states and political subdivisions
    7,565       7,824  
Manufactured housing
    748       766  
Ginnie Mae
    239       249  
                 
Total available-for-sale mortgage-related securities
    202,422       210,659  
                 
Total investments in available-for-sale securities
    202,422       210,659  
                 
Trading:
               
Mortgage-related securities:
               
Freddie Mac(1)
    14,504       16,047  
Fannie Mae
    13,692       15,165  
Ginnie Mae
    151       156  
Other
    153       164  
                 
Total trading mortgage-related securities
    28,500       31,532  
                 
Non-mortgage-related securities:
               
Asset-backed securities
    695       302  
Treasury bills
    3,000       100  
Treasury notes
    23,164       24,712  
FDIC-guaranteed corporate medium-term notes
    2,960       2,184  
                 
Total trading non-mortgage-related securities
    29,819       27,298  
                 
Total investments in trading securities
    58,319       58,830  
                 
Total investments in securities
  $ 260,741     $ 269,489  
                 
(1)  For information on the types of instruments that are included, see “NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES — Investments in Securities” in our 2011 Annual Report.
 
Non-Mortgage-Related Securities
 
Our investments in non-mortgage-related securities provide an additional source of liquidity. We held investments in non-mortgage-related securities classified as trading of $29.8 billion and $27.3 billion as of March 31, 2012 and December 31, 2011, respectively. While balances may fluctuate from period to period, we continue to meet required liquidity and contingency levels.
 
Mortgage-Related Securities
 
Our investments in mortgage-related securities consist of securities issued by Fannie Mae, Ginnie Mae, and other financial institutions. We also invest in our own mortgage-related securities. However, the single-family PCs and certain Other Guarantee Transactions we purchase as investments are not accounted for as investments in securities because we recognize the underlying mortgage loans on our consolidated balance sheets through consolidation of the related trusts.
 
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The table below provides the UPB of our investments in mortgage-related securities classified as available-for-sale or trading on our consolidated balance sheets. The table below does not include our holdings of our own single-family PCs and certain Other Guarantee Transactions. For further information on our holdings of such securities, see “Table 11 — Composition of Segment Mortgage Portfolios and Credit Risk Portfolios.”
 
Table 17 — Characteristics of Mortgage-Related Securities on Our Consolidated Balance Sheets
 
                                                 
    March 31, 2012     December 31, 2011  
    Fixed
    Variable
          Fixed
    Variable
       
    Rate     Rate(1)     Total     Rate     Rate(1)     Total  
    (in millions)  
 
Freddie Mac mortgage-related securities:(2)
                                               
Single-family
  $ 68,545     $ 9,064     $ 77,609     $ 72,795     $ 9,753     $ 82,548  
Multifamily
    859       1,755       2,614       1,216       1,792       3,008  
                                                 
Total Freddie Mac mortgage-related securities
    69,404       10,819       80,223       74,011       11,545       85,556  
                                                 
Non-Freddie Mac mortgage-related securities:
                                               
Agency securities:(3)
                                               
Fannie Mae:
                                               
Single-family
    14,859       14,908       29,767       16,543       15,998       32,541  
Multifamily
    47       76       123       52       76       128  
Ginnie Mae:
                                               
Single-family
    243       100       343       253       104       357  
Multifamily
    16             16       16             16  
                                                 
Total Non-Freddie Mac agency securities
    15,165       15,084       30,249       16,864       16,178       33,042  
                                                 
Non-agency mortgage-related securities:
                                               
Single-family:(4)
                                               
Subprime
    332       47,519       47,851       336       48,696       49,032  
Option ARM
          13,508       13,508             13,949       13,949  
Alt-A and other
    2,047       14,272       16,319       2,128       14,662       16,790  
CMBS
    19,113       33,122       52,235       19,735       34,375       54,110  
Obligations of states and political subdivisions(5)
    7,448       22       7,470       7,771       22       7,793  
Manufactured housing
    797       138       935       831       129       960  
                                                 
Total non-agency mortgage-related securities(6)
    29,737       108,581       138,318       30,801       111,833       142,634  
                                                 
Total UPB of mortgage-related securities
  $ 114,306     $ 134,484       248,790     $ 121,676     $ 139,556       261,232  
                                                 
Premiums, discounts, deferred fees, impairments of UPB and other basis adjustments
                    (12,724 )                     (12,363 )
Net unrealized (losses) on mortgage-related securities, pre-tax
                    (5,144 )                     (6,678 )
                                                 
Total carrying value of mortgage-related securities
                  $ 230,922                     $ 242,191  
                                                 
(1)  Variable-rate mortgage-related securities include those with a contractual coupon rate that, prior to contractual maturity, is either scheduled to change or is subject to change based on changes in the composition of the underlying collateral.
(2)  When we purchase REMICs and Other Structured Securities and certain Other Guarantee Transactions that we have issued, we account for these securities as investments in debt securities as we are investing in the debt securities of a non-consolidated entity. We do not consolidate our resecuritization trusts since we are not deemed to be the primary beneficiary of such trusts. We are subject to the credit risk associated with the mortgage loans underlying our Freddie Mac mortgage-related securities. Mortgage loans underlying our issued single-family PCs and certain Other Guarantee Transactions are recognized on our consolidated balance sheets as held-for-investment mortgage loans, at amortized cost. See “NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES — Investments in Securities” in our 2011 Annual Report for further information.
(3)  Agency securities are generally not separately rated by nationally recognized statistical rating organizations, but have historically been viewed as having a level of credit quality at least equivalent to non-agency mortgage-related securities AAA-rated or equivalent.
(4)  For information about how these securities are rated, see “Table 23 — Ratings of Non-Agency Mortgage-Related Securities Backed by Subprime, Option ARM, Alt-A and Other Loans, and CMBS.”
(5)  Consists of housing revenue bonds. Approximately 36% and 37% of these securities held at March 31, 2012 and December 31, 2011, respectively, were AAA-rated as of those dates, based on the UPB and the lowest rating available.
(6)  Credit ratings for most non-agency mortgage-related securities are designated by no fewer than two nationally recognized statistical rating organizations. Approximately 21% of total non-agency mortgage-related securities held at both March 31, 2012 and December 31, 2011 were AAA-rated as of those dates, based on the UPB and the lowest rating available.
 
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The table below provides the UPB and fair value of our investments in mortgage-related securities classified as available-for-sale or trading on our consolidated balance sheets.
 
Table 18 — Additional Characteristics of Mortgage-Related Securities on Our Consolidated Balance Sheets
 
                                 
    March 31, 2012     December 31, 2011  
    UPB     Fair Value     UPB     Fair Value  
    (in millions)  
 
Agency pass-through securities(1)
  $ 22,093     $ 23,940     $ 24,283     $ 26,193  
Agency REMICs and Other Structured Securities:
                               
Interest-only securities(2)
          2,725             2,863  
Principal-only securities(3)
    3,284       3,057       3,569       3,344  
Inverse floating-rate securities(4)
    4,439       6,165       4,839       6,826  
Other Structured Securities
    80,656       87,759       85,907       93,805  
                                 
Total agency securities
    110,472       123,646       118,598       133,031  
Non-agency securities(5)
    138,318       107,276       142,634       109,160  
                                 
Total mortgage-related securities
  $ 248,790     $ 230,922     $ 261,232     $ 242,191  
                                 
(1)  Represents an undivided beneficial interest in trusts that hold pools of mortgages.
(2)  Represents securities where the holder receives only the interest cash flows.
(3)  Represents securities where the holder receives only the principal cash flows.
(4)  Represents securities where the holder receives interest cash flows that change inversely with the reference rate (i.e. higher cash flows when interest rates are low and lower cash flows when interest rates are high). Additionally, these securities receive a portion of principal cash flows associated with the underlying collateral.
(5)  Includes fair values of $3 million and $2 million of interest-only securities at March 31, 2012 and December 31, 2011, respectively.
 
The total UPB of our investments in mortgage-related securities on our consolidated balance sheets decreased from $261.2 billion at December 31, 2011 to $248.8 billion at March 31, 2012, while the fair value of these investments decreased from $242.2 billion at December 31, 2011 to $230.9 billion at March 31, 2012. The reduction resulted from our purchase activity remaining less than liquidations, consistent with our efforts to reduce our mortgage-related investments portfolio, as described in “EXECUTIVE SUMMARY — Limits on Investment Activity and Our Mortgage-Related Investments Portfolio.”
 
The table below summarizes our mortgage-related securities purchase activity for the three months ended March 31, 2012 and 2011. The purchase activity includes single-family PCs and certain Other Guarantee Transactions issued by trusts that we consolidated. Purchases of single-family PCs and certain Other Guarantee Transactions issued by trusts that we consolidated are recorded as an extinguishment of debt securities of consolidated trusts held by third parties on our consolidated balance sheets.
 
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Table 19 — Mortgage-Related Securities Purchase Activity(1)
 
                 
    Three Months Ended
 
    March 31,  
    2012     2011  
    (in millions)  
 
Non-Freddie Mac mortgage-related securities purchased for resecuritization:
               
Ginnie Mae Certificates
  $ 5     $ 16  
Non-agency mortgage-related securities purchased for Other Guarantee Transactions
    3,124       2,879  
                 
Total non-Freddie Mac mortgage-related securities purchased for resecuritization
    3,129       2,895  
                 
Non-Freddie Mac mortgage-related securities purchased as investments in securities:
               
Agency securities:
               
Fannie Mae:
               
Fixed-rate
          1,019  
Variable-rate
    50       168  
                 
Total agency securities
    50       1,187  
                 
Non-agency mortgage-related securities:
               
CMBS:
               
Variable-rate
    10        
                 
Total non-agency mortgage-related securities
    10        
                 
Total non-Freddie Mac mortgage-related securities purchased as investments in securities
    60       1,187  
                 
Total non-Freddie Mac mortgage-related securities purchased
  $ 3,189     $ 4,082  
                 
Freddie Mac mortgage-related securities purchased:
               
Single-family:
               
Fixed-rate
  $ 3,465     $ 36,679  
Variable-rate
    132       2,542  
Multifamily:
               
Fixed-rate
          25  
                 
Total Freddie Mac mortgage-related securities purchased
  $ 3,597     $ 39,246  
                 
(1)  Based on UPB. Excludes mortgage-related securities traded but not yet settled.
 
During the three months ended March 31, 2012, we reduced our participation in dollar roll transactions, which were primarily used to support the market and pricing of our PCs, as compared to the three months ended March 31, 2011. When these transactions involve our consolidated PC trusts, the purchase and sale represents an extinguishment and issuance of debt securities, respectively, and impacts our net interest income and recognition of gain or loss on the extinguishment of debt on our consolidated statements of comprehensive income. These transactions can cause short-term fluctuations in the balance of our mortgage-related investments portfolio. The purchases during the three months ended March 31, 2011 reflected in “Table 19 — Mortgage-Related Securities Purchase Activity” are attributed primarily to these transactions. For more information, see “BUSINESS — Our Business Segments — Investments Segment — PC Support Activities” and “RISK FACTORS — Competitive and Market Risks — Any decline in the price performance of or demand for our PCs could have an adverse effect on the volume and profitability of our new single-family guarantee business” in our 2011 Annual Report.
 
Unrealized Losses on Available-For-Sale Mortgage-Related Securities
 
At March 31, 2012, our gross unrealized losses, pre-tax, on available-for-sale mortgage-related securities were $18.7 billion, compared to $20.1 billion at December 31, 2011. The decrease was primarily due to fair value gains related to the movement of non-agency mortgage-related securities with unrealized losses towards maturity and the recognition in earnings of other-than-temporary impairments on our non-agency mortgage-related securities. We believe the unrealized losses related to these securities at March 31, 2012 were mainly attributable to poor underlying collateral performance, limited liquidity and large risk premiums in the market for residential non-agency mortgage-related securities. All available-for-sale securities in an unrealized loss position are evaluated to determine if the impairment is other-than-temporary. See “Total Equity (Deficit)” and “NOTE 7: INVESTMENTS IN SECURITIES” for additional information regarding unrealized losses on our available-for-sale securities.
 
Higher-Risk Components of Our Investments in Mortgage-Related Securities
 
As discussed below, we have exposure to subprime, option ARM, interest-only, 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.
 
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  •  Single-family Freddie Mac mortgage-related securities:  We hold certain Other Guarantee Transactions as part of our investments in securities. There are subprime and option ARM loans underlying some of these Other Guarantee Transactions. For more information on single-family loans with certain higher-risk characteristics underlying our issued securities, see “RISK MANAGEMENT — Credit Risk — Mortgage Credit Risk.”
 
Non-Agency Mortgage-Related Securities Backed by Subprime, Option ARM, and Alt-A Loans
 
We categorize our investments in non-agency mortgage-related securities as subprime, option ARM, or Alt-A if the securities were identified as such based on information provided to us when we entered into these transactions. We have not identified option ARM, CMBS, obligations of states and political subdivisions, and manufactured housing securities as either subprime or Alt-A securities. Since the first quarter of 2008, we have not purchased any non-agency mortgage-related securities backed by subprime, option ARM, or Alt-A loans. The two tables below present information about our holdings of our available-for-sale non-agency mortgage-related securities backed by subprime, option ARM and Alt-A loans.
 
Table 20 — Non-Agency Mortgage-Related Securities Backed by Subprime First Lien, Option ARM, and Alt-A Loans and Certain Related Credit Statistics(1)
 
                                         
    As of
    3/31/2012   12/31/2011   9/30/2011   6/30/2011   3/31/2011
    (dollars in millions)
 
UPB:
                                       
Subprime first lien(2)
  $ 47,478     $ 48,644     $ 49,794     $ 51,070     $ 52,403  
Option ARM
    13,508       13,949       14,351       14,778       15,232  
Alt-A(3)
    13,885       14,260       14,643       15,059       15,487  
Gross unrealized losses, pre-tax:(4)
                                       
Subprime first lien(2)
  $ 12,661     $ 13,401     $ 14,132     $ 13,764     $ 12,481  
Option ARM
    2,909       3,169       3,216       3,099       3,170  
Alt-A(3)
    2,094       2,612       2,468       2,171       1,941  
Present value of expected future credit losses:(5)
                                       
Subprime first lien(2)
  $ 7,325     $ 6,746     $ 5,414     $ 6,487     $ 6,612  
Option ARM
    3,908       4,251       4,434       4,767       4,993  
Alt-A(3)
    2,237       2,235       2,204       2,310       2,401  
Collateral delinquency rate:(6)
                                       
Subprime first lien(2)
    42 %     42 %     42 %     42 %     44 %
Option ARM
    43       44       44       44       44  
Alt-A(3)
    25       25       25       26       26  
Average credit enhancement:(7)
                                       
Subprime first lien(2)
    20 %     21 %     22 %     23 %     24 %
Option ARM
    6       7       8       10       11  
Alt-A(3)
    6       7       7       8       8  
Cumulative collateral loss:(8)
                                       
Subprime first lien(2)
    23 %     22 %     21 %     20 %     19 %
Option ARM
    18       17       16       15       14  
Alt-A(3)
    9       8       8       7       7  
(1)  See “Ratings of Non-Agency Mortgage-Related Securities” for additional information about these securities.
(2)  Excludes non-agency mortgage-related securities backed exclusively by subprime second liens. Certain securities identified as subprime first lien may be backed in part by subprime second lien loans, as the underlying loans of these securities were permitted to include a small percentage of subprime second lien loans.
(3)  Excludes non-agency mortgage-related securities backed by other loans, which are primarily comprised of securities backed by home equity lines of credit.
(4)  Represents the aggregate of the amount by which amortized cost, after other-than-temporary impairments, exceeds fair value measured at the individual lot level.
(5)  Represents our estimate of future contractual cash flows that we do not expect to collect, discounted at the effective interest rate implicit in the security at the date of acquisition. This discount rate is only utilized to analyze the cumulative credit deterioration for securities since acquisition and may be lower than the discount rate used to measure ongoing other-than-temporary impairment to be recognized in earnings for securities that have experienced a significant improvement in expected cash flows since the last recognition of other-than-temporary impairment recognized in earnings.
(6)  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.
(7)  Reflects the ratio of the current principal amount of the securities issued by a trust that will absorb losses in the trust before any losses are allocated to securities that we own. Percentage generally calculated based on: (a) the total UPB of securities subordinate to the securities we own, divided by (b) the total UPB of all of the securities issued by the trust (excluding notional balances). Only includes credit enhancement provided by subordinated securities; excludes credit enhancement provided by bond insurance, overcollateralization and other forms of credit enhancement.
(8)  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 non-agency mortgage-related securities backed by subprime, option ARM, and Alt-A loans were structured to include credit enhancements, particularly through subordination and other structural enhancements.
 
For purposes of our cumulative credit deterioration analysis, our estimate of the present value of expected future credit losses on our non-agency mortgage-related securities increased to $14.2 billion at March 31, 2012 from $14.0 billion at December 31, 2011. All of these amounts have been reflected in our net impairment of available-for-sale
 
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securities recognized in earnings in this period or prior periods. The increase in the present value of expected future credit losses was primarily due to our expectation of slower prepayments on our non-agency mortgage-related securities.
 
Table 21 — Non-Agency Mortgage-Related Securities Backed by Subprime, Option ARM, Alt-A and Other Loans(1)
 
                                         
    Three Months Ended
    3/31/2012   12/31/2011   9/30/2011   6/30/2011   3/31/2011
    (in millions)
 
Principal repayments and cash shortfalls:(2)
                                       
Subprime:
                                       
Principal repayments
  $ 1,175     $ 1,159     $ 1,287     $ 1,341     $ 1,361  
Principal cash shortfalls
    6       7       6       10       14  
Option ARM:
                                       
Principal repayments
  $ 272     $ 298     $ 318     $ 331     $ 315  
Principal cash shortfalls
    169       103       109       123       100  
Alt-A and other:
                                       
Principal repayments
  $ 374     $ 385     $ 425     $ 464     $ 452  
Principal cash shortfalls
    97       80       81       84       81  
(1)  See “Ratings of Non-Agency Mortgage-Related Securities” for additional information about these securities.
(2)  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.
 
Since the beginning of 2007, we have incurred actual principal cash shortfalls of $1.8 billion on impaired non-agency mortgage-related securities, of which $275 million related to the three months ended March 31, 2012. Many of the trusts that issued non-agency mortgage-related securities we hold were structured so that realized collateral losses in excess of structural credit enhancements are not passed on to investors until the investment matures. We currently estimate that the future expected principal and interest shortfalls on non-agency mortgage-related securities we hold will be significantly less than the fair value declines experienced on these securities.
 
The investments in non-agency mortgage-related securities we hold backed by subprime, option ARM, and Alt-A loans were structured to include credit enhancements, particularly through subordination and other structural enhancements. Bond insurance is an additional credit enhancement covering some of the non-agency mortgage-related securities. These credit enhancements are the primary reason we expect our actual losses, through principal or interest shortfalls, to be less than the underlying collateral losses in the aggregate. It is difficult to estimate the point at which structural credit enhancements will be exhausted and we will incur actual losses. During the three months ended March 31, 2012, we continued to experience the erosion of structural credit enhancements on many securities backed by subprime, option ARM, and Alt-A loans due to poor performance of the underlying collateral. For more information, see “RISK MANAGEMENT — Credit Risk — Institutional Credit Risk — Bond Insurers.”
 
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Other-Than-Temporary Impairments on Available-For-Sale Mortgage-Related Securities
 
The table below provides information about the mortgage-related securities for which we recognized other-than-temporary impairments in earnings.
 
Table 22 — Net Impairment of Available-For-Sale Mortgage-Related Securities Recognized in Earnings
 
                                         
    Net Impairment of Available-For-Sale
 
    Securities Recognized in Earnings  
    Three Months Ended  
    3/31/2012     12/31/2011     9/30/2011     6/30/2011     3/31/2011  
    (in millions)  
 
Subprime:(1)
                                       
2006 & 2007
  $ 433     $ 472     $ 29     $ 67     $ 717  
Other years
    8       8       2       3       17  
                                         
Total subprime
    441       480       31       70       734  
                                         
Option ARM:
                                       
2006 & 2007
    32       40       15       43       232  
Other years
    16       19       4       22       49  
                                         
Total option ARM
    48       59       19       65       281  
                                         
Alt-A:
                                       
2006 & 2007
    16       22       29       16       15  
Other years
    36       21       10       15       23  
                                         
Total Alt-A
    52       43       39       31       38  
                                         
Other loans
    5       3       41       1       2  
                                         
Total subprime, option ARM, Alt-A and other loans
    546       585       130       167       1,055  
CMBS
    16       8       27       183       135  
Manufactured housing
    2       2       4       2       3  
                                         
Total available-for-sale mortgage-related securities
  $ 564     $ 595     $ 161     $ 352     $ 1,193  
                                         
(1)  Includes all first and second liens.
 
We recorded net impairment of available-for-sale mortgage-related securities recognized in earnings of $564 million during the three months ended March 31, 2012, compared to $1.2 billion during the three months ended March 31, 2011. We recorded these impairments because our estimate of the present value of expected future credit losses on certain individual securities increased during the period. These impairments include $546 million related to securities backed by subprime, option ARM, and Alt-A and other loans during the three months ended March 31, 2012, compared to $1.1 billion during the three months ended March 31, 2011. For more information, see “NOTE 7: INVESTMENTS IN SECURITIES — Other-Than-Temporary Impairments on Available-for-Sale Securities.”
 
While it is reasonably possible that collateral losses on our available-for-sale mortgage-related securities where we have not recorded an impairment charge in earnings could exceed our credit enhancement levels, we do not believe that those conditions were likely at March 31, 2012. Based on our conclusion that we do not intend to sell our remaining available-for-sale mortgage-related securities in an unrealized loss position and it is not more likely than not that we will be required to sell these securities before a sufficient time to recover all unrealized losses and our consideration of other available information, we have concluded that the reduction in fair value of these securities was temporary at March 31, 2012 and have recorded these fair value losses in AOCI.
 
The credit performance of loans underlying our holdings of non-agency mortgage-related securities has declined since 2007. This decline has been particularly severe for subprime, option ARM, and Alt-A and other loans. Economic factors negatively impacting the performance of our investments in non-agency mortgage-related securities include high unemployment, a large inventory of seriously delinquent mortgage loans and unsold homes, tight credit conditions, and weak consumer confidence during recent years. In addition, subprime, option ARM, and Alt-A and other loans backing the securities we hold have significantly greater concentrations in the states that are undergoing the greatest economic stress, such as California and Florida. Loans in these states undergoing economic stress are more likely to become seriously delinquent and the credit losses associated with such loans are likely to be higher than in other states.
 
We rely on bond insurance, including secondary coverage, to provide credit protection on some of our investments in non-agency mortgage-related securities. We have determined that there is substantial uncertainty surrounding certain bond insurers’ ability to pay our future claims on expected credit losses related to our non-agency mortgage-related security investments. This uncertainty contributed to the impairments recognized in earnings during the three months ended March 31, 2012 and 2011. See “RISK MANAGEMENT — Credit Risk — Institutional Credit Risk — Bond Insurers” and “NOTE 15: CONCENTRATION OF CREDIT AND OTHER RISKS — Bond Insurers” for additional information.
 
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Our assessments concerning other-than-temporary impairment require significant judgment and the use of models, and are subject to potentially significant change. In addition, changes in the performance of the individual securities and in mortgage market conditions may also affect our impairment assessments. Depending on the structure of the individual mortgage-related security and our estimate of collateral losses relative to the amount of credit support available for the tranches we own, a change in collateral loss estimates can have a disproportionate impact on the loss estimate for the security. Additionally, servicer performance, loan modification programs and backlogs, bankruptcy reform and other forms of government intervention in the housing market can significantly affect the performance of these securities, including the timing of loss recognition of the underlying loans and thus the timing of losses we recognize on our securities. Impacts related to changes in interest rates may also affect our losses due to the structural credit enhancements on our investments in non-agency mortgage-related securities. Foreclosure processing suspensions can also affect our losses. For example, while defaulted loans remain in the trusts prior to completion of the foreclosure process, the subordinate classes of securities issued by the securitization trusts may continue to receive interest payments, rather than absorbing default losses. This may reduce the amount of funds available for the tranches we own. Given the extent of the housing and economic downturn, it is difficult to estimate the future performance of mortgage loans and mortgage-related securities with high assurance, and actual results could differ materially from our expectations. Furthermore, various market participants could arrive at materially different conclusions regarding estimates of future cash shortfalls.
 
For more information on risks associated with the use of models, see “RISK FACTORS — Operational Risks — We face risks and uncertainties associated with the internal models that we use for financial accounting and reporting purposes, to make business decisions, and to manage risks. Market conditions have raised these risks and uncertainties” in our 2011 Annual Report. For more information on how delays in the foreclosure process, including delays related to concerns about deficiencies in foreclosure documentation practices, could adversely affect the values of, and the losses on, the non-agency mortgage-related securities we hold, see “RISK FACTORS — Operational Risks — We have incurred, and will continue to incur, expenses and we may otherwise be adversely affected by delays and deficiencies in the foreclosure process” in our 2011 Annual Report.
 
For information regarding our efforts to mitigate losses on our investments in non-agency mortgage-related securities, see “RISK MANAGEMENT — Credit Risk — Institutional Credit Risk.”
 
Ratings of Non-Agency Mortgage-Related Securities
 
The table below shows the ratings of non-agency mortgage-related securities backed by subprime, option ARM, Alt-A and other loans, and CMBS held at March 31, 2012 based on their ratings as of March 31, 2012, as well as those held at December 31, 2011 based on their ratings as of December 31, 2011 using the lowest rating available for each security.
 
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Table 23 — Ratings of Non-Agency Mortgage-Related Securities Backed by Subprime, Option ARM, Alt-A and Other Loans, and CMBS
 
                                         
                      Gross
    Bond
 
          Percentage
    Amortized
    Unrealized
    Insurance
 
Credit Ratings as of March 31, 2012   UPB     of UPB     Cost     Losses     Coverage(1)  
    (dollars in millions)  
 
Subprime loans:
                                       
AAA-rated
  $ 599       1 %   $ 599     $ (65 )   $ 18  
Other investment grade
    2,292       5       2,292       (291 )     383  
Below investment grade(2)
    44,960       94       36,859       (12,310 )     1,603  
                                         
Total
  $ 47,851       100 %   $ 39,750     $ (12,666 )   $ 2,004  
                                         
Option ARM loans:
                                       
AAA-rated
  $       %   $     $     $  
Other investment grade
    63             63       (6 )     63  
Below investment grade(2)
    13,445       100       8,651       (2,903 )     36  
                                         
Total
  $ 13,508       100 %   $ 8,714     $ (2,909 )   $ 99  
                                         
Alt-A and other loans:
                                       
AAA-rated
  $ 109       1 %   $ 109     $ (6 )   $ 6  
Other investment grade
    2,395       14       2,413       (302 )     296  
Below investment grade(2)
    13,815       85       10,723       (1,945 )     2,067  
                                         
Total
  $ 16,319       100 %   $ 13,245     $ (2,253 )   $ 2,369  
                                         
CMBS:
                                       
AAA-rated
  $ 25,479       49 %   $ 25,517     $ (17 )   $ 41  
Other investment grade
    23,801       45       23,754       (220 )     1,584  
Below investment grade(2)
    2,955       6       2,833       (463 )     1,695  
                                         
Total
  $ 52,235       100 %   $ 52,104     $ (700 )   $ 3,320  
                                         
Total subprime, option ARM, Alt-A and other loans, and CMBS:
                                       
AAA-rated
  $ 26,187       20 %   $ 26,225     $ (88 )   $ 65  
Other investment grade
    28,551       22       28,522       (819 )     2,326  
Below investment grade(2)
    75,175       58       59,066       (17,621 )     5,401  
                                         
Total
  $ 129,913       100 %   $ 113,813     $ (18,528 )   $ 7,792  
                                         
Total investments in mortgage-related securities
  $ 248,790                                  
Percentage of subprime, option ARM, Alt-A and other loans, and CMBS of total investments in mortgage-related securities
    52 %                                
                                         
Credit Ratings as of December 31, 2011                              
 
Subprime loans:
                                       
AAA-rated
  $ 1,000       2 %   $ 1,000     $ (115 )   $ 23  
Other investment grade
    2,643       5       2,643       (399 )     383  
Below investment grade(2)
    45,389       93       37,704       (12,894 )     1,641  
                                         
Total
  $ 49,032       100 %   $ 41,347     $ (13,408 )   $ 2,047  
                                         
Option ARM loans:
                                       
AAA-rated
  $       %   $     $     $  
Other investment grade
    76       1       76       (8 )     76  
Below investment grade(2)
    13,873       99       8,943       (3,161 )     39  
                                         
Total
  $ 13,949       100 %   $ 9,019     $ (3,169 )   $ 115  
                                         
Alt-A and other loans:
                                       
AAA-rated
  $ 350       2 %   $ 348     $ (20 )   $ 6  
Other investment grade
    2,237       13       2,260       (371 )     310  
Below investment grade(2)
    14,203       85       11,053       (2,421 )     2,139  
                                         
Total
  $ 16,790       100 %   $ 13,661     $ (2,812 )   $ 2,455  
                                         
CMBS:
                                       
AAA-rated
  $ 25,499       47 %   $ 25,540     $ (22 )   $ 42  
Other investment grade
    25,421       47       25,394       (346 )     1,585  
Below investment grade(2)
    3,190       6       2,851       (180 )     1,697  
                                         
Total
  $ 54,110       100 %   $ 53,785     $ (548 )   $ 3,324  
                                         
Total subprime, option ARM, Alt-A and other loans, and CMBS:
                                       
AAA-rated
  $ 26,849       20 %   $ 26,888     $ (157 )   $ 71  
Other investment grade
    30,377       23       30,373       (1,124 )     2,354  
Below investment grade(2)
    76,655       57       60,551       (18,656 )     5,516  
                                         
Total
  $ 133,881       100 %   $ 117,812     $ (19,937 )   $ 7,941  
                                         
Total investments in mortgage-related securities
  $ 261,232                                  
Percentage of subprime, option ARM, Alt-A and other loans, and CMBS of total investments in mortgage-related securities
    51 %                                
(1)  Represents the amount of UPB covered by bond insurance. This amount does not represent the maximum amount of losses we could recover, as the bond insurance also covers interest.
(2)  Includes securities with S&P equivalent credit ratings below BBB– and certain securities that are no longer rated.
 
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Mortgage Loans
 
The UPB of mortgage loans on our consolidated balance sheets declined to $1.80 trillion as of March 31, 2012, as compared to $1.82 trillion as of December 31, 2011. This decline reflects that the amount of single-family loan liquidations has exceeded new loan purchase and guarantee activity, which we believe is due, in part, to declines in the amount of single-family mortgage debt outstanding in the market and our competitive position compared to other market participants.
 
The UPB of unsecuritized single-family mortgage loans declined by $6.2 billion to $165.5 billion at March 31, 2012, from $171.7 billion at December 31, 2011, primarily due to our net loan securitization volume exceeding the amount of delinquent loans we removed from PC trusts during the first quarter of 2012. We expect that our holdings of unsecuritized single-family loans could increase in the remainder of 2012.
 
Based on the amount of the recorded investment of single-family loans on our consolidated balance sheets, approximately $70.0 billion, or 4.1%, of these loans as of March 31, 2012 were seriously delinquent, as compared to $72.4 billion, or 4.2%, as of December 31, 2011. This decline was primarily due to modifications, foreclosure transfers, and short sale activity. The majority of these seriously delinquent loans are unsecuritized, and were removed by us from our PC trusts. As guarantor, we have the right to remove mortgages that back our PCs from the underlying loan pools under certain circumstances. See “NOTE 5: INDIVIDUALLY IMPAIRED AND NON-PERFORMING LOANS” for more information on our removal of single-family loans from PC trusts.
 
The UPB of unsecuritized multifamily mortgage loans was $82.5 billion at March 31, 2012 and $82.3 billion at December 31, 2011. Our multifamily loan activity in the first quarters of 2012 and 2011 primarily consisted of purchases of loans intended for securitization and subsequent sale through Other Guarantee Transactions. To pursue our primary multifamily business strategy, we expect to continue to purchase and then securitize multifamily loans, which provides liquidity for the multifamily market, supports affordability for multifamily rental housing, and helps us manage our credit risks.
 
We maintain an allowance for loan losses on mortgage loans that we classify as held-for-investment on our consolidated balance sheets. Our reserve for guarantee losses is associated with Freddie Mac mortgage-related securities backed by multifamily loans, certain single-family Other Guarantee Transactions, and other guarantee commitments, for which we have incremental credit risk. Collectively, we refer to our allowance for loan losses and our reserve for guarantee losses as our loan loss reserves. Our loan loss reserves were $38.3 billion and $39.5 billion at March 31, 2012 and December 31, 2011, respectively, including $37.8 billion and $38.9 billion, respectively, related to single-family loans. At March 31, 2012 and December 31, 2011, our loan loss reserves, as a percentage of our total mortgage portfolio, excluding non-Freddie Mac securities, were 2.0% and 2.1%, respectively, and as a percentage of the UPB associated with our non-performing loans was 31.3% and 32.0%, respectively. See “RISK MANAGEMENT — Credit Risk — Mortgage Credit Risk” and “NOTE 4: MORTGAGE LOANS AND LOAN LOSS RESERVES” for further detail about the mortgage loans and associated allowance for loan losses recorded on our consolidated balance sheets.
 
The table below summarizes our purchase and guarantee activity in mortgage loans. This activity consists of: (a) mortgage loans underlying consolidated single-family PCs issued in the period (regardless of whether such securities are held by us or third parties); (b) single-family and multifamily mortgage loans purchased, but not securitized, in the
 
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period; and (c) mortgage loans underlying our mortgage-related financial guarantees issued in the period, which are not consolidated on our balance sheets.
 
Table 24 — Mortgage Loan Purchase and Other Guarantee Commitment Activity(1)
 
                                 
    Three Months Ended March 31,  
    2012     2011  
    UPB
    % of
    UPB
    % of
 
    Amount     Total     Amount     Total  
          (dollars in millions)        
 
Mortgage loan purchases and guarantee issuances:
                               
Single-family:
                               
30-year or more amortizing fixed-rate
  $ 61,847       56 %   $ 62,898       62 %
20-year amortizing fixed-rate
    8,410       8       6,715       7  
15-year amortizing fixed-rate
    29,574       26       22,110       22  
Adjustable-rate(2)
    5,152       5       5,741       6  
FHA/VA and other governmental
    90       <1       87       <1  
                                 
Total single-family(3)
    105,073       95       97,551       97  
                                 
Multifamily
    5,751       5       3,049       3  
                                 
Total mortgage loan purchases and other guarantee commitment activity(4)
  $ 110,824       100 %   $ 100,600       100 %
                                 
Percentage of mortgage purchases and other guarantee commitment activity with credit enhancements(5)
    9 %             7 %        
(1)  Based on UPB. Excludes mortgage loans traded but not yet settled. Excludes the removal of seriously delinquent loans and balloon/reset mortgages out of PC trusts. Includes other guarantee commitments associated with mortgage loans. See endnote (4) for further information.
(2)  Includes amortizing ARMs with 1-, 3-, 5-, 7-, and 10-year initial fixed-rate periods. We did not purchase any option ARM loans during the first quarters of 2012 or 2011.
(3)  Includes $8.6 billion and $7.3 billion of mortgage loans in excess of $417,000, which we refer to as conforming jumbo mortgages, for the first quarters of 2012 and 2011, respectively.
(4)  Includes issuances of other guarantee commitments on single-family loans of $2.3 billion and $1.8 billion and issuances of other guarantee commitments on multifamily loans of $0.1 billion and $0.2 billion during the first quarters of 2012 and 2011, respectively.
(5)  See “NOTE 4: MORTGAGE LOANS AND LOAN LOSS RESERVES — Credit Protection and Other Forms of Credit Enhancement” for further details on credit enhancement of mortgage loans in our multifamily mortgage and single-family credit guarantee portfolios.
 
See “RISK MANAGEMENT — Credit Risk — Mortgage Credit Risk” and “NOTE 15: CONCENTRATION OF CREDIT AND OTHER RISKS — Table 15.2 — Certain Higher-Risk Categories in the Single-Family Credit Guarantee Portfolio” for information about mortgage loans in our single-family credit guarantee portfolio that we believe have higher-risk characteristics.
 
Derivative Assets and Liabilities, Net
 
The composition of our derivative portfolio changes from period to period as a result of derivative purchases, terminations, or assignments prior to contractual maturity, and expiration of the derivatives at their contractual maturity. We classify net derivative interest receivable or payable, trade/settle receivable or payable, and cash collateral held or posted on our consolidated balance sheets in derivative assets, net and derivative liabilities, net. See “NOTE 10: DERIVATIVES” for additional information regarding our derivatives.
 
The table below shows the fair value for each derivative type, the weighted average fixed rate of our pay-fixed and receive-fixed swaps, and the maturity profile of our derivative positions reconciled to the amounts presented on our consolidated balance sheets as of March 31, 2012. A positive fair value in the table below for each derivative type is the estimated amount, prior to netting by counterparty, that we would be entitled to receive if the derivatives of that type were
 
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terminated. A negative fair value for a derivative type is the estimated amount, prior to netting by counterparty, that we would owe if the derivatives of that type were terminated.
 
Table 25 — Derivative Fair Values and Maturities
 
                                                 
    March 31, 2012  
    Notional or
          Fair Value(1)  
    Contractual
    Total Fair
    Less than
    1 to 3
    Greater than 3
    In Excess
 
    Amount(2)     Value(3)     1 Year     Years     and up to 5 Years     of 5 Years  
    (dollars in millions)  
 
Interest-rate swaps:
                                               
Receive-fixed:
                                               
Swaps
  $ 236,803     $ 9,080     $ 59     $ 519     $ 3,538     $ 4,964  
Weighted average fixed rate(4)
                    1.52 %     0.92 %     2.24 %     3.10 %
Forward-starting swaps(5)
    11,650       792                         792  
Weighted average fixed rate(4)
                    %     %     %     3.83 %
                                                 
Total receive-fixed
    248,453       9,872       59       519       3,538       5,756  
                                                 
Basis (floating to floating)
    2,400       2       (1 )           3        
Pay-fixed:
                                               
Swaps
    280,869       (26,292 )     (38 )     (2,647 )     (5,112 )     (18,495 )
Weighted average fixed rate(4)
                    0.95 %     3.11 %     2.83 %     3.68 %
Forward-starting swaps(5)
    15,704       (1,490 )                       (1,490 )
Weighted average fixed rate(4)
                    %     %     %     3.80 %
                                                 
Total pay-fixed
    296,573       (27,782 )     (38 )     (2,647 )     (5,112 )     (19,985 )
                                                 
Total interest-rate swaps
    547,426       (17,908 )     20       (2,128 )     (1,571 )     (14,229 )
                                                 
Option-based:
                                               
Call swaptions
                                               
Purchased
    52,500       7,766       1,789       3,382       555       2,040  
Written
    12,025       (886 )     (172 )     (557 )     (157 )      
Put swaptions
                                               
Purchased
    49,450       527       6       35       134       352  
Written
    250       (5 )     (5 )                  
Other option-based derivatives(6)
    34,365       2,029                         2,029  
                                                 
Total option-based
    148,590       9,431       1,618       2,860       532       4,421  
                                                 
Futures
    44,281       (66 )