10-Q 1 f71301e10vq.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, 2010
 
or
 
o   TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934.
 
For the transition period from                to
 
Commission File Number: 000-53330
 
 
Federal Home Loan Mortgage Corporation
(Exact name of registrant as specified in its charter)
 
Freddie Mac
     
Federally chartered corporation   52-0904874
(State or other jurisdiction of
incorporation or organization)
  (I.R.S. Employer
Identification No.)
     
8200 Jones Branch Drive, McLean, Virginia   22102-3110
(Address of principal executive offices)   (Zip Code)
 
(703) 903-2000
 
(Registrant’s telephone number, including area code)
 
Indicate by check mark whether the registrant:  (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.     x Yes  o No
 
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).     o Yes  o No
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
 
Large accelerated filer o Accelerated filer x
 
Non-accelerated filer (Do not check if a smaller reporting company) o Smaller reporting company o
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  o Yes   x No
 
As of April 21, 2010, there were 649,106,877 shares of the registrant’s common stock outstanding.
 


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FINANCIAL STATEMENTS
 
         
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PART I — FINANCIAL INFORMATION
 
This Quarterly Report on Form 10-Q includes forward-looking statements, which may include statements pertaining to the conservatorship and our current expectations and objectives for our efforts under the MHA Program and other programs to assist the U.S. residential mortgage market, our future business plans, liquidity, capital management, economic and market conditions and trends, market share, legislative and regulatory developments, implementation of new accounting standards, credit losses, internal control remediation efforts, and results of operations and financial condition on a GAAP, Segment Earnings and fair value basis. You should not rely unduly on our forward-looking statements. Actual results might differ significantly from those described in or implied by such forward-looking statements due to various factors and uncertainties, including those described in: (a) Management’s Discussion and Analysis, or MD&A, “MD&A — FORWARD-LOOKING STATEMENTS” and “RISK FACTORS” in this Form 10-Q and in the comparably captioned sections of our Annual Report on Form 10-K for the year ended December 31, 2009, or 2009 Annual Report; and (b) the “BUSINESS” section of our 2009 Annual Report. These forward-looking statements are made as of the date of this Form 10-Q and we undertake no obligation to update any forward-looking statement to reflect events or circumstances after the date of this Form 10-Q, or to reflect the occurrence of unanticipated events.
 
Throughout PART I of this Form 10-Q, we use certain acronyms and terms which are defined in the Glossary.
 
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 
EXECUTIVE SUMMARY
 
You should read this MD&A in conjunction with our consolidated financial statements and related notes for the three months ended March 31, 2010 and our 2009 Annual Report.
 
Overview
 
Freddie Mac was chartered by Congress in 1970 with a public mission to stabilize the nation’s residential mortgage markets and expand opportunities for home ownership and affordable rental housing. Our statutory mission is to provide liquidity, stability and affordability to the U.S. housing market. Our participation in the secondary mortgage market includes providing our credit guarantee for residential mortgages originated by mortgage lenders and investing in mortgage loans and mortgage-related securities. Through our credit guarantee activities, we securitize mortgage loans by issuing PCs to third-party investors. We also resecuritize mortgage-related securities that are issued by us or Ginnie Mae as well as private, or non-agency, entities by issuing Structured Securities to third-party investors. We guarantee multifamily mortgage loans that support housing revenue bonds issued by third parties and we guarantee other multifamily mortgage loans held by third parties.
 
Our financial results for the first quarter of 2010 and net worth as of March 31, 2010 were significantly adversely affected by changes in accounting principles, which resulted in a net decrease to total equity (deficit) as of January 1, 2010 of $11.7 billion. See “Changes in Accounting Standards Related to Accounting for Transfers of Financial Assets and Consolidation of VIEs” for additional information. We had a net loss attributable to Freddie Mac of $6.7 billion for the three months ended March 31, 2010. Total equity (deficit) was $(10.5) billion at March 31, 2010. The $10.5 billion deficit was primarily driven by: (a) a net decrease in total equity (deficit) of $11.7 billion due to the cumulative effect of the change in accounting principles; (b) our first quarter 2010 net loss of $6.7 billion reflecting the ongoing adverse conditions in the U.S. mortgage markets; and (c) the dividend payment of $1.3 billion to Treasury on the senior preferred stock, partially offset by a $4.8 billion decrease in unrealized losses recorded in AOCI primarily driven by improved values on the company’s available-for-sale securities. To address the deficit in our net worth, FHFA, as Conservator, will submit a draw request, on our behalf, to Treasury for $10.6 billion in funding under our Purchase Agreement with Treasury. Following receipt of the draw, we will have received an aggregate of $61.3 billion from Treasury under the Purchase Agreement.
 
Business Objectives
 
We continue to operate under the conservatorship that commenced on September 6, 2008, conducting our business under the direction of FHFA as our Conservator. We are focused on meeting the urgent liquidity needs of the U.S. residential mortgage market, lowering costs for borrowers and supporting the recovery of the housing market and U.S. economy. By continuing to provide access to funding for mortgage originators and, indirectly, for mortgage borrowers and through our role in the Obama Administration’s initiatives, including the MHA Program, we are working to meet the needs of the mortgage market by making homeownership and rental housing more affordable, reducing the number of foreclosures and helping families keep their homes.
 
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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. On March 23, 2010, the Secretary of the Treasury stated in congressional testimony that, after reform, the GSEs will not exist in the same form. On April 22, 2010, Treasury and HUD published seven questions soliciting public comment on the future of the housing finance system, including Freddie Mac and Fannie Mae, and the overall role of the federal government in housing policy. Comments on the questions must be submitted by July 21, 2010. While we are not aware of any current plans of our Conservator to significantly change our business structure in the near-term, Treasury and HUD, in consultation with other government agencies, are expected to develop legislative recommendations for the future of the GSEs.
 
Our business objectives and strategies have in some cases been altered since we entered conservatorship, and may continue to change. Certain changes to our business objectives and strategies are designed to provide support for the mortgage market in a manner that serves our public mission and other non-financial objectives, but may not contribute to profitability. Our efforts to help struggling homeowners and the mortgage market, in line with our mission, may help to mitigate our credit losses, but in some cases may increase our expenses or require us to forego revenue opportunities in the near term. There is significant uncertainty as to the ultimate impact that our efforts to aid the housing and mortgage markets, including our efforts in connection with the MHA Program, will have on our future capital or liquidity needs. We cannot estimate whether, or the extent to which, the costs we incur in the near term as a result of these efforts, which for the most part we are not reimbursed for, will be offset by the prevention or reduction of potential future costs. It is likely that the costs we incur related to loan modifications and other activities under HAMP, the MHA Program’s loan modification initiative, may be significant, to the extent that borrowers participate in this program in large numbers. For information on the MHA Program and our other efforts to assist the housing market, see “MHA PROGRAM AND OTHER EFFORTS TO ASSIST THE U.S. HOUSING MARKET.”
 
In a letter to the Chairmen and Ranking Members of the Congressional Banking and Financial Services Committees dated February 2, 2010, the Acting Director of FHFA stated that minimizing our credit losses is our central goal and that we will be limited to continuing our existing core business activities and taking actions necessary to advance the goals of the conservatorship. The Acting Director stated that permitting us to engage in new products is inconsistent with the goals of the conservatorship. In addition, the Acting Director stated that FHFA does not expect we will be a substantial buyer or seller of mortgages for our mortgage-related investments portfolio, except for purchases of delinquent mortgages out of PC pools. These restrictions could limit our ability to return to profitability in future periods.
 
While the conservatorship has benefited us through, for example, improved access to the debt markets because of the support we have received from Treasury and the Federal Reserve, we are also subject to certain constraints on our business activities by Treasury due to the terms of, and Treasury’s rights under, the Purchase Agreement.
 
Government Support for our Business
 
We are dependent upon the continued support of Treasury and FHFA in order to continue operating our business. In recent periods, we also received substantial support from the Federal Reserve.
 
Our ability to access funds from Treasury under the Purchase Agreement is critical to keeping us solvent and avoiding the appointment of a receiver by FHFA under statutory mandatory receivership provisions. To date, we have received an aggregate of $50.7 billion in funding under the Purchase Agreement. To address our deficit in net worth of $10.5 billion as of March 31, 2010, FHFA, as Conservator, will submit a draw request, on our behalf, to Treasury under the Purchase Agreement in the amount of $10.6 billion. We expect to receive these funds by June 30, 2010. Upon funding of the draw request: (a) the aggregate liquidation preference on the senior preferred stock owned by Treasury will increase from $51.7 billion to $62.3 billion; and (b) the corresponding annual cash dividends payable to Treasury will increase to $6.2 billion, which exceeds our annual historical earnings in most periods. We expect to make additional draws under the Purchase Agreement in future periods due to a variety of factors that could adversely affect our net worth.
 
To date, we have paid $5.6 billion in cash dividends on the senior preferred stock. Continued cash payment of senior preferred dividends combined with potentially substantial quarterly commitment fees payable to Treasury beginning in 2011 (the amounts of which must be determined by December 31, 2010), will have an adverse impact on our future financial condition and net worth. The payment of dividends on our senior preferred stock in cash reduces our net worth. For periods in which our earnings and other changes in equity do not result in positive net worth, such as the first quarter of 2010, draws under the Purchase Agreement effectively fund the cash payment of senior preferred dividends to Treasury.
 
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In November 2008, the Federal Reserve established programs to purchase: (a) our direct obligations and those of Fannie Mae and the FHLBs; and (b) mortgage-related securities issued by us, Fannie Mae and Ginnie Mae. According to information provided by the Federal Reserve, it held $66.4 billion of our direct obligations and had net purchases of $432.3 billion of our mortgage-related securities under these programs as of April 21, 2010. The Federal Reserve completed its purchases under these programs in March 2010. We have not experienced any immediate adverse effects on our business from the completion of these programs. However, it is difficult at this time to predict the impact that the completion of these programs will have on our business and mortgage market generally over time. For more information, see “LIQUIDITY AND CAPITAL RESOURCES — Liquidity” and “RISK FACTORS” in our 2009 Annual Report.
 
For more information on the terms of the conservatorship, the powers of our Conservator and the terms of the Purchase Agreement, see “BUSINESS — Conservatorship and Related Developments” in our 2009 Annual Report.
 
Changes in Accounting Standards Related to Accounting for Transfers of Financial Assets and Consolidation of VIEs
 
In June 2009, the FASB issued two new accounting standards that amended guidance applicable to the accounting for transfers of financial assets and the consolidation of VIEs. The guidance in these standards was effective for fiscal years beginning after November 15, 2009. The accounting standard for transfers of financial assets was applicable on a prospective basis to new transfers, while the accounting standard relating to consolidation of VIEs was applied prospectively to all entities within its scope as of the date of adoption. We adopted these new accounting standards prospectively for all existing VIEs effective January 1, 2010. The adoption of these two standards had a significant impact on our consolidated financial statements and other financial disclosures beginning in the first quarter of 2010.
 
We use securitization trusts in our securities issuance process. Prior to January 1, 2010, these trusts met the definition of QSPEs and were not subject to consolidation. Effective January 1, 2010, the concept of a QSPE was removed from GAAP and entities previously considered QSPEs were required to be evaluated for consolidation. Based on our consolidation evaluation, we determined that we are the primary beneficiary of trusts that issue our single-family PCs and certain Structured Transactions. As a result, a large portion of our off-balance sheet assets and liabilities will now be consolidated. Effective January 1, 2010, we consolidated these trusts and recognized their assets and liabilities at their unpaid principal balances using the practical expedient permitted upon adoption.
 
Upon consolidation, we recognized the mortgage loans as assets on our consolidated balance sheets and the debt securities issued by the securitization trusts as debt on our consolidated balance sheets. We also eliminated our investments in the debt securities issued by these trusts and the related guarantee accounting (e.g., guarantee asset, guarantee obligation, credit enhancements, etc.) associated with these trusts. After adoption of these new accounting standards, purchases of debt securities issued by these consolidated trusts are accounted for as extinguishments of debt, rather than investment securities. Further, separate management and guarantee fee income will not be recognized from these securitization trusts, and instead will be recognized as a portion of the interest income on the consolidated mortgage loans.
 
The adoption of these accounting principles resulted in an increase to our assets and liabilities of $1.5 trillion and a net decrease to total equity (deficit) as of January 1, 2010 of $11.7 billion, which includes changes to the opening balances of retained earnings (accumulated deficit) and AOCI, net of taxes. This net decrease was driven principally by: (a) the elimination of unrealized gains resulting from the extinguishment of PCs held as investment securities upon consolidation of the PC trusts, representing the difference between the unpaid principal balance of the loans underlying the PC trusts and the fair value of the PCs, including premiums, discounts and other basis adjustments; (b) the elimination of the guarantee asset and guarantee obligation established for guarantees issued to securitization trusts we consolidated; and (c) the application of our nonaccrual policy to delinquent mortgage loans consolidated as of January 1, 2010.
 
Because our results of operations for the first quarter of 2010 (on both a GAAP and segment basis) include the activities of the consolidated VIEs, they are not directly comparable with the results of operations for the first quarter of 2009, which reflect the accounting policies in effect during that time (i.e., securitization entities were accounted for off-balance sheet).
 
See “NOTE 2: CHANGE IN ACCOUNTING PRINCIPLES” to our consolidated financial statements for additional information regarding these changes and a related change to the amortization method for certain related deferred items.
 
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Results for the First Quarter of 2010
 
Financial Results
 
Net loss attributable to Freddie Mac was $6.7 billion and $10.0 billion for the first quarters of 2010 and 2009, respectively. Key highlights of our financial results for the first quarter of 2010 include:
 
  •  Net interest income for the first quarter of 2010 was significantly impacted by the changes in accounting standards adopted on January 1, 2010. As a result of these changes, net interest income for the first quarter of 2010 has the positive effect of including the coupon interest on our loans and the offsetting interest expense on debt of consolidated trusts held by third parties, which was previously recognized as management and guarantee fee income on single-family PCs and certain Structured Transactions. However, net interest income was negatively impacted by a significant increase in the amount of non-performing mortgage loans held in consolidated trusts that are now on our balance sheet, for which we do not recognize interest income. Net interest margin declined in the first quarter of 2010 compared to the first quarter of 2009, in large part because the net interest margin of our consolidated single-family trusts was lower than the net interest margin of our other interest-earning assets.
 
  •  Provision for credit losses decreased to $5.4 billion during the first quarter of 2010 compared to $8.9 billion in the first quarter of 2009, which was primarily due to less significant increases in delinquencies and average severity rates in the first quarter of 2010 as compared to the first quarter of 2009.
 
  •  Non-interest income (loss) was $(4.9) billion for the first quarter of 2010, compared to non-interest income (loss) of $(3.1) billion for the first quarter of 2009. This decline in the first quarter of 2010 was primarily due to higher losses on derivatives and investment securities, partially offset by lower net impairments of available-for-sale securities recognized in earnings, as compared to the first quarter of 2009.
 
  •  At March 31, 2010, our liabilities exceeded our assets under GAAP by $10.5 billion principally due to the impact of our adoption of the changes in accounting principles and the net loss for the quarter discussed above. Accordingly, we must obtain funding from Treasury pursuant to its commitment under the Purchase Agreement in order to avoid being placed into receivership by FHFA.
 
We expect a variety of factors will place downward pressure on our financial results in future periods, and could cause us to incur additional GAAP net losses. Key factors include the potential for: (a) continued weak conditions in the housing market, which could increase credit-related expenses and security impairments; and (b) adverse changes in interest rates and spreads, which could result in mark-to-market losses. Our continued efforts under the MHA Program and other government initiatives to support struggling homeowners may also have an adverse impact on our financial results. To the extent we incur GAAP net losses in future periods, we will likely need to take additional draws under the Purchase Agreement. In addition, due to the substantial dividend obligation on the senior preferred stock, we expect to continue to record net losses attributable to common stockholders in future periods. For a discussion of factors that could result in additional draws, see “LIQUIDITY AND CAPITAL RESOURCES — Capital Resources.”
 
Investment Activity Pursuant to the Purchase Agreement
 
Our mortgage-related investments portfolio under the Purchase Agreement is determined without giving effect to any change in accounting standards related to the transfer of financial assets and consolidation of VIEs or any similar accounting standard. Accordingly, for purposes of the portfolio limit, the single-family PCs and certain Structured Transactions purchased into the mortgage-related investments portfolio are considered assets rather than debt reductions. We disclose our mortgage assets on this basis monthly under the caption “Mortgage-Related Investments Portfolio — Ending Balance” in our Monthly Volume Summary reports, which are available on our website and in current reports on Form 8-K we file with the SEC.
 
The unpaid principal balance of our mortgage-related investments portfolio, for purposes of the limit imposed by the Purchase Agreement and FHFA regulation, was $753.3 billion at March 31, 2010, compared to $755.3 billion at December 31, 2009. The unpaid principal balance of our mortgage-related investments portfolio remained relatively flat primarily due to liquidations, offset by the purchase of $56.6 billion of delinquent loans from PC trusts, which resulted from our February 10, 2010 announcement that we would purchase substantially all of the single-family mortgage loans that are 120 days or more delinquent from our related fixed-rate and adjustable-rate PCs.
 
Under the terms of the Purchase Agreement, the unpaid principal balance of our mortgage-related investments portfolio calculated as discussed above may not exceed $810 billion as of December 31, 2010 and this limit will be reduced by 10% each year until it reaches $250 billion.
 
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Liquidity
 
We believe that the increased support provided by Treasury pursuant to the December 2009 amendment to the Purchase Agreement will be sufficient to enable us to maintain our access to the debt markets and ensure that we have adequate liquidity to conduct our normal business activities through December 31, 2012, although the costs of our debt funding could vary. Under the December 2009 amendment, the $200 billion cap on Treasury’s funding commitment will increase as necessary to accommodate any cumulative reduction in our net worth during 2010, 2011 and 2012. During the first quarter of 2010, the Federal Reserve continued to be an active purchaser in the secondary market of our long-term debt under its purchase program and spreads on our debt remained favorable relative to historical averages. The Federal Reserve completed its purchases under this program in March 2010. We have not experienced any immediate adverse effects on our business from the completion of this program. However, the completion of this program could, over time, negatively affect the availability of longer-term funding as well as the spreads on our debt, and thus increase our debt funding costs.
 
Single-Family and Multifamily Portfolio
 
The unpaid principal balance of our single-family credit guarantee portfolio decreased 1%, from $1.90 trillion at December 31, 2009 to $1.88 trillion at March 31, 2010. The unpaid principal balance of our multifamily mortgage portfolio decreased 1%, from $98.2 billion at December 31, 2009 to $97.2 billion at March 31, 2010. Our total non-performing assets were approximately 5.8% and 5.2% of our total mortgage portfolio, excluding non-Freddie Mac securities, at March 31, 2010 and December 31, 2009, respectively, and our loan loss reserves totaled 33.3% and 34.1% of our non-performing loans, respectively, as of such dates.
 
Segment Earnings
 
Our operations consist of three reportable segments, which are based on the type of business activities each performs — Investments, Single-family Guarantee and Multifamily. Certain activities that are not part of a segment are included in the All Other category.
 
We evaluate segment performance and allocate resources based on a Segment Earnings approach, subject to the conduct of our business under the direction of the Conservator. Beginning January 1, 2010, we revised our method for presenting Segment Earnings to reflect changes in how management measures and assesses the financial performance of each segment and the company as a whole. Under the revised method, the financial performance of our segments is measured based on each segment’s contribution to GAAP net income (loss). This change in method, in conjunction with our implementation of changes in accounting standards relating to transfers of financial assets and the consolidation of VIEs, resulted in significant changes to our presentation of Segment Earnings. In particular, under the revised method, Segment Earnings includes fair value adjustments, gains and losses on investment sales, loans purchased from PC pools and debt retirements that are included in our GAAP-basis earnings, but that had previously been excluded from or deferred in Segment Earnings. The accounting principles we apply to present certain line items in Segment Earnings for our reportable segments, in particular Segment Earnings net interest income and management and guarantee income, differ significantly from those applied in preparing the comparable line items in our consolidated financial statements in accordance with GAAP. Accordingly, the results of such line items differ significantly from, and should not be used as a substitute for, the comparable line items as determined in accordance with GAAP.
 
Under the revised method of presenting Segment Earnings, the All Other category consists of material corporate level expenses that are: (a) non-recurring in nature; and (b) based on management decisions outside the control of the management of our reportable segments. By recording these types of activities to the All Other category, we believe the financial results of our three reportable segments are more representative of the decisions and strategies that are executed within the reportable segments and provide greater comparability across time periods. Items included in the All Other category consist of: (a) the write-down of our LIHTC investments; and (b) the deferred tax asset valuation allowance associated with previously recognized income tax credits carried forward due to our tax net operating loss carryback. Other items previously recorded in the All Other category prior to the revision to our method for presenting Segment Earnings have been allocated to our three reportable segments.
 
Table 1 presents Segment Earnings by segment and the All Other category and includes a reconciliation of Segment Earnings to net (loss) attributable to Freddie Mac prepared in accordance with GAAP for the first quarter of 2009. While we restated Segment Earnings for the first quarter of 2009 to reflect the revisions to our method of evaluating the performance of our reportable segments, we did not restate Segment Earnings to include adjustments related to our adoption of the amendments to the accounting standards for transfers of financial assets and consolidation of VIEs. This change was applied prospectively, consistent with our GAAP financial results. As a result,
 
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our Segment Earnings results for the first quarter of 2010 are not directly comparable to the results for the first quarter of 2009.
 
Table 1 — Summary of Segment Earnings(1)
 
                 
    Three Months Ended
 
    March 31,  
    2010     2009  
    (in millions)  
 
Segment Earnings, net of taxes:
               
Investments
  $ (1,313 )   $ 518  
Single-family Guarantee
    (5,596 )     (10,291 )
Multifamily
    221       8  
All Other
          (567 )
Reconciliation to GAAP net (loss) attributable to Freddie Mac:
               
Credit guarantee-related adjustments(2)
          551  
Tax-related adjustments
          (194 )
                 
Total reconciling items, net of taxes
          357  
                 
Net (loss) attributable to Freddie Mac   $ (6,688 )   $ (9,975 )
                 
(1)  Under our revised method, the sum of Segment Earnings for each segment and the All Other category will equal GAAP net income (loss) attributable to Freddie Mac for the first quarter of 2010 and subsequent periods.
(2)  Consists primarily of amortization and valuation adjustments related to the guarantee asset and guarantee obligation which are excluded from Segment Earnings and cash compensation exchanged at the time of securitization, excluding buy-up and buy-down fees, which is amortized into earnings. These adjustments are recorded to periods prior to 2010 as the amendment to the accounting standards for transfers of financial assets and consolidation of VIEs was applied prospectively on January 1, 2010.
 
For more information on Segment Earnings, including the revised method we use to present Segment Earnings, see “CONSOLIDATED RESULTS OF OPERATIONS — Segment Earnings” and “NOTE 16: SEGMENT REPORTING” to our consolidated financial statements.
 
Mortgage Credit Risk
 
Mortgage and credit market conditions remained challenging in the first quarter of 2010. A number of factors make it difficult to predict when a sustained recovery in the mortgage and credit markets will occur, including, among others, uncertainty concerning the effect of current or any future government actions in these markets. We estimate that home prices decreased nationwide by approximately 0.9% during the first quarter of 2010 based on our own index of our single-family credit guarantee portfolio. Our assumption for home prices, based on our own index, continues to be for a further decline in national average home prices over the near term before any sustained turnaround in housing begins, due to, among other factors:
 
  •  our expectation for a significant increase in distressed sales, which include pre-foreclosure sales, foreclosure transfers and sales by financial institutions of their REO properties, due in part to HAFA. This reflects, in part, the substantial backlog of delinquent loans lenders developed over recent periods, due to various foreclosure suspensions and the implementation of HAMP. We expect many of these loans will transition to REO and be sold in 2010. This may cause prices to decline further as the market absorbs the additional supply of homes for sale;
 
  •  the April 2010 expiration of the federal homebuyer tax credit;
 
  •  our expectation that mortgage rates may increase in 2010, which will make it less affordable to buy a home; and
 
  •  the likelihood that unemployment rates will remain high.
 
Regardless of whether home prices are stabilizing or increasing, our credit losses will likely remain significantly above historical levels for the foreseeable future due to the substantial number of borrowers in our single-family credit guarantee portfolio that currently owe more on their mortgage than their home is worth in today’s market.
 
Single-Family Credit Guarantee Portfolio
 
The following table provides certain credit statistics for our single-family credit guarantee portfolio, which consists of unsecuritized single-family mortgage loans held for investment and those underlying our issued single-family PCs and Structured Securities and other mortgage-related guarantees.
 
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Table 2 — Credit Statistics, Single-Family Credit Guarantee Portfolio(1)
 
                                         
    As of
    3/31/2010   12/31/2009   9/30/2009   6/30/2009   3/31/2009
 
Delinquency rate(2)
    4.13 %     3.98 %     3.43 %     2.89 %     2.41 %
Non-performing assets (in millions)(3)
  $ 115,490     $ 103,350     $ 90,047     $ 75,224     $ 61,584  
Single-family loan loss reserve (in millions)(4)
  $ 35,969     $ 33,026     $ 30,160     $ 25,457     $ 22,527  
REO inventory (in units)
    53,831       45,047       41,133       34,699       29,145  
                                         
                                         
    For the Three Months Ended
    3/31/2010   12/31/2009   9/30/2009   6/30/2009   3/31/2009
    (in units, unless noted)
 
Delinquent loan additions(2)
    145,223       163,764       143,632       133,352       135,842  
Loan modifications(5)
    44,076       15,805       9,013       15,603       24,623  
REO acquisitions
    29,412       24,749       24,373       21,997       13,988  
REO disposition severity ratios(6):
                                       
California
    42.7 %     43.3 %     45.0 %     45.6 %     42.2 %
Florida
    53.3 %     51.4 %     50.7 %     50.9 %     47.9 %
Arizona
    44.9 %     43.2 %     42.7 %     45.5 %     41.9 %
Nevada
    49.8 %     50.1 %     48.8 %     47.5 %     38.9 %
Total U.S.
    39.0 %     38.5 %     39.2 %     39.8 %     36.7 %
Single-family credit losses (in millions)(7)
  $ 2,907     $ 2,498     $ 2,138     $ 1,906     $ 1,318  
(1)  See “GLOSSARY” for information about our portfolios.
(2)  Single-family delinquency information is based on the number of loans that are 90 days or more past due and those in the process of foreclosure. Mortgage loans whose contractual terms have been modified under agreement with the borrower are not included if the borrower is less than 90 days delinquent under the modified terms. The number of delinquent loan additions represents loans that became 90 days or more delinquent or in foreclosure during the respective quarter. See “RISK MANAGEMENT — Credit Risks — Portfolio Management Activities — Credit Performance — Delinquencies” for further information, including information about changes in our method of presenting delinquency rates.
(3)  Consists of the unpaid principal balance of loans in our single-family credit guarantee portfolio that have undergone a troubled debt restructuring or that are 90 days or more past due or in foreclosure and the net carrying value of our REO assets.
(4)  Consists of the combination of: (a) our allowance for loan loss on mortgage loans held for investment; and (b) our reserve for guarantee losses associated with non-consolidated single-family mortgage securitization trusts and other mortgage-related financial guarantees, the latter of which is included within other liabilities beginning January 1, 2010.
(5)  Represents the number of completed modifications under agreement with the borrower during the quarter. Excludes forbearance agreements, under which reduced or no payments are required during a defined period, repayment plans, which are separate agreements with the borrower to repay past due amounts and return to compliance with the original mortgage terms, and loans in the trial period under HAMP.
(6)  Calculated as the aggregate amount of our losses recorded on disposition of REO properties during the respective quarterly period divided by the aggregate unpaid principal balances of the related loans with the borrowers. The amount of losses recognized on disposition of the properties is equal to the amount by which the unpaid principal balance of the loans exceeds the amount of net sales proceeds from disposition of the properties. Excludes other related expenses, such as property maintenance and costs, as well as related recoveries from credit enhancements, such as mortgage insurance.
(7)  See endnote (3) of “Table 56 — Credit Loss Performance” for information on the composition of our credit losses.
 
As shown in the table above, although the number of delinquent loan additions (those borrowers who became 90 days or more past due or in foreclosure) declined in the first quarter of 2010, the credit statistics of our single-family credit guarantee portfolio reflect a high level of defaults. The credit losses of our single-family credit guarantee portfolio continued to increase in the first quarter of 2010 due to several factors, including the following:
 
  •  The housing and economic downturn affected a broad group of borrowers and we believe that high unemployment rates are contributing to further increases in delinquencies. The unemployment rate in the U.S. rose from 8.6% at March 31, 2009 to 9.7% at March 31, 2010. In the first quarter of 2010, our portfolio continued to experience an increase in the delinquency rate of single-family interest-only, Alt-A and option ARM loans as well as 30-year fixed-rate amortizing loans, which is a more traditional mortgage product. The delinquency rate for 30-year single-family fixed-rate amortizing loans increased to 4.2% at March 31, 2010 as compared to 4.0% at December 31, 2009.
 
  •  Certain loan groups within the single-family credit guarantee portfolio, such as those underwritten with certain lower documentation standards and interest-only loans, as well as 2006 and 2007 vintage loans, continue to be large contributors to our credit losses.
 
We believe the credit quality of the single-family loans we acquired in the first quarter of 2010 (excluding those refinance mortgages in the Home Affordable Refinance Program) is strong as compared to loans acquired from 2006 through 2008 as measured by original LTV ratios and FICO scores. We believe this improvement was, in part, the result of: (a) changes in our underwriting guidelines implemented during 2009; (b) increases in the relative amount of refinance mortgages we acquired in the first quarter of 2010; (c) less purchase volume in the first quarter of 2010 comprised of loans with higher risk characteristics as more of those loans were insured by FHA and securitized through Ginnie Mae; and (d) changes in mortgage insurers’ and lenders’ underwriting practices. Our purchase of interest-only loans during the first quarter of 2010 was not significant. In February 2010, we announced that as of September 1, 2010 we will no longer purchase interest-only loans.
 
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Multifamily Mortgage Portfolio
 
The following table provides certain credit statistics for our multifamily mortgage portfolio, which consists of loans held by us on our consolidated balance sheets as well as those underlying non-consolidated PCs, Structured Securities and other mortgage-related financial guarantees, but excluding those underlying Structured Transactions and our guarantees of HFA bonds.
 
Table 3 — Credit Statistics, Multifamily Mortgage Portfolio
 
                                         
    As of
    3/31/2010   12/31/2009   9/30/2009   6/30/2009   3/31/2009
 
Delinquency rate — 60 days or more(1)
    0.24 %     0.19 %     0.14 %     0.15 %     0.10 %
Delinquency rate — 90 days or more(1)
    0.18 %     0.15 %     0.11 %     0.11 %     0.09 %
Non-performing assets, on balance sheet (in millions)(2)
  $ 419     $ 351     $ 274     $ 209     $ 221  
Non-performing assets, off-balance sheet (in millions)(2)
  $ 203     $ 218     $ 198     $ 154     $ 108  
Multifamily loan loss reserve (in millions)(3)
  $ 842     $ 831     $ 404     $ 330     $ 275  
(1)  Based on the unpaid principal balance of mortgages 60 or 90 days or more delinquent, respectively. Mortgage loans whose contractual terms have been modified under agreement with the borrower are not included if the borrower is less than 60 days delinquent under the modified terms. See “RISK MANAGEMENT — Credit Risks — Portfolio Management Activities — Credit Performance — Delinquencies” for further information, including information about changes in our method of presenting delinquency rates. The 60-day delinquency rate for multifamily loans, including Structured Transactions, was 0.24% and 0.19% as of March 31, 2010 and December 31, 2009, respectively.
(2)  Consists of the unpaid principal balance of loans that: (a) have undergone a troubled debt restructuring; (b) are more than 90 days past due; or (c) are deemed credit-impaired based on management’s judgment and are at least 30 days delinquent. Non-performing assets on balance sheet include the net carrying value of our REO assets.
(3)  Includes our reserve for guarantee losses that beginning January 1, 2010 is presented within other liabilities on our consolidated balance sheets.
 
Our multifamily delinquency rates and non-performing loans continued to increase in the first quarter of 2010. In the first quarter of 2010, there was some stabilization in the national unemployment rate, albeit, at very high levels. Certain other multifamily market indicators, such as occupancy rates and effective rents, were essentially unchanged after experiencing deterioration for several quarters. Our delinquency rates remain low relative to other participants in the market. However, delinquency rates are historically a lagging indicator and, as a result, we may continue to experience increased delinquencies even if the market stabilizes, which could cause us to incur additional credit losses. Market fundamentals for multifamily properties that we monitor continued to be challenging during the first quarter of 2010, particularly in certain states in the Southeast and West regions, with a continued increase in borrowers seeking assistance and loan modifications. As of March 31, 2010, approximately half of our multifamily loans 60 days or more delinquent (measured both in terms of number of loans and on a UPB basis) have credit enhancements that we believe will mitigate our expected losses on those loans.
 
Loss Mitigation
 
We continue to increase our use of foreclosure alternatives, including those under the MHA Program, and have expanded our staff to assist our seller/servicers in completing loan modifications and other outreach programs with the objective of keeping more borrowers in their homes. Our loss mitigation activity included the following:
 
  •  We completed 71,314 and 39,623 single-family foreclosure alternatives during the first quarters of 2010 and 2009, respectively, including 9,619 and 3,093, respectively, of pre-foreclosure sales. We completed 44,076 and 24,623 loan modifications during the first quarters of 2010 and 2009, respectively, including 39,018 and 1,369 that were considered troubled debt restructurings. Due to various foreclosure suspensions and the implementation of HAMP, we developed a substantial backlog of delinquent loans during 2009. Significant numbers of these loans are beginning to transition to a completed modification or are otherwise being resolved in foreclosure and pre-foreclosure sales.
 
  •  Based on information provided by the MHA Program administrator, we had assisted approximately 198,000 single-family borrowers through HAMP as of March 31, 2010, of whom approximately 149,000 had made their first payment under the trial period and nearly 49,000 had completed modifications. FHFA reported that approximately 203,000 of our loans were in active trial periods or were modified under HAMP as of February 28, 2010. Unlike the MHA Program administrator’s data, FHFA’s HAMP information includes: (a) loans in the trial period regardless of the first payment date; and (b) modifications that are pending the borrower’s acceptance.
 
Some of our loss mitigation activities have created fluctuations in our credit statistics. For example, our temporary suspensions of foreclosure transfers of occupied homes reduced the rate of growth of our REO inventory and of charge-offs, a component of our credit losses, in certain periods since November 2008, but caused our loan loss reserves to rise. This also created an increase in the number of delinquent loans that remain in our single-family credit guarantee portfolio, which results in higher reported delinquency rates than without the suspension of foreclosure transfers. In addition, since we include loans in the HAMP trial period as delinquent in our statistical reporting, this results in a
 
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temporary rise in our delinquency rate until the modifications become effective and are removed from delinquent status. Insufficient empirical information exists to estimate the extent to which costs associated with HAMP may be offset, if at all, by the prevention or reduction of potential future costs of loan defaults and foreclosures due to these changes in business practices.
 
Investments in Non-Agency Mortgage-Related Securities
 
Our investments in non-agency mortgage-related securities continue to be adversely affected by the ongoing weak housing and credit conditions, as reflected in poor underlying collateral performance, limited liquidity and large risk premiums in the non-agency mortgage market.
 
In the table below, we provide delinquency rates for the loans that back our subprime first lien, option ARM and Alt-A securities. The information in the table on gross unrealized losses and net impairment of available-for-sale securities recognized in earnings also includes securities backed by “other loans,” which are primarily comprised of securities backed by home equity lines of credit.
 
Table 4 — Credit Statistics, Non-Agency Mortgage-Related Securities Backed by Subprime, Option ARM and Alt-A Loans
 
                                         
    As of
    03/31/2010   12/31/2009   09/30/2009   06/30/2009   03/31/2009
    (dollars in millions)
 
Delinquency rates:(1)(2)
                                       
Non-agency mortgage-related securities backed by:
                                       
Subprime first lien
    49 %     49 %     46 %     44 %     42 %
Option ARM
    46       45       42       40       36  
Alt-A
    27       26       24       22       20  
Cumulative collateral loss:(2)(3)
                                       
Non-agency mortgage-related securities backed by:
                                       
Subprime first lien
    15 %     13 %     12 %     10 %     7 %
Option ARM
    9       7       6       4       2  
Alt-A
    5       4       3       3       2  
Gross unrealized losses, pre-tax(4)(5)
  $ 29,613     $ 33,124     $ 38,039     $ 41,157     $ 27,475  
Net impairment of available-for-sale securities recognized in earnings for the three months ended(5)
  $ 453     $ 581     $ 1,130     $ 2,157     $ 6,956  
(1)  Determined based on the number of loans that are 60 days or more past due that underlie the securities using information obtained from a third-party data provider.
(2)  Excludes non-agency mortgage-related securities backed by other loans primarily comprised of securities backed by home equity lines of credit.
(3)  Based on the actual losses incurred on the collateral underlying these securities. Actual losses incurred on the securities that we hold are significantly less than the losses on the underlying collateral as presented in this table, as a majority of the securities we hold include significant credit enhancements, particularly through subordination.
(4)  Gross unrealized losses, pre-tax, represent the aggregate of the amount by which amortized cost exceeds fair value measured at the individual lot level.
(5)  Upon the adoption of an amendment to the accounting standards for investments in debt and equity securities on April 1, 2009, the amount of credit losses and other-than temporary impairment related to securities where we have the intent to sell or where it is more likely than not that we will be required to sell is recognized in our consolidated statements of operations within the line captioned net impairment on available-for-sale securities recognized in earnings. The amount of other-than-temporary impairment related to all other factors is recognized in AOCI. Includes non-agency mortgage-related securities backed by other loans primarily comprised of securities backed by home equity lines of credit.
 
We held unpaid principal balances of $97.4 billion of non-agency mortgage-related securities backed by subprime, option ARM, Alt-A and other loans as of March 31, 2010, compared to $100.7 billion as of December 31, 2009. This decrease is due to the receipt of monthly remittances of principal repayments from both the recoveries of liquidated loans and, to a lesser extent, voluntary prepayments on the underlying collateral representing a partial return of our investment in these securities. We recorded net impairment of available-for-sale securities recognized in earnings on non-agency mortgage-related securities backed by subprime, option ARM, Alt-A and other loans of approximately $453 million during the first quarter of 2010.
 
Pre-tax unrealized losses on securities backed by subprime, option ARM, Alt-A and other loans reflected in AOCI decreased to $29.6 billion at March 31, 2010. These unrealized losses declined during the first quarter of 2010 reflecting increases in fair value of $3.5 billion. Although mortgage OAS levels were relatively unchanged for these securities, we recognized fair value gains as these securities moved closer to maturity.
 
FHFA, as conservator, has directed us to work to mitigate our losses as an investor in non-agency mortgage-related securities. The documents governing the securities trusts in which we have invested do not provide us with any direct right of enforcement. Furthermore, other investors involved in these securities trusts may have competing financial interests to our own. As a result, the effectiveness of our loss mitigation efforts is uncertain and any potential recoveries may take significant time to realize.
 
For additional information on our investments in non-agency mortgage-related securities backed by subprime first lien, option ARM and Alt-A loans, including the credit enhancements on such securities, see “CONSOLIDATED
 
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BALANCE SHEETS ANALYSIS — Non-Agency Mortgage-Related Securities Backed by Subprime, Option ARM and Alt-A Loans.”
 
Legislative and Regulatory Matters
 
Proposed Legislation
 
Congress continues to consider legislation that would, if enacted, significantly change the regulation of the financial services industry, and affect the business and operations of Freddie Mac by potentially subjecting us to new and additional regulatory oversight and standards, including with respect to our activities, products and capital adequacy. For example, a substantial portion of our derivatives transactions could become subject to centralized clearing and increased capital and margin requirements. Among recent developments, on March 22, 2010 the Senate Committee on Banking, Housing and Urban Affairs passed a financial services regulatory reform bill that addresses many topics that are covered by the bill passed by the House of Representatives on December 11, 2009. For more information, see “BUSINESS — Regulation and Supervision — Legislative Developments” and “RISK FACTORS — Legal and Regulatory Risks” in our 2009 Annual Report.
 
State Actions
 
A number of states have enacted laws allowing localities to create energy loan assessment programs for the purpose of financing energy efficient home improvements. While the specific terms may vary, these laws generally treat the new energy assessments like property tax assessments and allow for the creation of a new lien to secure the assessment that is senior to any existing first mortgage lien. If numerous localities adopt such programs and borrowers obtain this type of financing, these laws could have a negative impact on Freddie Mac’s credit losses.
 
Various states, cities, and counties have implemented mediation programs that could delay or otherwise change their foreclosure processes. The processes, requirements, and duration of mediation programs may vary for each state but are designed to bring servicers and borrowers together to negotiate foreclosure alternatives. These actions could increase our expenses, including by potentially delaying the final resolution of delinquent mortgage loans and the disposition of non-performing assets.
 
Affordable Housing Goals for 2009
 
In March 2010, we reported to FHFA that we did not meet the 2009 underserved areas housing goal, special affordable housing goal, underserved areas home purchase subgoal and multifamily special affordable target. We believe that achievement of such goals was infeasible under the terms of the GSE Act, due to market and economic conditions and our financial condition. Accordingly, in January 2010 we submitted an infeasibility analysis to FHFA, which is reviewing our submission.
 
Proposed Affordable Housing Goals for 2010 and 2011
 
Effective beginning calendar year 2010, the Reform Act requires that FHFA establish, by regulation, three single-family owner-occupied housing goals, a single-family refinancing mortgage goal, one multifamily special affordable housing goal and requirements relating to multifamily housing for very low-income families.
 
On February 26, 2010, FHFA published in the Federal Register a proposed rule for public comment that would establish new affordable housing goals for 2010 and 2011 for Freddie Mac and Fannie Mae. The proposed goals and the proposed rules governing our performance under such goals differ substantially from those in effect prior to 2010.
 
For 2010 and 2011, FHFA is proposing levels for four goals for single-family owner-occupied housing, one multifamily special affordable housing goal and one multifamily special affordable housing subgoal. The single-family housing goals target purchase money mortgages for low-income families, very low-income families, and families that reside in low-income areas; and refinancing mortgages for low-income families. The multifamily special affordable housing goal targets multifamily rental housing affordable to low-income families, and the multifamily special affordable housing subgoal targets multifamily rental housing affordable to very low-income families. The proposed single-family goals are expressed as a percentage of the total number of eligible dwelling units underlying our total mortgage purchases, as was the case with the housing goals in effect prior to 2010. The multifamily goals are expressed in terms of minimum numbers of units financed.
 
With respect to the single-family goals, the proposed rule includes: (a) an assessment of performance as compared to the actual share of the market that meets the criteria for each goal; and (b) a benchmark level to measure performance. The benchmark levels for the single-family goals are set forth in Table 5 below. Where our performance on a single-family goal falls short of the benchmark for a goal, we still could achieve the goal if our performance meets or exceeds the actual share of the market that meets the criteria for the goal for that year. For example, if the actual market share of purchase money mortgages to low-income families relative to all purchase money mortgages
 
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originated to finance owner-occupied single-family properties is lower than the 27% benchmark rate, we would still satisfy this goal if we achieve that actual market percentage.
 
FHFA’s proposed affordable housing goals for Freddie Mac for 2010 and 2011 are set forth below.
 
Table 5 — Proposed Affordable Housing Goals for 2010 and 2011
 
         
   
Goals for 2010 and 2011
 
Single-family purchase money goals (benchmark levels):
       
Low-income
    27 %
Very low-income
    8 %
Low-income areas
    13 %
Single-family refinance low-income goal (benchmark level)
    25 %
Multifamily low-income goal
    215,000 units  
Multifamily very low-income subgoal
    28,000 units  
 
The proposed rule would exclude private-label mortgage-related securities and REMICs from counting toward meeting our housing goals, broaden our ability to count mortgage revenue bonds toward meeting our housing goals, and permit jumbo conforming loans to count toward meeting our housing goals. As was the case with respect to our housing goals for 2009, the proposed rule would permit loans we own or guarantee that are modified in accordance with the MHA Program to be treated as mortgage purchases and counted toward the housing goals.
 
FHFA stated that it does not intend for Freddie Mac and Fannie Mae to undertake uneconomic or high-risk activities in support of the goals, nor does it intend for the enterprises’ state of conservatorship to be a justification for withdrawing support from these market segments.
 
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SELECTED FINANCIAL DATA(1)
 
                 
    For the Three Months Ended
 
    March 31,  
    2010     2009(2)  
    (dollars in millions,
 
    except share related amounts)  
 
Statement of Operations Data
               
Net interest income
  $ 4,125     $ 3,859  
Provision for credit losses
    (5,396 )     (8,915 )
Non-interest income (loss)
    (4,854 )     (3,088 )
Non-interest expense
    (667 )     (2,768 )
Net loss attributable to Freddie Mac
    (6,688 )     (9,975 )
Net loss attributable to common stockholders
    (7,980 )     (10,353 )
Total comprehensive income (loss) attributable to Freddie Mac
    (1,880 )     (5,921 )
Per common share data:
               
Loss:
               
Basic
    (2.45 )     (3.18 )
Diluted
    (2.45 )     (3.18 )
Cash common dividends
           
Weighted average common shares outstanding (in thousands):(3)
               
Basic
    3,251,295       3,255,718  
Diluted
    3,251,295       3,255,718  
                 
                 
    March 31,
    December 31,
 
    2010     2009  
    (dollars in millions)  
 
Balance Sheet Data
               
Mortgage loans held-for-investment, at amortized cost by consolidated trusts (net of allowances for loan losses)
  $ 1,745,765     $  
All other assets
    614,445       841,784  
Debt securities of consolidated trusts held by third parties
    1,545,227        
Other debt
    806,621       780,604  
All other liabilities
    18,887       56,808  
Total Freddie Mac stockholders’ equity (deficit)
    (10,614 )     4,278  
Portfolio Balances(4)
               
Mortgage-related investments portfolio
    753,321       755,272  
Total PCs and Structured Securities(5)
    1,787,939       1,854,813  
Non-performing assets(6)
    116,112       103,919  
                 
                 
    For the Three Months Ended
 
    March 31,  
    2010     2009  
 
Ratios(7)
               
Return on average assets(8)
    (1.1 )%     (4.4 )%
Non-performing assets ratio(9)
    5.8       3.2  
Equity to assets ratio(10)
    (0.1 )     (2.0 )
Preferred stock to core capital ratio(11)
    N/A       N/A  
 (1)  See “NOTE 2: CHANGE IN ACCOUNTING PRINCIPLES” to our consolidated financial statements for information regarding accounting changes impacting the current period. See “NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES — Recently Adopted Accounting Standards” in our 2009 Annual Report for information regarding accounting changes impacting previously reported results.
 (2)  See “QUARTERLY SELECTED FINANCIAL DATA” in our 2009 Annual Report for an explanation of the changes in the Statement of Operations Data for the three months ended March 31, 2009.
 (3)  Includes the weighted average number of shares that are associated with the warrant for our common stock issued to Treasury as part of the Purchase Agreement. This warrant is included in basic loss per share for both the first quarter of 2010 and the first quarter of 2009, because it is unconditionally exercisable by the holder at a cost of $0.00001 per share.
 (4)  Represents the unpaid principal balance and excludes mortgage loans and mortgage-related securities traded, but not yet settled.
 (5)  For 2009, this included PCs and Structured Securities that we held for investment. See “CONSOLIDATED RESULTS OF OPERATIONS — Segment Earnings — Table 12 — Segment Portfolio Composition” for the composition of our total mortgage portfolio. Excludes Structured Securities for which we have resecuritized our PCs and Structured Securities. These resecuritized securities do not increase our credit-related exposure and consist of single-class Structured Securities backed by PCs, Structured Securities, and principal-only strips. The notional balances of interest-only strips are excluded because this line item is based on unpaid principal balance.
 (6)  See “RISK MANAGEMENT — Credit Risks — Mortgage Credit Risk — Credit Performance — Non-Performing Assets — Table 54 — Non-Performing Assets” for a description of our non-performing assets.
 (7)  The return on common equity ratio is not presented because the simple average of the beginning and ending balances of Total Freddie Mac stockholders’ equity (deficit), net of preferred stock (at redemption value), is less than zero for all periods presented. The dividend payout ratio on common stock is not presented because we are reporting a net loss attributable to common stockholders for all periods presented.
 (8)  Ratio computed as annualized net loss attributable to Freddie Mac divided by the simple average of the beginning and ending balances of total assets. To calculate the simple average for the three months ended March 31, 2010, the beginning balance of total assets is based on the January 1, 2010 total assets included in “NOTE 2: CHANGE IN ACCOUNTING PRINCIPLES — Table 2.1 — Impact of the Change in Accounting for Transfers of Financial Assets and Consolidation of Variable Interest Entities on Our Consolidated Balance Sheet” to our consolidated financial statements so that both the beginning and ending balances of total assets reflect the changes in accounting principles.
 (9)  Ratio computed as non-performing assets divided by the total mortgage portfolio, excluding non-Freddie Mac securities.
(10)  Ratio computed as the simple average of the beginning and ending balances of Total Freddie Mac stockholders’ equity (deficit) divided by the simple average of the beginning and ending balances of total assets.
(11)  Ratio computed as preferred stock (excluding senior preferred stock), at redemption value divided by core capital. Senior preferred stock does not meet the statutory definition of core capital. Ratio is not computed for periods in which core capital is less than zero. See “NOTE 17: REGULATORY CAPITAL” to our consolidated financial statements for more information regarding core capital.
 
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CONSOLIDATED RESULTS OF OPERATIONS
 
The following discussion of our consolidated results of operations should be read in conjunction with our consolidated financial statements including the accompanying notes. Also see “CRITICAL ACCOUNTING POLICIES AND ESTIMATES” for more information concerning our more significant accounting policies and estimates applied in determining our reported financial position and results of operations.
 
Change in Accounting Principles
 
In June 2009, the FASB issued two new accounting standards that amended guidance applicable to the accounting for transfers of financial assets and the consolidation of VIEs. The guidance in these standards was effective for fiscal years beginning after November 15, 2009. The accounting standard for transfers of financial assets was applicable on a prospective basis to new transfers, while the accounting standard relating to consolidation of VIEs was applied prospectively to all entities within its scope as of the date of adoption. We adopted these new accounting standards prospectively for all existing VIEs effective January 1, 2010. The adoption of these two standards had a significant impact on our consolidated financial statements and other financial disclosures beginning in the first quarter of 2010.
 
We use securitization trusts in our securities issuance process. Prior to January 1, 2010, these trusts met the definition of QSPEs and were not subject to consolidation. Effective January 1, 2010, the concept of a QSPE was removed from GAAP and entities previously considered QSPEs were required to be evaluated for consolidation. We must now consolidate VIEs when we hold a controlling financial interest. An enterprise has a controlling interest in, and thus is the primary beneficiary of, a VIE if it has both: (a) the power to direct the activities of the VIE that most significantly impact its economic performance; and (b) exposure to losses or benefits of the VIE that could potentially be significant to the VIE.
 
PCs are designed so that we bear the credit risk inherent in the loans underlying the PCs through our guarantee of principal and interest payments on the PCs. The PC holders bear the interest rate or prepayment risk on the mortgage loans and the risk that we will not perform on our obligation as guarantor. For purposes of our consolidation assessments, our evaluation of power and economic exposure with regard to PC trusts focuses on credit risk because the credit performance of the underlying mortgage loans was identified as the activity that most significantly impacts the economic performance of these entities. We have the power to impact the activities related to this risk in our role as guarantor and master servicer.
 
Specifically, in our role as master servicer, we establish requirements for how mortgage loans are serviced and what steps are to be taken to avoid credit losses (e.g., modification, foreclosure). Additionally, in our capacity as guarantor, we have the ability to purchase defaulted mortgage loans out of the PC trust to help manage credit losses. See “NOTE 5: MORTGAGE LOANS — Loans Acquired under Financial Guarantees” to our consolidated financial statements for further information regarding our purchase of mortgage loans out of PC trusts. These powers allow us to direct the activities of the VIE (i.e., the PC trust) that most significantly impact its economic performance. In addition, we determined that our guarantee to each PC trust to provide principal and interest payments exposes us to losses that could potentially be significant to the PC trusts.
 
Based on our consolidation evaluation, we determined that we are the primary beneficiary of trusts that issue our single-family PCs and certain Structured Transactions, and thus needed to consolidate the assets and liabilities of these trusts. Therefore, effective January 1, 2010, we consolidated on our balance sheet the assets and liabilities of these trusts at their unpaid principal balances, with accrued interest, allowance for credit losses or other-than-temporary impairments recognized as appropriate, using the practical expedient permitted upon adoption since we determined that calculation of historical carrying values was not practical. Other newly consolidated assets and liabilities that either do not have an unpaid principal balance or are required to be carried at fair value were measured at fair value. As a result of this consolidation, we recognized on our consolidated balance sheets the mortgage loans underlying our issued single-family PCs and certain Structured Transactions as mortgage loans held-for-investment by consolidated trusts, at amortized cost. We also recognized the corresponding single-family PCs and certain Structured Transactions held by third parties on our consolidated balance sheets as debt securities of consolidated trusts held by third parties. After January 1, 2010, new consolidations of trust assets and liabilities are recorded at either their: (a) carrying value if the underlying assets are contributed by us to the trust and consolidated at the time of the transfer; or (b) fair value for the assets and liabilities that are consolidated under the securitization trusts for our guarantor swap program, rather than their unpaid principal balance.
 
In light of the consolidation of our single-family PC trusts and certain Structured Transactions as discussed above, effective January 1, 2010 we elected to change the amortization method for deferred items (e.g., premiums, discounts and other basis adjustments) related to mortgage loans and investments in securities. We made this change to align the amortization method for these assets with the amortization method for deferred items associated with the related
 
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liabilities. As a result of this change, deferred items are amortized into interest income using an effective interest method over the contractual lives of these assets instead of the estimated life that was used for periods prior to 2010. It was impracticable to retrospectively apply this change to prior periods, so we recognized this change as a cumulative effect adjustment to the opening balance of retained earnings (accumulated deficit), and future amortization of these deferred items will be recognized using this new method. The effect of the change in the amortization method for deferred items was immaterial to our consolidated financial statements for the current period.
 
The cumulative effect of these changes in accounting principles was a net decrease of $11.7 billion to total equity (deficit) as of January 1, 2010, which includes changes to the opening balances of retained earnings (accumulated deficit) and AOCI, net of taxes. This net decrease was driven principally by: (a) the elimination of unrealized gains resulting from the extinguishment of PCs held as investment securities upon consolidation of the PC trusts, representing the difference between the unpaid principal balance of the loans underlying the PC trusts and the fair value of the PCs, including premiums, discounts and other basis adjustments; (b) the elimination of the guarantee asset and guarantee obligation established for guarantees issued to securitization trusts we consolidated; and (c) the application of our nonaccrual policy to delinquent mortgage loans consolidated as of January 1, 2010.
 
See “NOTE 2: CHANGE IN ACCOUNTING PRINCIPLES” and “NOTE 22: SELECTED FINANCIAL STATEMENT LINE ITEMS” to our consolidated financial statements for additional information regarding these changes.
 
As these changes in accounting principles were applied prospectively, our results of operations for the first quarter of 2010 (on both a GAAP and segment basis), which reflect the consolidation of trusts that issue our single-family PCs and certain Structured Transactions, are not directly comparable with the results of operations for the first quarter of 2009, which reflect the accounting policies in effect during that time (i.e., securitization entities were accounted for off-balance sheet).
 

Consolidated Statements of Operations — GAAP Results
 
Table 6 summarizes the GAAP Consolidated Statements of Operations.
 
Table 6 — Summary Consolidated Statements of Operations — GAAP Results(1)
 
                 
    Three Months Ended
 
    March 31,  
    2010     2009  
    (in millions)  
 
Net interest income
  $ 4,125     $ 3,859  
Provision for credit losses
    (5,396 )     (8,915 )
                 
Net interest income after provision for credit losses
    (1,271 )     (5,056 )
Non-interest income (loss):
               
Gains (losses) on extinguishment of debt securities of consolidated trusts
    (98 )      
Gains (losses) on retirement of other debt
    (38 )     (104 )
Gains (losses) on debt recorded at fair value
    347       467  
Derivative gains (losses)
    (4,685 )     181  
Impairment of available-for-sale securities(2):
               
Total other-than-temporary impairment of available-for-sale securities
    (417 )     (7,130 )
Portion of other-than-temporary impairment recognized in AOCI
    (93 )      
                 
Net impairment of available-for-sale securities recognized in earnings
    (510 )     (7,130 )
Other gains (losses) on investment securities recognized in earnings
    (416 )     2,182  
Other income
    546       1,316  
                 
Total non-interest income (loss)
    (4,854 )     (3,088 )
                 
Non-interest expense:
               
Administrative expenses
    (395 )     (372 )
REO operations expense
    (159 )     (306 )
Other expenses
    (113 )     (2,090 )
                 
Total non-interest expense
    (667 )     (2,768 )
                 
Loss before income tax benefit
    (6,792 )     (10,912 )
Income tax benefit
    103       937  
                 
Net loss
  $ (6,689 )   $ (9,975 )
Less: Net (income) loss attributable to noncontrolling interest
    1        
                 
Net loss attributable to Freddie Mac
  $ (6,688 )   $ (9,975 )
                 
(1)  See “NOTE 2: CHANGE IN ACCOUNTING PRINCIPLES” to our consolidated financial statements for information regarding accounting changes impacting the current period.
(2)  We adopted an amendment to the accounting standards for investments in debt and equity securities effective April 1, 2009. See “NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES — Recently Adopted Accounting Standards” in our 2009 Annual Report for additional information regarding the impact of this amendment.
 
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Net Interest Income
 
Table 7 presents an analysis of net interest income, including average balances and related yields earned on assets and incurred on liabilities.
 
Table 7 — Net Interest Income/Yield and Average Balance Analysis
 
                                                 
    Three Months Ended March 31,  
    2010     2009  
          Interest
                Interest
       
    Average
    Income
    Average
    Average
    Income
    Average
 
    Balance(1)(2)     (Expense)(1)     Rate     Balance(1)(2)     (Expense)(1)     Rate  
    (dollars in millions)  
 
Interest-earning assets:
                                               
Cash and cash equivalents:
                                               
Cash and cash equivalents, excluding consolidated trusts
  $ 50,468     $ 16       0.13 %   $ 49,932     $ 76       0.61 %
Cash and cash equivalents, held by consolidated trusts
    9,751       1       0.05                    
                                                 
Total cash and cash equivalents
    60,219       17       0.12       49,932       76       0.61  
Federal funds sold and securities purchased under agreements to resell:
                                               
Federal funds sold and securities purchased under agreements to resell, excluding consolidated trusts
    42,792       13       0.12       33,605       18       0.22  
Federal funds sold and securities purchased under agreements to resell, held by consolidated trusts
    8,853       3       0.11                    
                                                 
Total federal funds sold and securities purchased under agreements to resell
    51,645       16       0.12       33,605       18       0.22  
Mortgage-related securities:
                                               
Mortgage-related securities(3)
    593,512       7,279       4.91       698,464       8,760       5.02  
Extinguishment of PCs held by Freddie Mac
    (245,022 )     (3,441 )     (5.62 )                  
                                                 
Total mortgage-related securities, net
    348,490       3,838       4.41       698,464       8,760       5.02  
                                                 
Non-mortgage-related securities(3)
    20,189       61       1.21       11,197       211       7.53  
Mortgage loans held by consolidated trusts(4)
    1,786,834       22,732       5.09                    
Unsecuritized mortgage loans(4)
    160,688       1,961       4.88       118,555       1,580       5.33  
                                                 
Total interest-earning assets
  $ 2,428,065     $ 28,625       4.72     $ 911,753     $ 10,645       4.67  
                                                 
Interest-bearing liabilities:
                                               
Debt securities of consolidated trusts including PCs held by Freddie Mac
  $ 1,801,525     $ (23,084 )     (5.13 )   $     $        
Extinguishment of PCs held by Freddie Mac
    (245,022 )     3,441       5.62                    
                                                 
Total debt securities of consolidated trusts held by third parties
    1,556,503       (19,643 )     (5.05 )                  
Other debt:
                                               
Short-term debt
    242,938       (141 )     (0.23 )     362,566       (1,122 )     (1.24 )
Long-term debt(5)
    556,907       (4,458 )     (3.20 )     521,151       (5,364 )     (4.12 )
                                                 
Total other debt
    799,845       (4,599 )     (2.30 )     883,717       (6,486 )     (2.94 )
                                                 
Total interest-bearing liabilities
    2,356,348       (24,242 )     (4.12 )     883,717       (6,486 )     (2.94 )
Income (expense) related to derivatives(6)
          (258 )     (0.04 )           (300 )     (0.13 )
Impact of net non-interest bearing funding
    71,717             0.12       28,036             0.09  
                                                 
Total funding of interest-earning assets
  $ 2,428,065     $ (24,500 )     (4.04 )   $ 911,753     $ (6,786 )     (2.98 )
                                                 
Net interest income/yield
          $ 4,125       0.68             $ 3,859       1.69  
                                                 
(1)  Excludes mortgage loans and mortgage-related securities traded, but not yet settled.
(2)  For securities, we calculated average balances based on their unpaid principal balance plus their associated deferred fees and costs (e.g., premiums and discounts), but excluded the effect of mark-to-fair-value changes.
(3)  Interest income (expense) includes the portion of impairment charges recognized in earnings expected to be recovered.
(4)  Non-performing loans, where interest income is recognized when collected, are included in average balances.
(5)  Includes current portion of long-term debt.
(6)  Represents changes in fair value of derivatives in cash flow hedge relationships that were previously deferred in AOCI and have been reclassified to earnings as the associated hedged forecasted issuance of debt and mortgage purchase transactions affect earnings.
 
Our adoption of the change to the accounting standards for consolidation, as discussed above, had the following impact on net interest income and net interest yield for the first quarter of 2010, and will have similar effects on future periods:
 
  •  we include in net interest income both: (a) the interest income earned on the average balance of $1.8 trillion of interest-earning assets held in our consolidated single-family trusts, comprised primarily of mortgage loans, restricted cash and cash equivalents and investments in securities purchased under agreements to resell (the investing activities are performed in our capacity as securities administrator); and (b) the interest expense related to the average balance of $1.6 trillion of debt in the form of PCs and Structured Transactions issued by these trusts held by third parties. Prior to January 1, 2010, we reflected the earnings impact of these securitization activities as management and guarantee income, which was recorded within non-interest income on our
 
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  consolidated statements of operations; and interest income on single-family PCs and certain Structured Transactions we held;
 
  •  we now reverse interest income recognized in prior periods on non-performing loans, where the collection of interest is not reasonably assured, as well as the foregone interest income associated with these loans upon their placement on nonaccrual status. Prior to consolidation of these trusts, the foregone interest income on non-performing loans of the trusts did not affect net interest income or net interest yield, as it was accounted for through a charge to provision for credit losses; and
 
  •  we changed the amortization method for deferred items related to mortgage loans and investments in securities in order to align the amortization terms of these assets with those of their related liabilities. As a result of this change, beginning in 2010, deferred items, including premiums, discounts and other basis adjustments, are amortized into interest income using an effective interest method over the contractual lives of these assets instead of the estimated life that was used for periods prior to 2010. As it was impractical to retrospectively apply this change to prior periods, this change was applied prospectively. The effect of the change in the amortization method for deferred items was immaterial to our consolidated financial statements for the current period.
 
See “NOTE 2: CHANGE IN ACCOUNTING PRINCIPLES” to our consolidated financial statements for additional information.
 
Net interest income increased by $266 million during the three months ended March 31, 2010 compared to the three months ended March 31, 2009. Net interest yield decreased substantially during the same period as a result of our adoption of amendments to accounting standards for transfers of financial assets and the consolidation of VIEs. Beginning on January 1, 2010, our net interest yield now reflects a blended rate between the yield on our retained investments portfolio and the yield on our securitization guarantee contracts, adjusted to suspend the recognition of interest income on delinquent loans where the collection of interest is not reasonably assured.
 
The increase in net interest income was primarily due to a decrease in funding costs of other debt as a result of the replacement of higher cost short- and long-term debt with lower cost debt partially offset by: (a) a decrease in interest income resulting from the significantly increased average balance of non-performing mortgage loans, where the collection of interest is not reasonably assured; and (b) the impact of declining interest rates on our floating-rate mortgage-related and non-mortgage-related securities.
 
The decrease in net interest yield was primarily due to: (a) the low net interest yield on the interest-earning assets of our consolidated single-family trusts when compared to our historical net interest yield; and (b) the funding costs associated with the increased balance of non-performing mortgage loans.
 
During the three months ended March 31, 2010, spreads on our debt and our access to the debt markets remained favorable. We believe the Federal Reserve’s purchases in the secondary market of our long-term debt under its purchase program contributed to the favorable spreads on our debt. As a result, when compared to the three months ended March 31, 2009, we were able to replace some higher cost short- and long-term debt with lower cost floating-rate long-and short-term debt, resulting in a decrease in our funding costs. For more information, see “LIQUIDITY AND CAPITAL RESOURCES — Liquidity.”
 
During the three months ended March 31, 2010, compared to the three months ended March 31, 2009, the average balance of our mortgage-related securities declined because we did not purchase sufficient amounts of mortgage-related securities to offset ongoing liquidations of our existing holdings. Our purchase activity has been limited due to continued tight spreads on mortgage assets, which have made investment opportunities less favorable. We believe these tight spreads resulted from the Federal Reserve and Treasury actively purchasing agency mortgage-related securities in the secondary market during 2009 and, with respect to the Federal Reserve, during 2010.
 
Provision for Credit Losses
 
Our allowance for loan losses reflects our best projection of defaults we believe are likely as a result of loss events that have occurred through March 31, 2010 on mortgage loans, held-for-investment. The ongoing weakness in the national housing market, the uncertainty in other macroeconomic factors, such as trends in unemployment rates, and the uncertainty of the effect of government actions to address the economic and housing crisis, make forecasting default rates and loss severity on defaults inherently imprecise. Our allowance for loan losses also reflects: (a) the projected recoveries of losses through credit enhancements; (b) the projected impact of strategic loss mitigation initiatives (such as our efforts under the MHA Program), including an expected higher volume of loan modifications; and (c) the projected recoveries through repurchases by seller/servicers of defaulted loans. An inability to realize the projected benefits of our loss mitigation plans, a lower than projected realized rate of seller/servicer repurchases or default rates that exceed our current projections would cause our losses to be higher than those currently estimated.
 
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The provision for credit losses was $5.4 billion in the first quarter of 2010 compared to $8.9 billion in the first quarter of 2009. During the first quarter of 2010, we experienced less significant increases than in the first quarter of 2009 in: (a) average loss severity rates; (b) increases in rates of delinquency; and (c) the rate of growth in the balance of our non-performing assets. These factors moderated the increase in our loan loss reserves and consequently, our provision for credit losses in the first quarter of 2010 was less than that recognized in the first quarter of 2009.
 
For more information regarding how we derive our estimate for the provision for credit losses, see “MD&A — CRITICAL ACCOUNTING POLICIES AND ESTIMATES” in our 2009 Annual Report. See “Table 2 — Credit Statistics, Single-Family Credit Guarantee Portfolio” for quarterly trends in single-family credit statistics.
 
Our charge-offs, net of recoveries, increased to $2.8 billion in the first quarter of 2010, compared to $1.0 billion in the first quarter of 2009, primarily due to an increase in the volume of foreclosure transfers. We also recognized $2.7 billion of provision for credit losses above the level of our charge-offs, net during the first quarter of 2010 primarily as a result of:
 
  •  An increase in the number of loans subject to individual impairment rather than the collective reserve for loan losses at March 31, 2010, due to an increase in the number of completed loan modifications where a concession was granted to the borrower (that were accounted for as a troubled debt restructuring), including those under HAMP, during the first quarter of 2010. Impairment analysis for troubled debt restructurings requires giving recognition to the present value of the concession granted to the borrower, which generally resulted in an increase in our allowance for loan losses. We expect a continued increase in the number of delinquent loans during 2010 that will undergo a troubled debt restructuring due to HAMP and other loan modification efforts since the majority of our modifications in 2010 are anticipated to include a significant reduction in contractual interest;
 
  •  A continued increase in non-performing loans and foreclosures reflecting the combination of declining home values that began in 2006 and persistently high rates of unemployment. Although still increasing, the rate of growth in delinquency rates and balance of non-performing loans slowed during the first quarter of 2010. The delinquency rate of our single-family credit guarantee portfolio increased from 3.98% at December 31, 2009 to 4.13% at March 31, 2010, as compared to an increase from 1.83% at December 31, 2008 to 2.41% at March 31, 2009; and
 
  •  Higher average severity rates on loans that transition to a loss event, such as a pre-foreclosure sale or foreclosure transfer.
 
The level of our provision for credit losses in the remainder of 2010 will depend on a number of factors, including the actual level of mortgage defaults, the impact of the MHA Program and our other loss mitigation efforts, changes in property values, regional economic conditions, including unemployment rates, third-party mortgage insurance coverage and recoveries and the realized rate of seller/servicer repurchases. See “RISK MANAGEMENT — Credit Risks — Institutional Credit Risk” for additional information on seller/servicer repurchase obligations.
 
The amount of our loan loss reserve associated with multifamily properties, including our reserve for guarantee losses, was $842 million and $831 million as of March 31, 2010 and December 31, 2009, respectively and our total non-performing multifamily loans were $565 million and $538 million, respectively, as of such dates. Market fundamentals for multifamily properties we monitor continued to be challenging during the first quarter of 2010, particularly in certain states in the Southeast and West regions. See “Table 3 — Credit Statistics, Multifamily Mortgage Portfolio” for quarterly trends in multifamily credit statistics.
 
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 trust. We recognize a gain (loss) on extinguishment of the debt securities to the extent the amount paid to redeem the debt security differs from its carrying value adjusted for any related purchase commitments accounted for as derivatives. For the three months ended March 31, 2010, we extinguished debt securities of consolidated trusts with an unpaid principal balance of $4.4 billion (representing our purchase of single-family PCs with an unpaid principal balance of $4.4 billion) and our gains (losses) on extinguishment of these debt securities of consolidated trusts was $(98) million. For the three months ended March 31, 2009, we did not recognize a gain or loss on extinguishment of debt securities of consolidated trusts as our PCs trusts had not been consolidated prior to the change in the consolidation accounting for VIEs. See “NOTE 2: CHANGE IN ACCOUNTING PRINCIPLES” to our consolidated financial statements for additional information.
 
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Gains (Losses) on Retirement of Other Debt
 
Gains (losses) on retirement of other debt were $(38) million and $(104) million during the three months ended March 31, 2010 and 2009, respectively. During the three months ended March 31, 2010, we recognized fewer losses on retirement compared to the three months ended March 31, 2009 due to declines in write-offs of concession fees and write-offs related to basis adjustments from previously discontinued hedging relationships.
 
Derivative Gains (Losses) and Gains (Losses) on Debt Recorded at Fair Value
 
We use derivatives to: (a) regularly adjust or rebalance our funding mix in order to more closely match changes in the interest rate characteristics of our mortgage-related assets; (b) hedge forecasted issuances of debt; (c) synthetically create callable and non-callable funding; and (d) hedge foreign-currency exposure. We account for our derivatives pursuant to the accounting standards for derivatives and hedging. See “NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES — Derivatives” to our consolidated financial statements for additional information.
 
At March 31, 2010 and December 31, 2009, we did not have any derivatives in hedge accounting relationships; however, there are amounts recorded in AOCI related to discontinued cash flow hedges. Changes in fair value and interest accruals on derivatives not in hedge accounting relationships are recorded as derivative gains (losses) in our consolidated statements of operations. The deferred amounts in AOCI related to closed cash flow hedges are reclassified to earnings when the forecasted transactions affect earnings.
 
Derivative Gains (Losses)
 
Table 8 presents derivative gains and losses. Derivative gains (losses) includes the accrual of periodic settlements for derivatives. Although derivatives are an important aspect of our management of interest-rate risk, they generally increase the volatility of reported net income (loss), because not all of the assets and liabilities being hedged are recorded at fair value with changes reported in net income.
 
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Table 8 — Derivative Gains (Losses)
 
                 
    Derivative Gains (Losses)(1)  
    Three Months Ended
 
Derivatives not Designated as Hedging Instruments under the
  March 31,  
accounting standards for derivatives and hedging(2)
  2010     2009  
    (in millions)  
 
Interest-rate swaps:
               
Receive-fixed
               
Foreign-currency denominated
  $ (8 )   $ 187  
U.S. dollar denominated
    2,383       (1,803 )
                 
Total receive-fixed swaps
    2,375       (1,616 )
Pay-fixed
    (4,747 )     6,705  
Basis (floating to floating)
    38       1  
                 
Total interest-rate swaps
    (2,334 )     5,090  
Option-based:
               
Call swaptions
               
Purchased
    500       (3,387 )
Written
    59       117  
Put swaptions
               
Purchased
    (974 )     45  
Written
    (5 )     13  
Other option-based derivatives(3)
    (162 )     25  
                 
Total option-based
    (582 )     (3,187 )
Futures
    (54 )     28  
Foreign-currency swaps(4)
    (331 )     (573 )
Commitments(5)
    (35 )     (412 )
Credit derivatives
          1  
Swap guarantee derivatives
          (31 )
                 
Subtotal
    (3,336 )     916  
Accrual of periodic settlements:
               
Receive-fixed interest-rate swaps(6)
    1,532       1,088  
Pay-fixed interest-rate swaps
    (2,884 )     (1,942 )
Foreign-currency swaps
    7       49  
Other
    (4 )     70  
                 
Total accrual of periodic settlements
    (1,349 )     (735 )
                 
Total
  $ (4,685 )   $ 181  
                 
(1)  Gains (losses) are reported as derivative gains (losses) on our consolidated statements of operations.
(2)  See “NOTE 11: DERIVATIVES” to our consolidated financial statements for additional information about the purpose of entering into derivatives not designated as hedging instruments and our overall risk management strategies.
(3)  Primarily represents purchased interest rate caps and floors, guarantees of stated final maturity of issued Structured Securities, and written options, including written call options on agency mortgage-related securities. For the three months ended March 31, 2009, other option-based derivatives also included purchased put options on agency mortgage-related securities.
(4)  Foreign-currency swaps are defined as swaps in which net settlement is based on one leg calculated in a foreign-currency and the other leg calculated in U.S. dollars.
(5)  Commitments include: (a) our commitments to purchase and sell investments in securities; and (b) our commitments to purchase and extinguish or issue debt securities of our consolidated trusts.
(6)  Includes imputed interest on zero-coupon swaps.
 
Gains (losses) on derivatives are principally driven by changes in: (a) swap interest rates and implied volatility; and (b) the mix and volume of derivatives in our derivative portfolio.
 
During the first quarter of 2010, the fair value of our derivative portfolio was impacted by a decline in swap interest rates and implied volatility, resulting in a loss on derivatives of $4.7 billion. As a result of these factors, we recorded losses on our pay-fixed swaps, partially offset by gains on our receive-fixed swap positions as illustrated in the table above. We also recorded losses on our purchased put swaptions.
 
During the first quarter of 2009, we recorded a gain on derivatives of $181 million primarily due to rising long-term interest rates while implied volatility decreased. These changes in interest rates and volatility resulted in a gain on our pay-fixed swap positions, partially offset by losses on our receive-fixed swaps and a loss on our purchased call swaptions.
 
Foreign Currency Swaps and Foreign-Currency Denominated Debt
 
Gains (losses) on debt recorded at fair value primarily relates to changes in the fair value of our foreign-currency denominated debt. For the three months ended March 31, 2010, we recognized gains on debt recorded at fair value of $347 million due primarily to the U.S. dollar strengthening relative to the Euro. For the three months ended March 31, 2009, we recognized gains on debt recorded at fair value of $467 million primarily due to an increase in interest rates and the U.S. dollar strengthening relative to the Euro. 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.
 
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During the first quarter of 2010 we recognized fair value gains of $346 million on our foreign-currency denominated debt. This amount included:
 
  •  fair value gains related to translation of $321 million, which was offset by derivative losses on foreign-currency swaps of $(331) million; and
 
  •  fair value gains relating to interest rate and instrument-specific credit risk adjustments of $25 million, which was partially offset by derivative losses on foreign-currency denominated receive-fixed interest rate swaps of $(8) million.
 
During the first quarter of 2009, we recognized fair value gains of $467 million on our foreign-currency denominated debt. This amount included:
 
  •  fair value gains related to translation of $580 million, which was offset by derivative losses on foreign-currency swaps of $(573) million; and
 
  •  fair value losses relating to interest rate and instrument-specific credit risk adjustments of $(113) million, which was offset by derivative gains on foreign-currency denominated receive-fixed interest-rate swaps of $187 million.
 
For a discussion of the instrument-specific credit risk and our election to adopt the fair value option on our foreign-currency denominated debt see “NOTE 19: FAIR VALUE DISCLOSURES — Fair Value Election — Foreign-Currency Denominated Debt with Fair Value Option Elected” to our consolidated financial statements.
 
Investment Securities-Related Activities
 
As a result of our adoption of amendments to the accounting standards for transfers of financial assets and consolidation of VIEs, we no longer account for the single-family PCs and certain Structured Transactions we hold as investments in securities. Instead, we now recognize the underlying mortgage loans on our consolidated balance sheets through consolidation of the related trusts. Our adoption of these amendments resulted in a decrease in our investments in securities of $286.5 billion on January 1, 2010. See “NOTE 2: CHANGE IN ACCOUNTING PRINCIPLES” to our consolidated financial statements for additional information.
 
Impairments of Available-for-Sale Securities
 
During the three months ended March 31, 2010, we recorded net impairment of available-for-sale securities recognized in earnings of $510 million, all of which related to expected credit losses on our non-agency mortgage-related securities. During the three months ended March 31, 2009, which was prior to the adoption of an amendment to the accounting standards for investments in debt and equity securities, we recognized in earnings approximately $6.9 billion of other-than-temporary impairment related to non-agency mortgage-related securities backed by subprime, option ARM and Alt-A and other loans that were probable of incurring a contractual principal or interest loss.
 
See “CONSOLIDATED BALANCE SHEETS ANALYSIS — Investments in Securities — Mortgage-Related Securities — Non-Agency Mortgage-Related Securities Backed by Subprime, Option ARM and Alt-A Loans” and “NOTE 7: INVESTMENTS IN SECURITIES” to our consolidated financial statements for additional 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, 2010 and 2009. See “NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES — Recently Adopted Accounting Standards — Change in the Impairment Model for Debt Securities” in our 2009 Annual Report for information on how other-than-temporary impairments are recorded on our financial statements commencing in the second quarter of 2009.
 
Other Gains (Losses) on Investment Securities Recognized in Earnings
 
We recognized $(417) million and $2.1 billion related to gains (losses) on trading securities during the three months ended March 31, 2010 and 2009, respectively. The impact of declining interest rates on our interest-only securities classified as trading resulted in a mark-to-fair-value loss of $482 million during the three months ended March 31, 2010. The net gains on trading securities during the first quarter of 2009 related primarily to tightening OAS levels. Our sales of agency securities classified as trading with unpaid principal balances of approximately $36 billion generated realized gains of $1.1 billion.
 
The unpaid principal balance of our securities classified as trading was approximately $71 billion at March 31, 2010 compared to approximately $253 billion at March 31, 2009. The decline in unpaid principal balance was primarily due to our adoption of amendments to the accounting standards for transfers of financial assets and consolidation of VIEs on January 1, 2010.
 
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Other Income
 
Table 9 summarizes the significant components of other income.
 
Table 9 — Other Income
 
                 
    Three Months Ended
 
    March 31,  
    2010     2009  
    (in millions)  
 
Other income (losses):
               
Management and guarantee income
  $ 35     $ 780  
Gains (losses) on guarantee asset
    (12 )     (156 )
Income on guarantee obligation
    36       910  
Gains (losses) on sale of mortgage loans
    95       151  
Lower-of-cost-or-fair-value adjustments
          (129 )
Gains (losses) on mortgage loans elected at fair value
    21       (18 )
Recoveries on loans impaired upon purchase
    169       50  
Low-income housing tax credit partnerships
          (106 )
Trust management income (expense)
          (207 )
All other
    202       41  
                 
Total other income
  $ 546     $ 1,316  
                 
 
Other income primarily includes items associated with our guarantee business activities of non-consolidated trusts, including recoveries of loans impaired upon purchase, management and guarantee income, gains (losses) on guarantee asset and income on guarantee obligation, as well as all other income from non-guarantee related activities. Upon consolidation of our single-family PC trusts and certain Structured Transactions, guarantee-related items no longer have a material impact on our results and are therefore included in other income on our consolidated statements of operations. For additional information on the impact of consolidation of our single-family PC trusts and certain Structured Transactions, see “NOTE 2: CHANGE IN ACCOUNTING PRINCIPLES” and “NOTE 22: SELECTED FINANCIAL STATEMENT LINE ITEMS” to our consolidated financial statements.
 
Management and Guarantee Income
 
Management and guarantee income decreased significantly during the three months ended March 31, 2010 as compared to the three months ended March 31, 2009. The significant decrease was due to the consolidation of our single-family PC trusts and certain Structured Transactions as a result of the change in the accounting for VIEs. Beginning January 1, 2010, the income associated with most of our securitization and guarantee activities relates to our consolidated securitization trusts and is recognized as a component of net interest income. The management and guarantee income recognized during the first quarter of 2010 was earned from our non-consolidated securitization trusts and other mortgage credit guarantees whose ending unpaid principal balance was $40.4 billion as of March 31, 2010 compared to $1.8 trillion as of March 31, 2009.
 
Gains (Losses) on Guarantee Asset
 
Gains (losses) on guarantee asset decreased significantly during the three months ended March 31, 2010 as compared to the three months ended March 31, 2009, primarily due to the decrease in the balance of our recognized guarantee asset resulting from the consolidation of our single-family PC trusts and certain Structured Transactions. Beginning January 1, 2010, we no longer record a guarantee asset on our consolidated balance sheet for guarantees associated with our consolidated trusts, and therefore no longer recognize gains (losses) on guarantee assets related to such trusts. As of March 31, 2010 and December 31, 2009, our guarantee assets on our consolidated balance sheets were $482 million and $10.4 billion, respectively.
 
Income on Guarantee Obligation
 
Income on guarantee obligation decreased significantly during the three months ended March 31, 2010, as compared to the three months ended March 31, 2009 primarily due to the decrease in the balance of our recognized guarantee obligation resulting from the consolidation of our single-family PC trusts and certain Structured Transactions. Beginning January 1, 2010, we no longer recognize income on our guarantee obligation for guarantees associated with our consolidated trusts. As of March 31, 2010 and December 31, 2009, our guarantee obligations on our consolidated balance sheets were $656 million and $12.5 billion, respectively.
 
Recoveries on Loans Impaired Upon Purchase
 
During the three months ended March 31, 2010 and 2009, we recognized recoveries on loans impaired upon purchase of $169 million and $50 million, respectively. Our recoveries on loans impaired upon purchase increased due to a higher volume of foreclosure transfers combined with improvements in home prices in some geographical areas during the first quarter of 2010, as compared to the first quarter of 2009. Our recoveries on these loans may be volatile
 
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in the short-term due to the effects of changes in home prices, among other factors. We expect our recoveries to remain higher in 2010, as compared to 2009, due to higher expected volumes of foreclosures in 2010.
 
Low-income Housing Tax Credit Partnerships
 
We wrote down the carrying value of our LIHTC investments to zero in the fourth quarter of 2009, as we will not be able to realize any value either through reductions to our taxable income and related tax liabilities or through a sale to a third party. See “CONSOLIDATED RESULTS OF OPERATIONS — Non-Interest Income (Loss) — Low-Income Housing Tax Credit Partnerships” in our 2009 Annual Report for more information.
 
Trust Management Income (Expense)
 
Due to the change in consolidation accounting for VIEs, which resulted in the consolidation of our single-family PC trusts and certain Structured Transactions, there was no trust management income or expense in the three months ended March 31, 2010. Beginning January 1, 2010, trust management income and expense associated with consolidated trusts is recognized within net interest income.
 
Non-Interest Expense
 
Table 10 summarizes the components of non-interest expense.
 
Table 10 — Non-Interest Expense
 
                 
    Three Months Ended
 
    March 31,  
    2010     2009  
    (in millions)  
 
Administrative expenses:
               
Salaries and employee benefits
  $ 234     $ 207  
Professional services
    71       60  
Occupancy expense
    16       18  
Other administrative expenses
    74       87  
                 
Total administrative expenses
    395       372  
REO operations expense
    159       306  
Other expenses
    113       2,090  
                 
Total non-interest expense
  $ 667     $ 2,768  
                 
 
Administrative Expenses
 
Administrative expenses increased for the three months ended March 31, 2010, compared to the three months ended March 31, 2009, in part due to an increase in the number of full-time employees, increased incentive awards as well as higher professional service costs that support corporate initiatives, including our HAMP efforts.
 
REO Operations Expense
 
The table below presents the components of our REO operations expense.
 
Table 11 — REO Operations Expense
 
                 
    Three Months Ended
 
    March 31,  
    2010     2009  
    (dollars in millions)  
 
Single-family:
               
REO property expenses(1)
  $ 241     $ 116  
Disposition (gains) losses(2)
    4       306  
Change in holding period allowance(3)
    70       32  
Recoveries
    (159 )     (148 )
                 
Total single-family REO operations expense
    156       306  
Multifamily REO operations expense
    3        
                 
Total REO operations expense
  $ 159     $ 306  
                 
REO inventory (properties), at March 31,
    53,839       29,151  
REO property dispositions (properties)
    21,969       14,184  
(1)  Consists of costs incurred to maintain or protect a property after foreclosure acquisition, such as legal fees, insurance, taxes, cleaning and other maintenance charges.
(2)  Represents the difference between the disposition proceeds, net of selling expenses, and the fair value of the property on the date of the foreclosure transfer. Excludes holding period writedowns while in REO inventory.
(3)  Includes both the increase (decrease) in the holding period allowance for properties that remain in inventory at the end of the period as well as any reductions associated with dispositions during the period.
 
REO operations expense decreased to $159 million for the first quarter of 2010 from $306 million during the first quarter of 2009. Disposition losses during the first quarter of 2010 were lower as compared to the first quarter of 2009 due to the relative stabilization in national home prices in 2010 that included slight improvements in certain geographic
 
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areas. Improvement in disposition losses was partially offset by higher property expenses in the first quarter of 2010 as compared to the first quarter of 2009 due to increased property inventory and acquisition volumes in the first quarter of 2010. We expect REO property expense to continue to increase for the remainder of 2010, as single-family REO acquisition volume continues to increase and property inventory continues to grow.
 
Other Expenses
 
Other expenses primarily consists of losses on loans purchased and other miscellaneous expenses. Our losses on loans purchased were $17 million during the first quarter of 2010 compared to $2.0 billion during the first quarter of 2009. Losses on delinquent and modified loans purchased from mortgage pools within our non-consolidated securitization trusts occur when the acquisition basis of the purchased loan exceeds the estimated fair value of the loan on the date of purchase. When a loan underlying our PCs is modified, we generally exercise our repurchase option and hold the modified loan as an unsecuritized mortgage loan, held-for-investment. See “Recoveries on Loans Impaired Upon Purchase” for additional information about the impacts from these loans on our financial results. Beginning January 1, 2010, our single-family PC trusts are consolidated as a result of the change in accounting for consolidation of VIEs. As a result, we no longer record losses on loans purchased when we purchase loans from these consolidated entities since the loans are already recorded on our consolidated balance sheets. In the first quarter of 2010, losses on loans purchased were associated solely with loans purchased pursuant to long-term standby agreements. See “NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES — Impaired Loans” and “NOTE 22: SELECTED FINANCIAL STATEMENT LINE ITEMS” to our consolidated financial statements for additional information.
 
Income Tax Benefit
 
For the three months ended March 31, 2010 and 2009, we reported an income tax benefit of $103 million and $937 million, respectively. See “NOTE 13: INCOME TAXES” to our consolidated financial statements for additional information.
 
Segment Earnings
 
Our operations consist of three reportable segments, which are based on the type of business activities each performs — Investments, Single-family Guarantee and Multifamily. Certain activities that are not part of a reportable segment are included in the All Other category.
 
The Investments segment includes our investment, funding and hedging activities. In our Investments segment, we invest principally in mortgage-related securities and single-family mortgage loans funded by debt issuances and hedged by asset and liability management. Segment Earnings for this segment consists primarily of the returns on these investments, less the related financing, hedging and administrative expenses.
 
The Single-family Guarantee segment includes our single-family credit guarantee activities. In our Single-family Guarantee segment, we purchase single-family mortgage loans originated by our lender customers in the primary mortgage market, primarily through our guarantor swap program. We securitize most of the mortgages we purchase. In this segment, we also guarantee the payment of principal and interest on single-family mortgage loans and mortgage-related securities in exchange for management and guarantee fees received over time and other up-front credit-related fees. Segment Earnings for this segment consist primarily of management and guarantee fee revenues, including amortization of upfront fees, less the related credit costs (i.e., provision for credit losses) and administrative expenses. Segment Earnings for this segment also includes management and guarantee fee revenues earned on loans held in the Investments segment related to single-family guarantee activities, net of allocated funding costs and amounts related to net float benefits or expenses.
 
The Multifamily segment includes our investments and guarantee activities in multifamily mortgage loans and securities. In our Multifamily segment, we primarily purchase multifamily mortgage loans and CMBS for investment and guarantee the payment of principal and interest on multifamily mortgage-related securities and mortgages underlying multifamily housing revenue bonds. These activities support our mission to supply financing for affordable rental housing. Segment Earnings for this segment also includes management and guarantee fee revenues and the interest earned on assets related to multifamily guarantee and investment activities, net of allocated funding costs.
 
We evaluate segment performance and allocate resources based on a Segment Earnings approach, subject to the conduct of our business under the direction of the Conservator. Beginning January 1, 2010, we revised our method for presenting Segment Earnings to reflect changes in how management measures and assesses the performance of each segment and the company as a whole. Under the revised method, the financial performance of our segments is measured based on each segment’s contribution to GAAP net income (loss). Under the revised method, the sum of Segment Earnings for each segment and the All Other category will equal GAAP net income (loss) attributable to Freddie Mac for the first quarter of 2010 and subsequent periods.
 
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Segment Earnings for prior periods presented now include the following items that are included in our GAAP-basis earnings, but were deferred or excluded under the previous method for presenting Segment Earnings:
 
  •  Current period GAAP earnings impact of fair value accounting for investments, debt and derivatives;
 
  •  Allocation of the valuation allowance established against our net deferred tax assets;
 
  •  Gains and losses on investment sales and debt retirements;
 
  •  Losses on loans purchased and related recoveries;
 
  •  Other-than-temporary impairment of securities recognized in earnings in excess of expected losses; and
 
  •  GAAP-basis accretion income that may result from impairment adjustments.
 
Under the revised method of presenting Segment Earnings, the All Other category consists of material corporate level expenses that are: (a) non-recurring in nature; and (b) based on management decisions outside the control of the management of our reportable segments. By recording these types of activities to the All Other category, we believe the financial results of our three reportable segments are more representative of the decisions and strategies that are executed within the reportable segments and provide greater comparability across time periods. Items included in the All Other category consist of: (a) the write-down of our LIHTC investments; and (b) the deferred tax asset valuation allowance associated with previously recognized income tax credits carried forward due to our tax net operating loss carryback. Other items previously recorded in the All Other category prior to the revision to our method for presenting Segment Earnings have been allocated to our three reportable segments.
 
Effective January 1, 2010, we also made significant changes to our GAAP consolidated statements of operations as a result of our adoption of changes in accounting standards for transfers of financial assets and the consolidation of VIEs. These changes make it difficult to view results of our Investments, Single-family Guarantee and Multifamily segments. As a result, in presenting Segment Earnings we make significant reclassifications to line items for our segment businesses in order to reflect a measure of net interest income on investments and management and guarantee income on guarantees that is in line with our internal measures of performance.
 
We present Segment Earnings by: (a) reclassifying certain investment-related activities and credit guarantee-related activities between various line items on our GAAP consolidated statements of operations; and (b) allocating certain revenues and expenses, including certain returns on assets and funding costs, and all administrative expenses to our three reportable segments.
 
As a result of these reclassifications and allocations, Segment Earnings for our reportable segments differs significantly from, and should not be used as a substitute for, net income (loss) as determined in accordance with GAAP. Our definition of Segment Earnings may differ from similar measures used by other companies. However, we believe that Segment Earnings provides us with meaningful metrics to assess the financial performance of each segment and our company as a whole.
 
We have restated Segment Earnings for the first quarter of 2009 to reflect changes in our method of measuring and assessing the performance of our reportable segments. The restated Segment Earnings for the first quarter of 2009 do not include changes to the guarantee asset, guarantee obligation or other items that were eliminated or changed as a result of our implementation of the amendments to the accounting standards for transfers of financial assets and consolidation of VIEs adopted on January 1, 2010, as this change was applied prospectively consistent with our GAAP results. See “NOTE 2: CHANGE IN ACCOUNTING PRINCIPLES” to our consolidated financial statements for further information regarding the consolidation of certain of our securitization trusts.
 
See “NOTE 16: SEGMENT REPORTING” to our consolidated financial statements for further information regarding our segments, including the descriptions and activities of the segments and the reclassifications and allocations used to present Segment Earnings.
 
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Table 12 provides information about our various segment portfolios.
 
Table 12 — Segment Portfolio Composition(1)
 
                 
    March 31, 2010     December 31, 2009  
    (in millions)  
 
Segment portfolios:
               
Investments — Mortgage investments portfolio:
               
Single-family unsecuritized mortgage loans
  $ 48,176     $ 44,135  
Guaranteed PCs and Structured Securities in the mortgage investments portfolio
    332,981       374,362  
Non-Freddie Mac mortgage-related securities in the mortgage investments portfolio
    171,052       179,330  
                 
Total Investments — Mortgage investments portfolio
    552,209       597,827  
                 
Single-family Guarantee — Credit guarantee portfolio:
               
Single-family mortgage loans(2)
    55,470       10,743  
Single-family PCs and Structured Securities in the mortgage investments portfolio
    313,881       354,439  
Single-family PCs and Structured Securities held by third parties
    1,442,673       1,471,166  
Single-family Structured Transactions in the mortgage investments portfolio
    17,431       18,227  
Single-family Structured Transactions held by third parties
    11,661       8,727  
                 
Total Single-family Guarantee — Credit guarantee portfolio
    1,841,116       1,863,302  
                 
Multifamily — Guarantee portfolio:
               
Multifamily PCs and Structured Securities
    14,786       14,277  
Multifamily Structured Transactions
    5,542       3,046  
                 
Total Multifamily — Guarantee portfolio
    20,328       17,323  
                 
Multifamily — Mortgage investments portfolio:
               
Multifamily investment securities portfolio
    62,634       62,764  
Multifamily loan portfolio
    83,008       83,938  
                 
Total Multifamily-mortgage investments portfolio
    145,642       146,702  
                 
Total Multifamily portfolio
    165,970       164,025  
                 
Less: Guaranteed PCs and Structured Securities in the mortgage-related investments portfolio(3)
    (333,641 )     (374,615 )
                 
Total mortgage portfolio
  $ 2,225,654     $ 2,250,539  
                 
(1)  Based on unpaid principal balance and excludes mortgage loans and mortgage-related securities traded, but not yet settled.
(2)  Represents unsecuritized non-performing single-family loans for which the Single-family Guarantee segment is actively performing loss mitigation.
(3)  The amount of PCs and Structured Securities in our mortgage-related investments portfolio is included in both our Investments segment’s mortgage investments portfolio and our Single-family Guarantee segment’s credit guarantee portfolio, and certain multifamily securities are included in both the multifamily investment securities portfolio and the multifamily guarantee portfolio. Therefore, these amounts are deducted in order to reconcile to our total mortgage portfolio.
 
Segment Earnings — Results
 
See “NOTE 16: SEGMENT REPORTING — Segments” to our consolidated financial statements for information regarding the description and activities of our Investments, Single-family Guarantee and Multifamily Segments.
 
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Investments
 
Table 13 presents the Segment Earnings of our Investments segment.
 
Table 13 — Segment Earnings and Key Metrics — Investments(1)
 
                 
    Three Months Ended
 
    March 31,  
    2010     2009  
    (dollars in millions)  
 
Segment Earnings:
               
Net interest income
  $ 1,311     $ 1,999  
Non-interest income (loss):
               
Net impairments of available-for-sale securities
    (376 )     (6,414 )
Derivative gains (losses)
    (2,702 )     1,164  
Other non-interest income (loss)
    (22 )     2,452  
                 
Total non-interest income (loss)
    (3,100 )     (2,798 )
                 
Non-interest expense:
               
Administrative expenses
    (122 )     (121 )
Other non-interest expense
    (7 )     (7 )
                 
Total non-interest expense
    (129 )     (128 )
                 
Segment adjustments(2)
    510        
                 
Segment Earnings (loss) before income tax benefit
    (1,408 )     (927 )
Income tax benefit
    97       1,445  
Less: Net (income) loss — noncontrolling interest
    (2 )      
                 
Segment Earnings (loss), net of taxes
  $ (1,313 )   $ 518  
                 
Key metrics — Investments:
               
Growth:
               
Purchases of securities — mortgage investments portfolio:(3)(4)
               
Freddie Mac securities
  $ 5,090     $ 84,180  
Non-Freddie Mac mortgage-related securities:
               
Agency
    47       31,321  
Non-agency
          76  
                 
Total purchases of securities — mortgage investments portfolio
  $ 5,137     $ 115,577  
                 
Growth rate of mortgage investments portfolio (annualized)
    (30.52 )%     34.98 %
Portfolio balances:
               
Average balances of interest-earning assets:(5)
               
Mortgage-related securities(6)
  $ 530,865     $ 631,404  
Non-mortgage-related investments(7)
    132,052       94,735  
Unsecuritized single-family loans
    44,467       44,267  
                 
Total average balances of interest-earning assets
  $ 707,384     $ 770,406  
                 
Return:
               
Net interest yield — Segment Earnings basis
    0.74 %     1.03 %
(1)  Under our revised method of presenting Segment Earnings, Segment Earnings for the Investments segment equals GAAP net income (loss) attributable to Freddie Mac for the Investments segment. For reconciliations of the Segment Earnings line items to the comparable line items in our consolidated financial statements prepared in accordance with GAAP, see “NOTE 16: SEGMENT REPORTING — Table 16.2 — Segment Earnings and Reconciliation to GAAP Results” to our consolidated financial statements.
(2)  For a description of our segment adjustments see “NOTE 16: SEGMENT REPORTING — Segment Earnings — Segment Adjustments” to our consolidated financial statements.
(3)  Based on unpaid principal balance and excludes mortgage-related securities traded, but not yet settled.
(4)  Excludes single-family mortgage loans.
(5)  For securities, we calculated average balances based on their unpaid principal balance plus their associated deferred fees and costs (e.g., premiums and discounts), but excluded the effect of mark-to-fair-value changes.
(6)  Includes our investments in single-family PCs and certain Structured Transactions, which have been consolidated under GAAP on our consolidated balance sheet beginning on January 1, 2010.
(7)  Includes the average balances of interest-earning cash and cash equivalents, non-mortgage-related securities and federal funds sold and securities purchased under agreements to resell.
 
Segment Earnings (loss) for this segment decreased to $(1.3) billion for the three months ended March 31, 2010 compared to $518 million for the three months ended March 31, 2009. Investments segment net interest income and net interest yield decreased during the three months ended March 31, 2010 compared to the three months ended March 31, 2009. In addition, our loss increased during the three months ended March 31, 2010 compared to the three months ended March 31, 2009 for Investments segment non-interest income (loss).
 
Segment Earnings net interest income decreased $688 million and Segment Earnings net interest yield decreased 29 basis points to 74 basis points during the three months ended March 31, 2010 compared to the three months ended March 31, 2009. The primary drivers underlying the decreases in Segment Earnings net interest income and Segment Earnings net interest yield were: (a) an increase in derivative interest carry on net pay-fixed interest-rate swaps, which is recognized within net interest income in Segment Earnings, due to short-term interest rate declines; (b) an increase
 
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in low-yielding short-term investments during the first quarter of 2010 in order to facilitate the purchase of $56.6 billion in unpaid principal balance of loans from PC trusts, which settled during the three months ended March 31, 2010; and (c) a decrease in the average balance of mortgage-related securities. These items were partially offset by a decrease in funding costs as a result of the replacement of higher cost short- and long-term debt with lower cost debt.
 
Our non-interest losses increased $302 million for the three months ended March 31, 2010 compared to the three months ended March 31, 2009, primarily due to derivative losses for our Investments segment non-interest income (loss). Derivative gains (losses) for this segment were $(2.7) billion during the three months ended March 31, 2010, primarily due to the impact of declines in interest rates on our pay-fixed interest-rate swaps and the impact of the decline in implied volatility on our options portfolio compared to $1.2 billion for the three months ended March 31, 2009 primarily due to the impact of increases in interest rates on our pay-fixed interest-rate swaps. Impairments recorded in our Investments segment decreased by $6.0 billion during the three months ended March 31, 2010 compared to the three months ended March 31, 2009 primarily related to reduced impairment on available-for-sale non-agency mortgage-related securities. As our adoption of the amendment to the accounting standards for investments in debt and equity securities on April 1, 2009 significantly impacted both the identification and measurement of other-than-temporary impairments, the results for the three months ended March 31, 2010 and 2009 are not comparable. However, the underlying collateral performance of loans supporting our non-agency securities deteriorated to a lesser extent during the three months ended March 31, 2010 than during the three months ended March 31, 2009. See “Non-Interest Income (Loss) — Derivative Gains (Losses) and Gains (Losses) on Debt Recorded at Fair Value” and “CONSOLIDATED BALANCE SHEETS ANALYSIS — Investments in Securities — Other-Than-Temporary Impairments on Available-for-Sale Mortgage-Related Securities” for additional information on our derivatives and impairments, respectively.
 
During the three months ended March 31, 2010, the mortgage investments portfolio of our Investments segment decreased at an annualized rate of (30.52)%, compared to an increase of 34.98% for the three months ended March 31, 2009. The unpaid principal balance of the mortgage investments portfolio of our Investments segment decreased from $598 billion at December 31, 2009 to $552 billion at March 31, 2010. The portfolio decreased during the three months ended March 31, 2010 due to a relative lack of favorable investment opportunities caused by tighter spreads on agency mortgage-related securities as a result of the Federal Reserve’s purchases of agency mortgage-related securities.
 
We held $61.1 billion of non-Freddie Mac agency mortgage-related securities and $110.0 billion of non-agency mortgage-related securities as of March 31, 2010 compared to $65.6 billion of non-Freddie Mac agency mortgage-related securities and $113.7 billion of non-agency mortgage-related securities as of December 31, 2009. The decline in the unpaid principal balance of non-agency mortgage-related securities is due primarily to the receipt of monthly remittances of principal repayments from both the recoveries of liquidated loans and, to a lesser extent, voluntary prepayments on the underlying collateral of these securities. Agency securities comprised approximately 71% and 74% of the unpaid principal balance of the Investments segment mortgage investments portfolio at March 31, 2010 and December 31, 2009, respectively. See “CONSOLIDATED BALANCE SHEETS ANALYSIS — Investments in Securities” for additional information regarding our mortgage-related securities.
 
The objectives set forth for us under our charter and conservatorship and restrictions set forth in the Purchase Agreement may negatively impact our Investments segment results over the long term. For example, the required reduction in our mortgage-related investments portfolio unpaid principal balance limit to $250 billion, through successive annual 10% declines, commencing in 2010, will cause a corresponding reduction in our net interest income from these assets. We expect this will negatively affect our Investments segment results. FHFA stated its expectation in the Acting Director’s February 2, 2010 letter that any net additions to our mortgage-related investments portfolio would be related to purchasing delinquent mortgages out of PC pools.
 
For information on the potential impact of the completion of the Federal Reserve’s purchase program and the requirement to reduce the mortgage-related investments portfolio limit by 10% annually, commencing in 2010, see “MD&A — LIQUIDITY AND CAPITAL RESOURCES — Liquidity” in our 2009 Annual Report and “NOTE 3: CONSERVATORSHIP AND RELATED DEVELOPMENTS — Impact of the Purchase Agreement and FHFA Regulation on the Mortgage-Related Investments Portfolio” to our consolidated financial statements.
 
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Single-Family Guarantee Segment
 
Table 14 presents the Segment Earnings of our Single-family Guarantee segment.
 
Table 14 — Segment Earnings and Key Metrics — Single-Family Guarantee(1)
 
                 
    Three Months Ended
 
    March 31,  
    2010     2009  
    (dollars in millions)  
 
Segment Earnings:
               
Net interest income
  $ 59     $ 54  
Provision for credit losses
    (6,041 )     (8,963 )
Non-interest income:
               
Management and guarantee income
    848       873  
Other non-interest income
    210       134  
                 
Total non-interest income
    1,058       1,007  
Non-interest expense:
               
Administrative expenses
    (219 )     (201 )
REO operations expense
    (156 )     (306 )
Other non-interest expense
    (89 )     (2,033 )
                 
Total non-interest expense
    (464 )     (2,540 )
                 
Segment adjustments(2)
    (213 )      
                 
Segment Earnings (loss) before income tax benefit
    (5,601 )     (10,442 )
Income tax benefit
    5       151  
                 
Segment Earnings (loss), net of taxes
    (5,596 )     (10,291 )
Reconciliation to GAAP net income (loss):
               
Credit guarantee-related adjustments(3)
          546  
Tax-related adjustments
          (192 )
                 
Total reconciling items, net of taxes
          354  
                 
Net income (loss) attributable to Freddie Mac
  $ (5,596 )   $ (9,937 )
                 
Key metrics — Single-family Guarantee:
               
Balances and Growth (in billions, except rate):
               
Average securitized balance of single-family credit guarantee portfolio(4)
  $ 1,797     $ 1,780  
Issuance — Single-family credit guarantees(4)
  $ 94     $ 104  
Fixed-rate products — Percentage of purchases(5)
    97.5 %     99.7 %
Liquidation Rate — Single-family credit guarantees (annualized)(6)
    34.7 %     21.2 %
Credit:
               
Delinquency rate(7)
    4.13 %     2.41 %
REO inventory (number of units)
    53,831       29,145  
Single-family credit losses, in basis points (annualized)(8)
    62.3       28.9  
Market:
               
Single-family mortgage debt outstanding (total U.S. market, in billions)(9)
    N/A     $ 10,423  
30-year fixed mortgage rate(10)
    5.1 %     4.8 %
 (1)  Under our revised method of presenting Segment Earnings, Segment Earnings for the Single-family Guarantee segment will equal GAAP net income (loss) attributable to Freddie Mac for the Single-family Guarantee segment for the first quarter of 2010 and subsequent periods. For reconciliations of Segment Earnings for the Single-family Guarantee segment in the first quarter of 2009 and the Segment Earnings line items to the comparable line items in our consolidated financial statements prepared in accordance with GAAP, see “NOTE 16: SEGMENT REPORTING — Table 16.2 — Segment Earnings and Reconciliation to GAAP Results” to our consolidated financial statements.
 (2)  For a description of our segment adjustments see “NOTE 16: SEGMENT REPORTING — Segment Earnings — Segment Adjustments” to our consolidated financial statements.
 (3)  Consists primarily of amortization and valuation adjustments pertaining to the guarantee obligation and guarantee asset which are excluded from Segment Earnings and cash compensation exchanged at the time of securitization, excluding buy-up and buy-down fees, which is amortized into earnings. These adjustments are recorded to periods prior to 2010 as the amendment to the accounting standards for transfers of financial assets and consolidation of VIEs was applied prospectively on January 1, 2010.
 (4)  Based on unpaid principal balance.
 (5)  Excludes Structured Transactions, but includes interest-only mortgages with fixed interest rates.
 (6)  Includes our purchases of delinquent loans from PC pools as discussed in our February 10, 2010 announcement that we would begin purchasing substantially all 120 days or more delinquent mortgages from our related fixed-rate and ARM PCs. See “CONSOLIDATED BALANCE SHEET ANALYSIS — Mortgage Loans” for more information.
 (7)  Single-family delinquency rate information is based on the number of loans that are 90 days or more past due and those in the process of foreclosure. Mortgage loans whose contractual terms have been modified under agreement with the borrower are not included if the borrower is less than 90 days delinquent under the modified terms. See “RISK MANAGEMENT — Credit Risks — Mortgage Credit Risk — Portfolio Management Activities — Credit Performance — Delinquencies” for further information.
 (8)  Credit losses are equal to REO operations expenses plus charge-offs, net of recoveries, associated with single-family mortgage loans. Calculated as the amount of credit losses divided by the average balance of our single-family credit guarantee portfolio.
 (9)  Source: Federal Reserve Flow of Funds Accounts of the United States of America dated March 11, 2010.
(10)  Based on Freddie Mac’s PMMS rate for the last week in the quarter, which represents the national average mortgage commitment rate to a qualified borrower exclusive of any fees and points required by the lender. This commitment rate applies only to conventional financing on conforming mortgages with LTV ratios of 80% or less.
 
Segment Earnings (loss) for our Single-family Guarantee segment improved to a loss of $(5.6) billion for the first quarter of 2010, compared to a loss of $(10.3) billion for the first quarter of 2009, primarily due to a $2.9 billion decrease in provision for credit losses and a $2.1 billion decrease in non-interest expense. Other non-interest expense
 
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declined from $2.0 billion in the first quarter of 2009 to $89 million in the first quarter of 2010 due to changes in accounting standards that resulted in lower losses on loans purchased in 2010. Upon adoption of new accounting standards for transfers of financial assets and the consolidation of VIEs as of January 1, 2010, we no longer recognize losses on single-family loans purchased under our financial guarantees with deterioration in credit quality, except for those associated with long-term standby agreements. See “NOTE 2: CHANGE IN ACCOUNTING PRINCIPLES” to our consolidated financial statements for further information.
 
Table 15 below provides summary information about Segment Earnings management and guarantee income for this segment. Segment Earnings management and guarantee income consists of contractual amounts due to us related to our management and guarantee fees as well as amortization of credit fees.
 
Table 15 — Segment Earnings Management and Guarantee Income — Single-Family Guarantee
 
                                 
    Three Months Ended March 31,  
    2010     2009  
          Average
          Average
 
    Amount     Rate(1)     Amount     Rate(1)  
    (dollars in millions, rates in basis points)  
 
Contractual management and guarantee fees
  $ 625       13.3     $ 658       14.4  
Amortization of credit fees
    223       4.8       215       4.7  
                                 
Total Segment Earnings management and guarantee income
  $ 848       18.1     $ 873       19.1  
                                 
(1)  Annualized, based on the average balance of our single-family credit guarantee portfolio.
 
Segment Earnings management and guarantee income decreased in the first quarter of 2010, as compared to the first quarter of 2009 due to a decline in the average rate of contractual management and guarantee fees. Our average contractual management and guarantee fee rates declined since newly issued PCs in 2009 and the first quarter of 2010 had lower average rates than those PCs that were liquidated during these periods, which in part reflects the impact of market-adjusted pricing on new business purchases and higher credit quality of the composition of mortgages within our new PC issuances in these periods (for which we receive a lower fee). Market adjusted pricing is a process in which we adjust our rates based on changes in spreads between the prices at which our PCs and Fannie Mae’s mortgage-backed securities trade in the market.
 
Current market conditions have placed competitive pressure on our contractual management and guarantee fee rates, which has limited our ability to increase our rates as our customers renew their contracts. The Conservator’s directive that we provide increased support to the mortgage market has also affected our guarantee pricing decisions by limiting our ability to adjust our fees for current expectations of credit risk, and will likely continue to do so. Due to these competitive and other pressures, we do not have the ability to raise our contractual management and guarantee fee rates to offset the increased provision for credit losses on existing business. Consequently, we expect to continue to report a net loss for the Single-family Guarantee segment for the foreseeable future.
 
Our Segment Earnings provision for credit losses for the Single-family Guarantee segment was $6.0 billion for the first quarter of 2010, compared to $9.0 billion for the first quarter of 2009. The provision for credit losses was lower in the first quarter of 2010 due to slower growth in the rate of delinquencies and non-performing loans in our single-family credit guarantee portfolio, as compared to the first quarter of 2009. See “RISK MANAGEMENT — Credit Risks — Non-performing assets” for further information on growth of non-performing single-family loans. Our Segment Earnings provision for credit losses is generally higher than that recorded under GAAP primarily due to recognized provision associated with foregone interest income on non-performing loans, which is not recognized under GAAP since the loans are placed on non-accrual status.
 
The delinquency rate on our single-family credit guarantee portfolio, including Structured Transactions, increased to 4.13% as of March 31, 2010 from 3.98% as of December 31, 2009. Charge-offs, gross, for this segment increased to $3.4 billion in the first quarter of 2010 compared to $1.4 billion in the first quarter of 2009, primarily due to a considerable increase in the volume of REO properties we acquired through foreclosure transfers. REO activity continued to increase in the first quarter of 2010 in all regions of the U.S., particularly in the states of California, Florida, Arizona, Michigan, Illinois and Georgia. The West region represented approximately 29% of our REO property acquisitions during the first quarter of 2010 based on the number of units. The highest concentration in the West region is in the state of California. California accounted for a significant amount of our credit losses, comprising approximately 26% and 29% of our total credit losses in the first quarters of 2010 and 2009, respectively. We expect growth in foreclosure transfers will result in continued increases in charge-offs during the remainder of 2010. See “RISK MANAGEMENT — Credit Risks — Portfolio Management Activities — Table 57 — Single-Family Credit Loss Concentration Analysis” for additional information about our credit losses.
 
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The average securitized balance of our single-family credit guarantee portfolio was 1% higher in the first quarter of 2010, as compared to the first quarter of 2009. We continued to experience a high composition of refinance mortgages in our purchase volume during the first quarter of 2010 due to continued low interest rates and the growth of the Freddie Mac Relief Refinance Mortgagessm. In addition, our $89 billion in single-family purchase activity during the first quarter of 2010 contained a higher composition of fixed-rate amortizing mortgage loans than in recent years. Loans purchased in 2009 and the first quarter of 2010 comprised 28%, in aggregate, of our single-family credit guarantee portfolio at March 31, 2010 and had average credit scores of 756 and 751, respectively.
 
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Multifamily Segment
 
Table 16 presents the Segment Earnings of our Multifamily segment.
 
Table 16 — Segment Earnings and Key Metrics — Multifamily(1)
 
                 
    Three Months Ended
 
    March 31,  
    2010     2009  
    (dollars in millions)  
 
Segment Earnings:
               
Net interest income
  $ 238     $ 195  
Provision for credit losses
    (29 )      
Non-interest income (loss):
               
Management and guarantee income
    24       21  
Security impairments
    (55 )      
Derivative gains (losses)
    5       (31 )
Other non-interest income (loss)
    108       (121 )
                 
Total non-interest income (loss)
    82       (131 )
Non-interest expense:
               
Administrative expenses
    (54 )     (50 )
REO operations expense
    (3 )      
Other non-interest expense
    (17 )     (5 )
                 
Total non-interest expense
    (74 )     (55 )
                 
Segment adjustments(2)
           
                 
Segment Earnings (loss) before income tax benefit (expense)
    217       9  
LIHTC partnerships tax benefit
    147       151  
Income tax benefit (expense)
    (146 )     (152 )
Less: Net (income) loss — noncontrolling interest
    3        
                 
Segment Earnings (loss), net of taxes
    221       8  
Reconciliation to GAAP net income (loss):
               
Credit guarantee-related adjustments(3)
          5  
Tax-related adjustments
          (2 )
                 
Total reconciling items, net of taxes
          3  
                 
Net income (loss) attributable to Freddie Mac
  $ 221     $ 11  
                 
Key metrics — Multifamily:
               
Balances and Growth:
               
Average balance of Multifamily loan portfolio
  $ 83,456     $ 74,243  
Average balance of Multifamily guarantee portfolio
  $ 18,179     $ 15,512  
Average balance of Multifamily investment securities portfolio
  $ 62,501     $ 64,758  
Purchases, net — Multifamily loan portfolio(4)
  $ (163 )   $ 3,648  
Issuances — Multifamily guarantee portfolio
  $ 3,157     $ 177  
Growth rate (annualized)
    8 %     13 %
Net interest yield — Segment Earnings basis (annualized)(5)
    0.65 %     0.56 %
Average Management and guarantee fee rate (annualized)(6)
    52.8 bps       52.7 bps  
Credit losses (annualized)(7)
    8.2 bps       0.9 bps  
Liquidation Rate — Multifamily loan portfolio (annualized)
    2.5 %     3.5 %
Credit:
               
Delinquency rate(8)
    0.24 %     0.10 %
Allowance for loan losses and reserve for guarantee losses
  $ 842     $ 275  
(1)  Under our revised method of presenting Segment Earnings, Segment Earnings for the Multifamily segment will equal GAAP net income (loss) attributable to Freddie Mac for the Multifamily segment for the first quarter of 2010 and subsequent periods. For reconciliations of Segment Earnings for the Multifamily segment in the first quarter of 2009 and the Segment Earnings line items to the comparable line items in our consolidated financial statements prepared in accordance with GAAP, see “NOTE 16: SEGMENT REPORTING — Table 16.2 — Segment Earnings and Reconciliation to GAAP Results” to our consolidated financial statements.
(2)  For a description of our segment adjustments see “NOTE 16: SEGMENT REPORTING — Segment Earnings — Segment Adjustments” to our consolidated financial statements.
(3)  Consists primarily of amortization and valuation adjustments pertaining to the guarantee asset and guarantee obligation which are excluded from Segment Earnings. These adjustments are recorded to periods prior to 2010 as the amendment to the accounting standards for transfers of financial assets and consolidation of VIEs was applied prospectively on January 1, 2010.
(4)  Consists of unpaid principal balance of all multifamily mortgage loan purchases, net of $1.6 billion and $0 million in the first quarters of 2010 and 2009, respectively, associated with issuances for the Multifamily guarantee portfolio.
(5)  Represents Multifamily Segment Earnings — net interest income divided by the average balance of the multifamily mortgage investments portfolio.
(6)  Represents the Multifamily Segment Earnings — management and guarantee income, excluding prepayment and certain other fees, divided by the average balance of the multifamily guarantee portfolio.
(7)  Credit losses are equal to REO operations expenses plus charge-offs, net of recoveries, associated with multifamily mortgage loans. Calculated as the amount of credit losses divided by the combined average balances of our multifamily loan portfolio and multifamily guarantee portfolio.
(8)  Based on unpaid principal balances of mortgages 60 days or more delinquent as well as those in the process of foreclosure and excluding Structured Transactions. See “RISK MANAGEMENT — Credit Risks — Mortgage Credit Risk — Portfolio Management Activities — Credit Performance — Delinquencies” for further information.
 
Segment Earnings (loss) for our Multifamily segment increased to $221 million for the first quarter of 2010 compared to $8 million for the first quarter of 2009, primarily due to higher net interest income and non-interest income, which was partially offset by higher provision for credit losses attributable to the segment. Net interest income
 
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increased $43 million, or 22%, for the first quarter of 2010 compared to the first quarter of 2009, primarily driven by a 12% increase in the average balance of our Multifamily loan portfolio and higher Segment Earnings net interest yield. Our Multifamily provision for credit losses was $(29) million for the first quarter of 2010 compared to $0 million for the first quarter of 2009. Non-interest income (loss) was $82 million in the first quarter of 2010 compared to $(131) million in the first quarter of 2009. The increase in non-interest income was primarily due to net gains recognized on the sale of loans. We sold $1.8 billion in unpaid principal balance of multifamily loans during the first quarter of 2010, including $1.6 billion in sales through Structured Transactions. In addition, there was a $106 million decline in LIHTC partnership losses during the first quarter of 2010, compared to the first quarter of 2009, due to the write-down of these investments to zero in the fourth quarter of 2009. See “MD&A CONSOLIDATED RESULTS OF OPERATIONS — Non-Interest Income (Loss) — Low-Income Housing Tax Credit Partnerships” in our 2009 Annual Report for more information.
 
Our multifamily delinquency rate increased in the first quarter of 2010, rising from 0.19% at December 31, 2009 to 0.24% at March 31, 2010. Our multifamily non-performing loans as of March 31, 2010 are principally loans on properties located in Texas, Florida, Georgia, Arizona and Nevada. Market fundamentals for multifamily properties that we monitor continued to be challenging during the first quarter of 2010, particularly in certain states in the Southeast and West regions of the U.S. See “NOTE 18: CONCENTRATION OF CREDIT AND OTHER RISKS” to our consolidated financial statements for further information on geographical concentrations. As of March 31, 2010, approximately half of the multifamily loans that were 60 days or more delinquent (measured both in terms of number of loans and on a UPB basis) have credit enhancements that we believe will mitigate our expected losses on those loans. The delinquency rate of credit-enhanced loans in our multifamily mortgage portfolio as of March 31, 2010 and December 31, 2009, was 1.11% and 1.13%, respectively, while the delinquency rate for non-credit-enhanced loans in our multifamily mortgage portfolio was 0.13% and 0.07%, respectively. See “Table 3 — Credit Statistics, Multifamily Mortgage Portfolio” for quarterly data on delinquency rates and non-performing loans.
 
CONSOLIDATED BALANCE SHEETS ANALYSIS
 
The following discussion of our consolidated balance sheets should be read in conjunction with our consolidated financial statements, including the accompanying notes. Also see “CRITICAL ACCOUNTING POLICIES AND ESTIMATES” for more information concerning our more significant accounting policies and estimates applied in determining our reported financial position.
 
Change in Accounting Principles
 
Effective January 1, 2010, we adopted amendments to the accounting standards for transfers of financial assets and consolidation of VIEs. The accounting standard for transfers of financial assets was applicable on a prospective basis to new transfers, while the accounting standard relating to consolidation of VIEs was applied prospectively to all entities within its scope as of the date of adoption. The adoption of these amendments had a significant impact on our consolidated financial statements and other financial disclosures beginning in the first quarter of 2010. As a result of adoption, our consolidated balance sheet results as of March 31, 2010 reflect the consolidation of our single-family PC trusts and certain of our Structured Transactions.
 
The cumulative effect of these changes in accounting principles was an increase of $1.5 trillion to assets and liabilities, respectively, and a net decrease of $11.7 billion to total equity (deficit) as of January 1, 2010, which included changes to the opening balances of retained earnings (accumulated deficit) and AOCI, net of taxes.
 
See “CONSOLIDATED RESULTS OF OPERATIONS — Change in Accounting Principles,” “NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES — Consolidation and Equity Method of Accounting” and “NOTE 2: CHANGE IN ACCOUNTING PRINCIPLES” to our consolidated financial statements for additional information on the impacts of the adoption of these changes in accounting principles.
 
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 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 also use these assets to manage our liquidity. We consider federal funds sold to be overnight unsecured trades executed with commercial banks that are members of the Federal Reserve System. We consider other unsecured lending to be unsecured trades with these commercial banks with a term longer than overnight. As discussed above, commencing January 1, 2010, we consolidated the assets of our single-family PC trusts and certain of our Structured Transactions. These assets included short-term non-mortgage assets, comprised primarily of restricted cash and cash equivalents and investments in
 
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securities purchased under agreements to resell (the investing activities are performed in our capacity as securities administrator).
 
We held $55.4 billion and $64.7 billion of cash and cash equivalents as of March 31, 2010 and December 31, 2009, respectively. The decrease in cash and cash equivalents from December 31, 2009 to March 31, 2010 is due, in part, to our purchase of $56.6 billion of unpaid principal balance of single-family loans from our PC trusts during the first quarter of 2010.
 
We held $4.1 billion and $0 billion of federal funds sold at March 31, 2010 and December 31, 2009, respectively. Securities purchased under agreements to resell increased $14.4 billion to $21.4 billion at March 31, 2010, compared to $7.0 billion at December 31, 2009. The amount at March 31, 2010 includes $8.8 billion as a result of the consolidation of our single-family PC trusts and certain of our Structured Transactions as discussed above. The increase in these assets and our non-mortgage-related securities was partially offset by the decreases in our cash and cash equivalents, as our liquid assets increased on an overall basis during the three months ended March 31, 2010.
 
Investments in Securities
 
Table 17 provides detail regarding our investments in securities as presented in our consolidated balance sheets. Due to the accounting changes noted above, Table 17 does not include our holdings of single-family PCs and certain Structured Transactions as of March 31, 2010. For information on our holdings of such securities, see “CONSOLIDATED RESULTS OF OPERATIONS — Segment Earnings — Table 12 — Segment Portfolio Composition.”
 
Table 17 — Investments in Securities
 
                 
    Fair Value  
    March 31, 2010     December 31, 2009  
    (in millions)  
 
Investments in securities:
               
Available-for-sale:
               
Available-for-sale mortgage-related securities:
               
Freddie Mac(1)
  $ 91,674     $ 223,467  
Subprime
    35,835       35,721  
Commercial mortgage-backed securities
    56,491       54,019  
Option ARM
    7,025       7,236  
Alt-A and other
    13,398       13,407  
Fannie Mae
    33,574       35,546  
Obligations of states and political subdivisions
    11,104       11,477  
Manufactured housing
    901       911  
Ginnie Mae
    335       347  
                 
Total available-for-sale mortgage-related securities
    250,337       382,131  
                 
Available-for-sale non-mortgage-related securities:
               
Asset-backed securities
    2,016       2,553  
                 
Total available-for-sale non-mortgage-related securities
    2,016       2,553  
                 
Total investments in available-for-sale securities
    252,353       384,684  
                 
Trading:
               
Trading mortgage-related securities:
               
Freddie Mac(1)
    12,890       170,955  
Fannie Mae
    31,798       34,364  
Ginnie Mae
    182       185  
Other
    25       28  
                 
Total trading mortgage-related securities
    44,895       205,532  
                 
Trading non-mortgage-related securities:
               
Asset-backed securities
    1,051       1,492  
Treasury bills
    29,568       14,787  
FDIC-guaranteed corporate medium-term notes
    441       439  
                 
Total trading non-mortgage-related securities
    31,060       16,718  
                 
Total investments in trading securities
    75,955       222,250  
                 
Total investments in securities
  $ 328,308     $ 606,934  
                 
(1)  Upon our adoption of amendments to the accounting standards for transfers of financial assets and consolidation of VIEs on January 1, 2010, we no longer account for single-family PCs and certain Structured Transactions we purchase as investments in securities because we now recognize the underlying mortgage loans on our consolidated balance sheets through consolidation of the related trusts. These loans are discussed below in “Mortgage Loans.” For further information, see “NOTE 2: CHANGE IN ACCOUNTING PRINCIPLES” to our consolidated financial statements.
 
Non-Mortgage-Related Securities
 
We held investments in non-mortgage-related available-for-sale and trading securities of $33.1 billion and $19.3 billion as of March 31, 2010 and December 31, 2009, respectively. Our holdings of non-mortgage-related securities increased during the three months ended March 31, 2010 as we purchased Treasury bills to maintain required
 
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liquidity and contingency levels. At March 31, 2010, investments in securities included $3.1 billion of non-mortgage-related asset-backed securities, $29.6 billion of Treasury bills and $0.4 billion of FDIC-guaranteed corporate medium-term notes that we could sell to meet mortgage funding needs, provide diverse sources of liquidity or help manage the interest rate risk inherent in mortgage-related assets. At December 31, 2009, investments in securities included $4.0 billion of non-mortgage-related asset-backed securities, $14.8 billion of Treasury bills and $0.4 billion of FDIC-guaranteed corporate medium-term notes.
 
We recorded net impairment of available-for-sale securities recognized in earnings during the three months ended March 31, 2010 and 2009 of $0 million and $0.2 billion, respectively, for our non-mortgage-related securities, as we could not assert that we did not intend to, or we will not be required to, sell these securities before a recovery of the unrealized losses. The decision to impair non-mortgage-related securities is consistent with our consideration of these securities as a contingent source of liquidity. We do not expect any contractual cash shortfalls related to these securities. See “NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES — Recently Adopted Accounting Standards — Change in the Impairment Model for Debt Securities” in our 2009 Annual Report for information on how other-than-temporary impairments are recorded on our financial statements commencing in the second quarter of 2009.
 
Table 18 provides credit ratings of our investments in non-mortgage-related asset-backed securities at March 31, 2010 classified as either available-for-sale or trading on our consolidated balance sheets.
 
Table 18 — Investments in Non-Mortgage-Related Asset-Backed Securities
 
                                         
    March 31, 2010  
                            Current
 
    Amortized
    Fair
    Original%
    Current%
    Investment
 
Collateral Type
  Cost     Value     AAA-rated(1)     AAA-rated(2)     Grade(3)  
    (dollars in millions)                    
 
Non-mortgage-related asset-backed securities:
                                       
Credit cards
  $ 2,052     $ 2,100       100 %     100 %     100 %
Auto credit
    733       748       100       100       100  
Equipment lease
    95       99       100       100       100  
Student loans
    65       67       100       100       100  
Stranded assets(4)
    52       53       100       100       100  
                                         
Total non-mortgage-related asset-backed securities
  $ 2,997     $ 3,067       100       100       100  
                                         
(1)  Reflects the percentage of our investments that were AAA-rated as of the date of our acquisition of the security, based on unpaid principal balance and the lowest rating available.
(2)  Reflects the AAA-rated composition of the securities as of April 21, 2010, based on unpaid principal balance as of March 31, 2010 and the lowest rating available.
(3)  Reflects the composition of these securities with credit ratings BBB– or above as of April 21, 2010, based on unpaid principal balance as of March 31, 2010 and the lowest rating available.
(4)  Consists of securities backed by liens secured by fixed assets owned by regulated public utilities.
 
Mortgage-Related Securities
 
We are primarily a buy-and-hold investor in mortgage-related securities, which consist of securities issued by Fannie Mae, Ginnie Mae and other financial institutions. Upon our adoption of amendments to the accounting standards for transfers of financial assets and consolidation of VIEs on January 1, 2010, we no longer account for single-family PCs and certain Structured Transactions we purchase as investments in securities because we now recognize the underlying mortgage loans on our consolidated balance sheets through consolidation of the related trusts. Our mortgage-related securities are classified as either available-for-sale or trading on our consolidated balance sheets.
 
We include our investments in mortgage-related securities in the calculation of our mortgage-related investments portfolio. Our mortgage-related investments portfolio also includes: (a) our holdings of single-family PCs and certain Structured Transactions, which are presented in “CONSOLIDATED RESULTS OF OPERATIONS — Segment Earnings — Table 12 — Segment Portfolio Composition”; and (b) our holdings of unsecuritized single-family and multifamily loans, which are presented in “Mortgage Loans — Table 25 — Characteristics of Mortgage Loans on Our Consolidated Balance Sheets.” The unpaid principal balance of our mortgage-related investments portfolio, for purposes of the limit imposed by the Purchase Agreement and FHFA regulation, was $753.3 billion at March 31, 2010, and may not exceed $810 billion as of December 31, 2010. The unpaid principal balance of our mortgage-related investments portfolio under the Purchase Agreement is determined without giving effect to any change in accounting standards related to transfer of financial assets and consolidation of VIEs or any similar accounting standard. Accordingly, for purposes of the portfolio limit, PCs and certain Structured Transactions purchased into the mortgage-related investments portfolio are considered assets rather than debt reductions. FHFA stated its expectation that we will not be a substantial buyer or seller of mortgages for our mortgage-related investments portfolio, except for purchases of delinquent mortgages out of PC trusts.
 
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Table 19 provides unpaid principal balances of our investments in mortgage-related securities classified as either available-for-sale or trading on our consolidated balance sheets. Due to the accounting changes noted above, Table 19 does not include our holdings of single-family PCs and certain Structured Transactions as of March 31, 2010. For information on our holdings of such securities, see “CONSOLIDATED RESULTS OF OPERATIONS — Segment Earnings — Table 12 — Segment Portfolio Composition.”
 
Table 19 — Characteristics of Mortgage-Related Securities on Our Consolidated Balance Sheets
 
                                                 
    March 31, 2010     December 31, 2009  
    Fixed Rate     Variable Rate(1)     Total     Fixed Rate     Variable Rate(1)     Total  
    (in millions)  
 
PCs and Structured Securities:(2)
                                               
Single-family
  $ 85,535     $ 9,078     $ 94,613     $ 294,958     $ 77,708     $ 372,666  
Multifamily
    316       2,013       2,329       277       1,672       1,949  
                                                 
Total PCs and Structured Securities
    85,851       11,091       96,942       295,235       79,380       374,615  
                                                 
Non-Freddie Mac mortgage-related securities:
                                               
Agency mortgage-related securities:(3)
                                               
Fannie Mae:
                                               
Single-family
    34,148       26,482       60,630       36,549       28,585       65,134  
Multifamily
    431       89       520       438       90       528  
Ginnie Mae:
                                               
Single-family
    329       129       458       341       133       474  
Multifamily
    35             35       35             35  
                                                 
Total agency mortgage-related securities
    34,943       26,700       61,643       37,363       28,808       66,171  
                                                 
Non-agency mortgage-related securities:
                                               
Single-family:(4)
                                               
Subprime
    385       59,058       59,443       395       61,179       61,574  
Option ARM
          17,206       17,206             17,687       17,687  
Alt-A and other
    2,654       18,146       20,800       2,845       18,594       21,439  
Commercial mortgage-backed securities
    23,102       38,286       61,388       23,476       38,439       61,915  
Obligations of states and political subdivisions(5)
    11,336       40       11,376       11,812       42       11,854  
Manufactured housing(6)
    1,007       163       1,170       1,034       167       1,201  
                                                 
Total non-agency mortgage-related securities(7)
    38,484       132,899       171,383       39,562       136,108       175,670  
                                                 
Total unpaid principal balance of mortgage-related securities
  $ 159,278     $ 170,690       329,968     $ 372,160     $ 244,296       616,456  
                                                 
Premiums, discounts, deferred fees, impairments of unpaid principal balances and other basis adjustments
                    (9,654 )                     (5,897 )
Net unrealized losses on mortgage-related securities, pre-tax
                    (25,083 )                     (22,896 )
                                                 
Total carrying value of mortgage-related securities
                  $ 295,231                     $ 587,663  
                                                 
(1)  Variable-rate mortgage-related securities include those with a contractual coupon rate that, prior to contractual maturity, is either scheduled to change or is subject to change based on changes in the composition of the underlying collateral.
(2)  For our PCs and Structured Securities, we are subject to the credit risk associated with the underlying mortgage loan collateral. On January 1, 2010, we began prospectively recognizing on our consolidated balance sheets the mortgage loans underlying our issued single-family PCs and certain Structured Transactions as held-for-investment mortgage loans, at amortized cost. We do not consolidate our resecuritization trusts since we are not deemed to be the primary beneficiary of such trusts. See “NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES — Investments in Securities” to our consolidated financial statements for further information.
(3)  Agency mortgage-related securities are generally not separately rated by nationally recognized statistical rating organizations, but are viewed as having a level of credit quality at least equivalent to non-agency mortgage-related securities AAA-rated or equivalent.
(4)  Single-family non-agency mortgage-related securities backed by subprime first lien, option ARM and Alt-A loans include significant credit enhancements, particularly through subordination. For information about how these securities are rated, see “Table 23 — Ratings of Available-for-Sale Non-Agency Mortgage-Related Securities Backed by Subprime, Option ARM, Alt-A and Other Loans and CMBS at March 31, 2010 and December 31, 2009” and “Table 24 — Ratings Trend of Available-for-Sale Non-Agency Mortgage-Related Securities Backed by Subprime, Option ARM, Alt-A and Other Loans and CMBS.”
(5)  Consists of mortgage revenue bonds. Approximately 54% and 55% of these securities held at March 31, 2010 and December 31, 2009, respectively, were AAA-rated as of those dates, based on the lowest rating available.
(6)  At both March 31, 2010 and December 31, 2009, 17% of mortgage-related securities backed by manufactured housing bonds were rated BBB– or above, based on the lowest rating available. For both dates, 91% of manufactured housing bonds had credit enhancements, including primary monoline insurance, that covered 23% of the manufactured housing bonds based on the unpaid principal balance. At both March 31, 2010 and December 31, 2009, we had secondary insurance on 61% of these bonds that were not covered by primary monoline insurance, based on the unpaid principal balance. Approximately 3% of the mortgage-related securities backed by manufactured housing bonds were AAA-rated at both March 31, 2010 and December 31, 2009, based on the unpaid principal balance and the lowest rating available.
(7)  Credit ratings for most non-agency mortgage-related securities are designated by no fewer than two nationally recognized statistical rating organizations. Approximately 25% and 26% of total non-agency mortgage-related securities held at March 31, 2010 and December 31, 2009, respectively, were AAA-rated as of those dates, based on the unpaid principal balance and the lowest rating available.
 
The total unpaid principal balance of our investments in mortgage-related securities decreased from $616.5 billion at December 31, 2009 to $330.0 billion at March 31, 2010 primarily as a result of a decrease of $286.5 billion related to our adoption of the amendments to the accounting standards for the transfer of financial assets and the consolidation of VIEs on January 1, 2010. Upon the adoption of these amendments, we no longer record the purchase of a PC or a single-class resecuritization security backed by PCs issued by our consolidated securitization trusts as an investment. We now account for these purchases as extinguishments of outstanding debt.
 
Table 20 summarizes our mortgage-related securities purchase activity for the three months ended March 31, 2010 and 2009. The purchase activity for the three months ended March 31, 2010 includes our purchase activity related to
 
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the single-family PCs and Structured Transactions issued by trusts that we consolidated. Due to the accounting changes noted above, effective January 1, 2010, purchases of single-family PCs and Structured Transactions issued by trusts that we consolidated are recorded as an extinguishment of debt securities of consolidated trusts held by third parties on our consolidated balance sheets. Prior to January 1, 2010, purchases of single-family PCs and Structured Transactions were recorded as either available-for-sale securities or trading securities on our consolidated balance sheets.
 
Table 20 — Total Mortgage-Related Securities Purchase Activity(1)
 
                 
    Three Months Ended
 
    March 31,  
    2010     2009  
    (in millions)  
 
Non-Freddie Mac mortgage-related securities purchased for Structured Securities:
               
Ginnie Mae Certificates
  $ 13     $ 11  
Non-agency mortgage-related securities purchased for Structured Transactions
    5,621        
                 
Total Non-Freddie Mac mortgage-related securities purchased for Structured Securities
    5,634       11  
                 
Non-Freddie Mac mortgage-related securities purchased as investments in securities:
               
Agency securities:
               
Fannie Mae:
               
Fixed-rate
          30,109  
Variable-rate
    47       1,185  
                 
Total Fannie Mae
    47       31,294  
                 
Ginnie Mae fixed-rate
          27  
                 
Total agency mortgage-related securities
    47       31,321  
                 
Non-agency securities:
               
Mortgage revenue bonds fixed-rate
          76  
                 
Total non-agency mortgage-related securities
          76  
                 
Total non-Freddie Mac mortgage-related securities purchased as investments in securities
    47       31,397  
                 
Total non-Freddie Mac mortgage-related securities purchased
  $ 5,681     $ 31,408  
                 
Freddie Mac mortgage-related securities repurchased:(2)
               
Single-family:
               
Fixed-rate
  $ 4,840     $ 83,931  
Variable-rate
    250       249  
Multifamily:
               
Fixed-rate
    40        
Variable-rate
    367        
                 
Total Freddie Mac mortgage-related securities repurchased
  $ 5,497     $ 84,180  
                 
(1)  Based on unpaid principal balances. Excludes mortgage-related securities traded but not yet settled.
(2)  Includes mortgage-related securities accounted for as investments in securities or extinguishments of debt based upon whether we are considered the primary beneficiary of the trusts that issue these securities.
 
Our purchases of mortgage-related securities continues to be very limited because of a relative lack of favorable investment opportunities, as evidenced by tight spreads on agency mortgage-related securities. We believe these tight spread levels were driven by the Federal Reserve’s agency mortgage-related securities purchase program. The Federal Reserve completed its purchase program in March 2010.
 
Higher Risk Components of Our Investments in Mortgage-Related Securities
 
As discussed below, we have exposure to subprime, option ARM, Alt-A and other loans as part of our investments in mortgage-related securities as follows:
 
  •  Single-family non-agency mortgage-related securities:  We hold non-agency mortgage-related securities backed by subprime, option ARM, and Alt-A and other loans.
 
  •  Structured Transactions:  We hold certain Structured Transactions as part of our investments in securities. There are subprime and option ARM loans underlying some of our Structured Transactions. For more information on certain higher risk categories of single-family loans underlying our Structured Transactions, see “RISK MANAGEMENT — Credit Risks — Mortgage Credit Risk.”
 
Non-Agency Mortgage-Related Securities Backed by Subprime, Option ARM and Alt-A Loans
 
During both the three months ended March 31, 2010 and 2009, we did not buy any non-agency mortgage-related securities backed by subprime, option ARM or Alt-A loans. As discussed below, we recognized significant impairment on our holdings of such securities during the three months ended March 31, 2010 and 2009. See “Table 22 — Net Impairment on Available-for-Sale Mortgage-Related Securities Recognized in Earnings” for more information.
 
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We classify our non-agency mortgage-related securities as subprime, option ARM or Alt-A if the securities were labeled as such when sold to us. Table 21 presents information about our holdings of these securities.
 
Table 21 — Non-Agency Mortgage-Related Securities Backed by Subprime, Option ARM and Alt-A Loans(1)
 
                                                 
    March 31, 2010   December 31, 2009
    Unpaid
  Collateral
  Average
  Unpaid
  Collateral
  Average
    Principal
  Delinquency
  Credit
  Principal
  Delinquency
  Credit
    Balance   Rate(2)   Enhancement(3)   Balance   Rate(2)   Enhancement(3)
    (dollars in millions)
 
Mortgage loans:
                                               
Single-family:(4)
                                               
Subprime first lien
  $ 58,912       49 %     28 %   $ 61,019       49 %     29 %
Option ARM
    17,206       46       15       17,687       45       16  
Alt-A
    17,476       27       10       17,998       26       11  
 
                 
    Three Months Ended
    March 31, 2010   March 31, 2009
    (in millions)
 
Principal repayments:(5)
               
Subprime — first and second liens
  $ 2,130     $ 3,855  
Option ARM
    481       386  
Alt-A and other
    639       903  
(1)  See “Ratings of Non-Agency Mortgage-Related Securities” for additional information about these securities.
(2)  Determined based on loans that are 60 days or more past due that underlie the securities using information obtained from a third-party data provider.
(3)  Reflects the average current credit enhancement on all such securities we hold provided by subordination of other securities held by third parties. Excludes securities with monoline bond insurance and credit enhancement provided by excess interest.
(4)  Excludes non-agency mortgage-related securities backed by other loans, which are primarily comprised of securities backed by home equity lines of credit.
(5)  In addition to the contractual interest payments, we receive monthly remittances of principal repayments from both voluntary prepayments on the underlying collateral of these securities and the recoveries of liquidated loans, representing a partial return of our investment in these securities.
 
We have significant credit enhancements on the majority of the non-agency mortgage-related securities we hold backed by subprime first lien, option ARM and Alt-A loans, particularly through subordination. These credit enhancements are one of the primary reasons we expect our actual losses, through principal or interest shortfalls, to be less than the underlying collateral losses in aggregate. However, during the first quarter of 2010, we continued to experience depletion of credit enhancements on certain of the securities backed by subprime first lien, option ARM and Alt-A loans due to poor performance of the underlying collateral.
 
Unrealized Losses on Available-for-Sale Mortgage-Related Securities
 
At March 31, 2010, our gross unrealized losses, pre-tax, on available-for-sale mortgage-related securities were $35.2 billion, compared to $42.7 billion at December 31, 2009. See “Total Equity (Deficit)” for additional information regarding unrealized losses on our available-for-sale securities.
 
Our investments in CMBS, although backed by mortgage pools that include mortgages financing both multifamily properties and commercial properties, are subject primarily to the risks of the multifamily market, because they receive distributions of cash flow primarily from multifamily mortgages. However, our CMBS investments may be exposed to stresses in the commercial real estate market in two respects. First, delinquencies on commercial mortgages in a pool could reach a level that would reduce the effectiveness of any credit enhancement in the form of subordination that supports our CMBS backed by that pool. Second, it is possible that stresses in the commercial mortgage market might further affect the market value of our investments. We believe the unrealized losses related to these securities at March 31, 2010 were mainly attributable to the limited liquidity and large risk premiums in the CMBS market consistent with the broader credit markets. Similarly, we believe that unrealized losses on single-family non-agency mortgage-related securities at March 31, 2010 were attributable to poor underlying collateral performance, limited liquidity and large risk premiums in the non-agency mortgage market. All securities in an unrealized loss position are evaluated to determine if the impairment is other-than-temporary. See “NOTE 7: INVESTMENTS IN SECURITIES” to our consolidated financial statements for additional information regarding unrealized losses on available-for-sale securities.
 
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Other-Than-Temporary Impairments on Available-for-Sale Mortgage-Related Securities
 
Table 22 provides information about the mortgage-related securities for which we recognized other-than-temporary impairments during the three months ended March 31, 2010 and 2009.
 
Table 22 — Net Impairment on Available-for-Sale Mortgage-Related Securities Recognized in Earnings
 
                                 
    Three Months Ended March 31, 2010     Three Months Ended March 31, 2009  
    Unpaid
    Net Impairment of
    Unpaid
    Net Impairment of
 
    Principal
    Available-for-Sale Securities
    Principal
    Available-for-Sale Securities
 
    Balance     Recognized in Earnings     Balance     Recognized in Earnings  
    (in millions)  
 
Subprime:
                               
2006 & 2007 first lien
  $ 19,084     $ 317     $ 10,305     $ 3,996  
Other years — first and second liens(1)
    643       15       363       101  
                                 
Total subprime — first and second liens
    19,727       332       10,668       4,097  
                                 
Option ARM:
                               
2006 & 2007
    7,251       88       1,348       769  
Other years
    223       14       397       248  
                                 
Total option ARM
    7,474       102       1,745       1,017  
                                 
Alt-A:
                               
2006 & 2007
    1,625       9       1,405       559  
Other years
    292       2       1,039       490  
                                 
Total Alt-A
    1,917       11       2,444       1,049  
                                 
Other loans
    491       8       1,168       793  
                                 
Total subprime, option ARM, Alt-A and other loans
    29,609       453       16,025       6,956  
Commercial mortgage-backed securities
    1,629       55              
Manufactured housing
    83       2              
                                 
Total available-for-sale mortgage-related securities
  $ 31,321     $ 510     $ 16,025     $ 6,956  
                                 
(1)  Includes all second liens.
 
As of March 31, 2010, we had recognized a present value of future credit losses of $10.9 billion on our non-agency mortgage-related securities, of which $510 million was recognized in earnings during the three months ended March 31, 2010. The present value of future credit losses relate to $70.1 billion of the total unpaid principal balance of $171.4 billion of our non-agency mortgage-related securities as of March 31, 2010. The $510 million impairment is primarily due to deterioration of the future expectation of collateral performance underlying these securities, particularly subprime, for our more recent vintages of non-agency mortgage-related securities. The deterioration in the performance of the collateral underlying these securities has not impacted our conclusion that we do not intend to sell these securities and it is not more likely than not that we will be required to sell such securities. Included in these net impairments are $453 million of impairments related to securities backed by subprime, option ARM, Alt-A and other loans.
 
As part of our impairment analysis, we identified CMBS with an unpaid principal balance of $1.6 billion that are expected to incur contractual losses, and recorded a total of $55 million of other-than-temporary impairment charges in earnings during the three months ended March 31, 2010. However, we view the performance of these securities as significantly worse than the vast majority of our CMBS, and while delinquencies for the remaining securities have increased, we believe the credit enhancement related to these securities is sufficient to cover expected losses. We do not intend to sell these securities and it is not more likely than not that we will be required to sell such securities before recovery of the unrealized losses.
 
We currently estimate that the future expected principal and interest shortfall on non-agency mortgage-related securities will be significantly less than the fair value declines. Since the beginning of 2007, we incurred actual principal cash shortfalls of $176 million on impaired securities backed by non-agency mortgage-related securities. However, many of our investments were structured so that realized collateral losses are not recognized until the investment matures.
 
The decline in mortgage credit performance has been particularly severe for subprime, option ARM, Alt-A and other loans. Many of the same economic factors impacting the performance of our single-family credit guarantee portfolio also impact the performance of our investments in non-agency mortgage-related securities. High unemployment, a large inventory of unsold homes, tight credit conditions and weak consumer confidence contributed to poor performance during the three months ended March 31, 2010. However, our expectations regarding future performance have generally improved. Both current and future performance are critical in assessing other-than-temporary impairments. In addition, the subprime, option ARM, Alt-A and other loans backing our
 
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securities have significantly greater concentrations in the states that are undergoing the greatest economic stress, such as California, Florida, Arizona and Nevada.
 
Contributing to the impairments recognized were certain credit enhancements related to primary monoline bond insurers where we have determined that it is likely a principal and interest shortfall will occur, and that in such a case there is substantial uncertainty surrounding the insurer’s ability to pay all future claims. We rely on monoline bond insurance, including secondary coverage, to provide credit protection on some of our investments in mortgage-related and non-mortgage-related securities. See “NOTE 18: CONCENTRATION OF CREDIT AND OTHER RISKS — Bond Insurers” to our consolidated financial statements for additional information. The recent deterioration has not impacted our conclusion that we do not intend to sell these securities and it is not more likely than not that we will be required to sell such securities.
 
While it is reasonably possible that collateral losses on our available-for-sale mortgage-related securities where we have not recorded an impairment earnings charge could exceed our credit enhancement levels, we do not believe that those conditions were likely at March 31, 2010. Based on our conclusion that we do not intend to sell our remaining available-for-sale mortgage-related securities and it is not more likely than not that we will be required to sell these securities before a sufficient time to recover all unrealized losses and our consideration of available information, we have concluded that the reduction in fair value of these securities was temporary at March 31, 2010 and as such has been recorded in AOCI.
 
We recognized impairment losses on non-agency mortgage-related securities of approximately $6.9 billion during the three months ended March 31, 2009. These impairment losses were recognized prior to the adoption of the amendment to the accounting standards for investments in debt and equity securities, and reflected mark-to-fair-value adjustments on non-agency mortgage-related securities backed by subprime, option ARM, Alt-A and other loans that were likely of incurring a contractual principal or interest loss. We believe that unrealized losses on non-agency mortgage-related securities at March 31, 2009 were attributable to poor underlying collateral performance, limited liquidity and large risk premiums in the non-agency mortgage market. During the three months ended March 31, 2009, we experienced significant deterioration in the performance of the underlying collateral of these securities and a lack of confidence in the credit enhancements provided by primary monoline bond insurance. For further information on our adoption of the amendment to the accounting standards for investments in debt and equity securities, see “NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES — Recently Adopted Accounting Standards — Change in the Impairment Model for Debt Securities” in our 2009 Annual Report.
 
Our assessments concerning other-than-temporary impairment require significant judgment and the use of models and are subject to change due to changes in the performance of the individual securities and mortgage market conditions. Bankruptcy reform, loan modification programs and other forms of government intervention in the housing market can significantly change the performance, including the timing of loss recognition, of the underlying loans and thus our securities. We use data provided by third-party vendors as an input in our evaluation of our non-agency mortgage-related securities. Given the extent of the housing and economic downturn over the past few years, it is difficult to forecast and estimate the future performance of mortgage loans and mortgage-related securities with any assurance, and actual results could differ materially from our expectations. Furthermore, different market participants could arrive at materially different conclusions regarding estimates of future cash shortfalls.
 
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Ratings of Non-Agency Mortgage-Related Securities
 
Table 23 shows the ratings of available-for-sale non-agency mortgage-related securities backed by subprime, option ARM, Alt-A and other loans and CMBS held at March 31, 2010 based on their ratings as of March 31, 2010 as well as those held at December 31, 2009 based on their ratings as of December 31, 2009. Tables 23 and 24 use the lowest rating available for each security.
 
Table 23 — Ratings of Available-for-Sale Non-Agency Mortgage-Related Securities Backed by Subprime, Option ARM, Alt-A and Other Loans and CMBS at March 31, 2010 and December 31, 2009
 
                                 
    Unpaid
          Gross
    Monoline
 
    Principal
    Amortized
    Unrealized
    Insurance
 
Credit Ratings as of March 31, 2010
  Balance     Cost     Losses     Coverage(1)  
    (in millions)  
 
Subprime loans:
                               
AAA-rated
  $ 3,976     $ 3,977     $ (497 )   $ 34  
Other investment grade
    5,966       5,965       (1,316 )     603  
Below investment grade(2)
    49,492       44,444       (16,741 )     1,838  
                                 
Total
  $ 59,434     $ 54,386     $ (18,554 )   $ 2,475  
                                 
Option ARM loans:
                               
AAA-rated
  $     $     $     $  
Other investment grade
    340       336       (131 )     162  
Below investment grade(2)
    16,866       12,815       (6,016 )     156  
                                 
Total
  $ 17,206     $ 13,151     $ (6,147 )   $ 318  
                                 
Alt-A and other loans:
                               
AAA-rated
  $ 1,749     $ 1,761     $ (193 )   $ 8  
Other investment grade
    4,115       4,120       (756 )     503  
Below investment grade(2)
    14,936       12,420       (3,963 )     2,668  
                                 
Total
  $ 20,800     $ 18,301     $ (4,912 )   $ 3,179  
                                 
Commercial mortgage-backed securities:
                               
AAA-rated
  $ 31,801     $ 31,881     $ (972 )   $ 43  
Other investment grade
    25,836       25,801       (2,521 )     1,657  
Below investment grade(2)
    3,713       3,499       (1,461 )     1,708  
                                 
Total
  $ 61,350     $ 61,181     $ (4,954 )   $ 3,408  
                                 
                                 
                                 
Credit Ratings as of December 31, 2009
                       
 
Subprime loans:
                               
AAA-rated
  $ 4,600     $ 4,597     $ (643 )   $ 34  
Other investment grade
    6,248       6,247       (1,562 )     625  
Below investment grade(2)
    50,716       45,977       (18,897 )     1,895  
                                 
Total
  $ 61,564     $ 56,821     $ (21,102 )   $ 2,554  
                                 
Option ARM loans:
                               
AAA-rated
  $     $     $     $  
Other investment grade
    350       345       (152 )     166  
Below investment grade(2)
    17,337       13,341       (6,323 )     163  
                                 
Total
  $ 17,687     $ 13,686     $ (6,475 )   $ 329  
                                 
Alt-A and other loans:
                               
AAA-rated
  $ 1,825     $ 1,844     $ (247 )   $ 9  
Other investment grade
    4,829       4,834       (1,051 )     530  
Below investment grade(2)
    14,785       12,267       (4,249 )     2,752  
                                 
Total
  $ 21,439     $ 18,945     $ (5,547 )   $ 3,291  
                                 
Commercial mortgage-backed securities:
                               
AAA-rated
  $ 32,831     $ 32,914     $ (2,108 )   $ 43  
Other investment grade
    26,233       26,167       (4,661 )     1,658  
Below investment grade(2)
    2,813       2,711       (1,019 )     1,701  
                                 
Total
  $ 61,877     $ 61,792     $ (7,788 )   $ 3,402  
                                 
(1)  Represents the amount of unpaid principal balance covered by monoline insurance coverage. This amount does not represent the maximum amount of losses we could recover, as the monoline insurance also covers interest.
(2)  Includes certain securities that are no longer rated.
 
            40 Freddie Mac


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Table 24 shows: (a) the percentage of unpaid principal balance of available-for-sale non-agency mortgage-related securities backed by subprime, option ARM, Alt-A and other loans and CMBS held at March 31, 2010 based on the ratings of such securities as of March 31, 2010 and April 21, 2010; and (b) the percentage of unpaid principal balance of such securities at December 31, 2009 based on their December 31, 2009 ratings.
 
Table 24 — Ratings Trend of Available-for-Sale Non-Agency Mortgage-Related Securities Backed by Subprime, Option ARM, Alt-A and Other Loans and CMBS
 
                         
    Percentage of Unpaid
    Percentage of Unpaid
 
    Principal Balance at
    Principal Balance at
 
    March 31, 2010     December 31, 2009  
    Credit Ratings as of  
    April 21, 2010     March 31, 2010     December 31, 2009  
 
Subprime loans:
                       
AAA-rated
    6 %     7 %     7 %
Other investment grade
    9       10       10  
Below investment grade(1)
    85       83       83  
                         
Total
    100 %     100 %     100 %
                         
Option ARM loans:
                       
AAA-rated
    %     %     %
Other investment grade
    2       2       2  
Below investment grade(1)
    98       98       98  
                         
Total
    100 %     100 %     100 %
                         
Alt-A and other loans:
                       
AAA-rated
    8 %     8 %     9 %
Other investment grade
    20       20       23  
Below investment grade(1)
    72       72       68  
                         
Total
    100 %     100 %     100 %
                         
Commercial mortgage-backed securities:
                       
AAA-rated
    52 %     52 %     53 %
Other investment grade
    42       42       42  
Below investment grade(1)
    6       6       5  
                         
Total
    100 %     100 %     100 %
                         
(1) Includes certain securities that are no longer rated.
 
Although certain non-agency mortgage-related securities backed by subprime, option ARM, Alt-A and other loans and CMBS may have experienced ratings downgrades during the first quarter and April of 2010, we believe the economic factors leading to these downgrades are already appropriately considered in our other-than-temporary impairment decisions and valuations.
 
Mortgage Loans
 
Mortgage loans consist of: (a) mortgage loans held-for-sale, at lower-of-cost-or-fair-value; and (b) mortgage loans held-for-investment, at amortized cost. Mortgage loans held-for-sale decreased, and mortgage loans held-for-investment increased from December 31, 2009 to March 31, 2010, primarily due to a change in the accounting for VIEs discussed in “Change in Accounting Principles,” which resulted in our consolidation of assets underlying approximately $1.817 trillion of our PCs and $21 billion of Structured Transactions as of January 1, 2010. Upon adoption of the new accounting standards on January 1, 2010, we redesignated all single-family loans that were held-for-sale as held-for-investment, which totaled $13.5 billion in unpaid principal balance and resulted in the recognition of a lower-of-cost-or-fair-value adjustment, which was recorded as an $80 million reduction in the beginning balance of retained earnings for 2010. As of March 31, 2010, our mortgage loans held-for-sale consists solely of multifamily mortgage loans that we purchase for securitization and sale to third parties. Prior to January 1, 2010, in addition to multifamily loans purchased for securitization, we also had investments in single-family mortgage loans held-for-sale related to mortgages purchased through cash window transactions. See “NOTE 2: CHANGE IN ACCOUNTING PRINCIPLES” to our consolidated financial statements for further information.
 
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Table 25 provides detail regarding our mortgage loans on our consolidated balance sheets, including: (a) mortgage loans underlying consolidated single-family PCs and certain Structured Transactions (regardless of whether such securities are held by us or third parties); and (b) unsecuritized single-family and multifamily mortgage loans.
 
Table 25 — Characteristics of Mortgage Loans on Our Consolidated Balance Sheets
 
                                                 
    March 31, 2010     December 31, 2009  
    Fixed Rate     Variable Rate     Total     Fixed Rate     Variable Rate     Total  
    (in millions)  
 
Mortgage loans held by consolidated trusts:
                                               
Single-family:(1)                                                
Conventional:                                                
Amortizing   $ 1,563,797     $ 63,716     $ 1,627,513     $     $     $  
Interest-only     25,531       92,348       117,879                    
                                                 
Total conventional     1,589,328       156,064       1,745,392                          
USDA Rural Development/FHA/VA     2,895       3       2,898                    
Structured Transactions     9,199       8,905       18,104                    
                                                 
Total unpaid principal balance of single-family mortgage loans held by consolidated trusts   $ 1,601,422     $ 164,972       1,766,394                    
                                                 
Premiums, discounts, deferred fees and other basis adjustments
                    1,129                    
Allowance for loan losses on mortgage loans held-for-investment by consolidated trusts(2)
                    (21,758 )                  
                                                 
Total carrying value of mortgage loans held by consolidated trusts                   $ 1,745,765     $     $     $  
                                                 
Unsecuritized mortgage loans:
                                               
Single-family:(1)                                                
Conventional:                                                
Amortizing   $ 95,591     $ 1,300     $ 96,891     $ 49,033     $ 1,250     $ 50,283  
Interest-only     4,564       464       5,028       425       1,060       1,485  
                                                 
Total conventional     100,155       1,764       101,919       49,458       2,310       51,768  
USDA Rural Development/FHA/VA     1,727             1,727       3,110             3,110  
                                                 
Total single-family     101,882       1,764       103,646       52,568       2,310       54,878  
Multifamily(3)     70,667       12,341       83,008       71,939       11,999       83,938  
                                                 
Total unpaid principal balance of unsecuritized mortgage loans   $ 172,549     $ 14,105       186,654     $ 124,507     $ 14,309       138,816  
                                                 
Premiums, discounts, deferred fees and other basis adjustments
                    (8,914 )                     (9,317 )
Lower-of-cost-or-fair-value adjustments on loans held-for-sale
                    (49 )                     (188 )
Allowance for loan losses on unsecuritized mortgage loans held-for-investment(2)
                    (14,872 )                     (1,441 )
                                                 
Total carrying value of unsecuritized mortgage loans
                  $ 162,819                     $ 127,870  
                                                 
(1)  Based on the unpaid principal balance. Variable-rate single-family mortgage loans include those with a contractual coupon rate that is scheduled to change prior to the contractual maturity date. Single-family mortgage loans also include mortgages with balloon/reset provisions.
(2)  See “NOTE 5: MORTGAGE LOANS” to our consolidated financial statements for information about our allowance for loan losses on mortgage loans held-for-investment.
(3)  Based on the unpaid principal balance, excluding mortgage loans traded but not yet settled. Variable-rate multifamily mortgage loans include only those loans that, as of the reporting date, have a contractual coupon rate that is subject to change.
 
The unpaid principal balance of unsecuritized single-family mortgage loans increased by $48.7 billion, from $54.9 billion at December 31, 2009 to $103.6 billion at March 31, 2010, primarily due to increased purchases of delinquent and modified loans from the mortgage pools underlying our PCs discussed below. The unpaid principal balance of multifamily mortgage loans decreased from $83.9 billion at December 31, 2009 to $83.0 billion at March 31, 2010, primarily due to our limited purchases as well as our sale of $1.8 billion in loans during the first quarter, which included $1.6 billion through the sale of Structured Transactions. We expect to continue to make investments in multifamily loans in 2010, though our purchases may not exceed liquidations and securitizations.
 
As securities administrator, we are required to purchase a mortgage loan out of consolidated trusts under certain circumstances at the direction of a court of competent jurisdiction or a U.S. government agency. Additionally, we are required to repurchase all convertible ARMs when the borrower exercises the option to convert the interest rate from an adjustable rate to a fixed rate; and in the case of balloon/reset loans, shortly before the mortgage reaches its scheduled balloon reset date. During the three months ended March 31, 2010 and 2009, we purchased $457 million and $434 million, respectively, of convertible ARMs and balloon/reset loans out of PC pools.
 
As guarantor, we also have the right to purchase mortgages that back our PCs from the underlying loan pools when they are significantly past due or when we determine that loss of the property is likely or default by the borrower is imminent due to borrower incapacity, death or other extraordinary circumstances that make future payments unlikely or impossible. This right to repurchase mortgages or assets is known as our repurchase option, and we also exercise this option when we modify a mortgage. When we purchase mortgage loans from consolidated trusts, we reclassify the loans from mortgage loans held-for-investment by consolidated trusts to unsecuritized mortgage loans
 
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held-for-investment and record an extinguishment of the corresponding portion of the debt securities of the consolidated trusts. We continue to purchase loans under financial guarantees related to our long-term standby agreements.
 
On February 10, 2010, we announced that we will purchase substantially all single-family mortgage loans that are 120 days or more delinquent from our PC trusts. The decision to effect these purchases was made based on a determination that the cost of guarantee, or debt payments to the security holders will exceed the cost of holding non-performing loans on our consolidated balance sheets. Due to our January 1, 2010 adoption of amendments to the accounting standards for transfers of financial assets and the consolidation of VIEs, the recognized cost of purchasing most delinquent loans from PC trusts will be less than the recognized cost of continued guarantee payments to security holders. We purchased $56.6 billion in unpaid principal balance of loans from PC trusts during the first quarter of 2010.
 
See “RISK MANAGEMENT — Credit Risks — Mortgage Credit Risk” and “Table 47 — Credit Performance of Certain Higher Risk Categories in the Single-Family Credit Guarantee Portfolio” for information about single-family mortgage loans in our single-family credit guarantee portfolio that we believe have higher risk characteristics.
 
The tables below present the number and unpaid principal balances of loans 90-119 days delinquent and 120 days or more delinquent, respectively, that underlie our consolidated trusts as of March 31, 2010. Loans presented in the table that are 120 days or more delinquent at March 31, 2010 are those for which our purchase of the loans and extinguishment of the PC debt will settle at the next scheduled PC debt payment date (45 or 75 day delay, as appropriate).
 
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Table 26 — 90-119 Day Delinquency Rates — Loans in PC Trusts, By Loan Origination Year — UPB $ in millions(1)
 
                                                                                                                                                                                                 
    As of March 31, 2010  
    4.0% PC Coupon(2)     4.5% PC Coupon     5.0% PC Coupon     5.5% PC Coupon     6.0% PC Coupon     6.5% PC Coupon     7.0% PC Coupon and over     Total  
    UPB for
    90-119 Day
    Number of
    UPB for
    90-119 Day
    Number of
    UPB for
    90-119 Day
    Number of
    UPB for
    90-119 Day
    Number of
    UPB for
    90-119 Day
    Number of
    UPB for
    90-119 Day
    Number of
    UPB for
    90-119 Day
    Number of
    UPB for
    90-119 Day
    Number of
 
    Delinquent
    Delinquency
    Delinquent
    Delinquent
    Delinquency
    Delinquent
    Delinquent
    Delinquency
    Delinquent
    Delinquent
    Delinquency
    Delinquent
    Delinquent
    Delinquency
    Delinquent
    Delinquent
    Delinquency
    Delinquent
    Delinquent
    Delinquency
    Delinquent
    Delinquent
    Delinquency
    Delinquent
 
    Loans(3),(4)     Rate(3)     Loans(3)     Loans(3),(4)     Rate(3)     Loans(3)     Loans(3),(4)     Rate(3)     Loans(3)     Loans(3),(4)     Rate(3)     Loans(3)     Loans(3),(4)     Rate(3)     Loans(3)     Loans(3),(4)     Rate(3)     Loans(3)     Loans(3),(4)     Rate(3)     Loans(3)     Loans(3),(4)     Rate(3)     Loans(3)  
 
Fixed-rate
                                                                                                                                                                                               
                                                                                                                                                                                                 
30 year maturity —                                                                                                                                                                                                
Loan origination year:                                                                                                                                                                                                
2009   $ 6       0.01 %     25     $ 48       0.02 %     197     $ 33       0.04 %     156     $ 13       0.13 %     59     $ 5       0.26 %     22     $ < 1       0.00 %     0     $ < 1       0.00 %     0     $ 105       0.03 %     459  
2008     < 1       0.03 %     2       12       0.10 %     41       198       0.33 %     758       387       0.55 %     1,602       304       0.80 %     1,426       107       1.14 %     551       34       1.54 %     193       1,042       0.56 %     4,573  
2007     < 1       0.00 %     0       7       0.47 %     26       133       0.71 %     543       571       0.82 %     2,531       874       1.13 %     4,461       369       1.58 %     2,219       73       2.28 %     520       2,027       1.09 %     10,300  
2006     < 1       0.00 %     0       2       0.26 %     9       63       0.61 %     273       355       0.79 %     1,585       650       0.94 %     3,319       210       1.19 %     1,269       23       1.34 %     160       1,303       0.92 %     6,615  
2005     < 1       0.00 %     0       38       0.29 %     173       354       0.50 %     1,757       420       0.66 %     2,320       159       0.95 %     987       22       1.39 %     151       2       1.04 %     12       995       0.61 %     5,400  
2004 and Prior
    1       0.25 %     7       29       0.16 %     158       239       0.24 %     1,484       386       0.35 %     2,683       175       0.43 %     1,464       93       0.43 %     971       75       0.50 %     1,082       998       0.35 %     7,849  
15 year maturity —                                                                                                                                                                                                
Loan origination year:                                                                                                                                                                                                
2009     3       0.01 %     15       2       0.01 %     12       < 1       0.03 %     2       < 1       0.19 %     1       < 1       0.00 %     0       N/A       N/A       N/A       N/A       N/A       N/A       5       0.01 %     30  
2008     < 1       0.03 %     1       8       0.11 %     46       12       0.15 %     80       5       0.20 %     44       2       0.35 %     24       < 1       0.24 %     1       < 1       0.00 %     0       27       0.15 %     196  
2007     < 1       0.49 %     1       2       0.15 %     8       7       0.20 %     46       14       0.30 %     102       9       0.45 %     80       1       0.80 %     14       < 1       0.62 %     1       33       0.31 %     252  
2006     < 1       0.00 %     0