10-Q 1 f71550e10vq.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, 2011
 
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 22, 2011, there were 649,688,423 shares of the registrant’s common stock outstanding.
 
 
            


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TABLE OF CONTENTS
 
             
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MD&A TABLE REFERENCE
 
                 
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FINANCIAL STATEMENTS
 
         
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PART I — FINANCIAL INFORMATION
 
We continue to operate under the conservatorship that commenced on September 6, 2008, under the direction of FHFA as our Conservator. The Conservator succeeded to all rights, titles, powers and privileges of Freddie Mac, and of any shareholder, officer or director thereof, with respect to the company and its assets. The Conservator has delegated certain authority to our Board of Directors to oversee, and management to conduct, day-to-day operations. The directors serve on behalf of, and exercise authority as directed by, the Conservator. See “BUSINESS — Conservatorship and Related Matters” in our Annual Report on Form 10-K for the year ended December 31, 2010, or 2010 Annual Report, for information on the terms of the conservatorship, the powers of the Conservator, and related matters, including the terms of our Purchase Agreement with Treasury.
 
This Quarterly Report on Form 10-Q includes forward-looking statements that are based on current expectations and are subject to significant risks and uncertainties. These forward-looking statements are made as of the date of this Form 10-Q and we undertake no obligation to update any forward-looking statement to reflect events or circumstances after the date of this Form 10-Q. Actual results might differ significantly from those described in or implied by such statements due to various factors and uncertainties, including those described in: (a) “MD&A — FORWARD-LOOKING STATEMENTS,” and “RISK FACTORS” in this Form 10-Q and in the comparably captioned sections of our 2010 Annual Report; and (b) the “BUSINESS” section of our 2010 Annual Report.
 
Throughout 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
 
You should read this MD&A in conjunction with our consolidated financial statements and related notes for the three months ended March 31, 2011, included in “FINANCIAL STATEMENTS,” and our 2010 Annual Report.
 
EXECUTIVE SUMMARY
 
Overview
 
Freddie Mac is a GSE chartered by Congress in 1970 with a public mission to provide liquidity, stability, and affordability to the U.S. housing market. We have maintained a consistent market presence since our inception, providing mortgage liquidity in a wide range of economic environments. During the worst housing and financial crisis since the Great Depression, we are working to support the recovery of the housing market and the nation’s economy by providing essential liquidity to the mortgage market and helping to stem the rate of foreclosures. Taken together, we believe our actions are helping communities across the country by providing America’s families with access to mortgage funding at low rates while helping distressed borrowers keep their homes and avoid foreclosure.
 
Summary of Financial Results
 
Our financial performance in the first quarter of 2011 improved compared to the first quarter of 2010, even though we continued to be impacted by the ongoing weakness in the economy, including the mortgage market. Our total comprehensive income (loss) was $2.7 billion and $(1.9) billion for the first quarters of 2011 and 2010, respectively, consisting of: (a) a net income (loss) of $676 million and $(6.7) billion, respectively, reflecting reductions in both derivative losses and provision for credit losses in the first quarter of 2011 compared to the first quarter of 2010; and (b) $2.1 billion and $4.8 billion of changes in AOCI, respectively, primarily resulting from improved fair values on available-for-sale securities.
 
Our total equity was $1.2 billion at March 31, 2011 reflecting total comprehensive income of $2.7 billion during the first quarter of 2011, partially offset by our dividend payment of $1.6 billion on our senior preferred stock on March 31, 2011. As a result of our positive net worth at March 31, 2011, FHFA will not submit a draw request on our behalf to Treasury under the Purchase Agreement.
 
Also contributing to total equity was cash proceeds received of $500 million from a draw under Treasury’s funding commitment on March 31, 2011, related to our deficit in net worth at December 31, 2010. As a result of this draw from Treasury under the Purchase Agreement, the aggregate liquidation preference of Treasury’s senior preferred stock increased to $64.7 billion at March 31, 2011.
 
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Our Primary Business Objectives
 
Under conservatorship, we are focused on: (a) meeting the needs of the U.S. residential mortgage market by making home ownership and rental housing more affordable by providing liquidity to mortgage originators and, indirectly, to mortgage borrowers; (b) working to reduce the number of foreclosures and helping to keep families in their homes, including through our role in the MHA Program initiatives, including HAMP and HARP; (c) minimizing our credit losses; (d) maintaining the credit quality of the loans we purchase and guarantee; and (e) strengthening our infrastructure and improving overall efficiency. Our business objectives reflect, in part, direction we have received from the Conservator. We also have a variety of different, and potentially competing, objectives based on our charter, public statements from Treasury and FHFA officials, and other guidance from our Conservator. For more information, see “BUSINESS — Conservatorship and Related Matters — Impact of Conservatorship and Related Actions on Our Business” in our 2010 Annual Report.
 
Providing Mortgage Liquidity and Conforming Loan Availability
 
We provide liquidity and support to the U.S. mortgage market in a number of important ways:
 
  •  Our support enables borrowers to have access to a variety of conforming mortgage products, including the prepayable 30-year fixed-rate mortgage which represents the foundation of the mortgage market.
 
  •  Our support provides lenders with a constant source of liquidity. We estimate that we, Fannie Mae, and Ginnie Mae collectively continued to guarantee more than 90% of the single-family conforming mortgages originated during the first quarter of 2011.
 
  •  Our consistent market presence provides assurance to our customers that there will be a buyer for their conforming loans that meet our credit standards. We believe this provides our customers with confidence to continue lending in difficult environments.
 
  •  We are an important counter-cyclical influence as we stay in the market even when other sources of capital have pulled out, as evidenced by the events of the last three years.
 
During the first quarter of 2011, we guaranteed $95.7 billion in UPB of single-family conforming mortgage loans representing more than 430,000 borrowers who purchased homes or refinanced their mortgages. Relief refinance mortgages with LTV ratios of 80% and above represented approximately 15% of our total single-family credit guarantee portfolio purchases in the first quarter of 2011.
 
Borrowers typically pay a lower interest rate on loans acquired or guaranteed by Freddie Mac, Fannie Mae, or Ginnie Mae. Mortgage originators are generally able to offer homebuyers and homeowners lower mortgage rates on conforming loan products, including ours, in part because of the value investors place on GSE-guaranteed mortgage-related securities. Prior to 2007, mortgage markets were less volatile, home values were stable or rising, and there were many sources of mortgage funds. We estimate that prior to 2007 the average effective interest rates on conforming single-family mortgage loans were about 30 basis points lower than on non-conforming loans. Since 2007, there have been fewer sources of mortgage funds, and we estimate that interest rates on conforming loans, excluding conforming jumbo loans, have been lower than those on non-conforming loans by as much as 184 basis points. In March 2011, we estimate that borrowers were paying an average of 61 basis points less on these conforming loans than on non-conforming loans. These estimates are based on data provided by HSH Associates, a third-party provider of mortgage market data.
 
Reducing Foreclosures and Keeping Families in Homes
 
We are focused on reducing the number of foreclosures and helping to keep families in their homes. In addition to our participation in HAMP, we introduced several new initiatives during the housing crisis to help eligible borrowers, including our relief refinance mortgage initiative, which is our implementation of HARP. In the first quarter of 2011, we helped more than 62,000 borrowers either stay in their homes or sell their properties and avoid foreclosure through HAMP and our various other workout programs. In March 2011, FHFA announced it had extended HARP to June 30, 2012 for qualifying borrowers. Table 1 presents our recent single-family loan workout activities.
 
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Table 1 — Total Single-Family Loan Workout Volumes(1)
 
                                         
    For the Three Months Ended  
    03/31/2011     12/31/2010     09/30/2010     06/30/2010     03/31/2010  
    (number of loans)  
 
Loan modifications
    35,158       37,203       39,284       49,562       44,228  
Repayment plans
    9,099       7,964       7,030       7,455       8,761  
Forbearance agreements(2)
    7,678       5,945       6,976       12,815       8,858  
Short sales and deed-in-lieu transactions
    10,706       12,097       10,472       9,542       7,064  
                                         
Total single-family loan workouts
    62,641       63,209       63,762       79,374       68,911  
                                         
(1)  Based on actions completed with borrowers for loans within our single-family credit guarantee portfolio. Excludes those modification, repayment, and forbearance activities for which the borrower has started the required process, but the actions have not been made permanent, or effective, such as loans in the trial period under HAMP. Also excludes certain loan workouts where our single-family seller/servicers have executed agreements in the current or prior periods, but these have not been incorporated into certain of our operational systems, due to delays in processing. These categories are not mutually exclusive and a loan in one category may also be included within another category in the same period.
(2)  Excludes loans with long-term forbearance under a completed loan modification. Many borrowers complete a short-term forbearance agreement before another loan workout is pursued or completed. We only report forbearance activity for a single loan once during each quarterly period; however, a single loan may be included under separate forbearance agreements in separate periods.
 
We continue to execute a high volume of loan workouts. Highlights of these efforts include the following:
 
  •  We completed 62,641 single-family loan workouts during the first quarter of 2011, including 35,158 loan modifications and 10,706 short sales and deed-in-lieu transactions.
 
  •  Based on information provided by the MHA Program administrator, our servicers had completed 119,690 loan modifications under HAMP from the introduction of the initiative in 2009 through March 31, 2011 and, as of March 31, 2011, 19,897 loans were in HAMP trial periods (this figure only includes borrowers who made at least their first payment under the trial period).
 
In addition to these efforts, we continue to focus on assisting consumers through outreach and other efforts. These efforts included: (a) meeting with borrowers nationwide in foreclosure prevention workshops; (b) operating a Borrower Help Network to provide distressed borrowers with free one-on-one counseling; and (c) in instances where foreclosure has occurred, allowing affected families who qualify to rent back their homes for a limited period of time. In recent periods, we also increased our efforts to directly assist our servicers by increasing our servicing staff.
 
For more information about HAMP, other loan workout programs, and our relief refinance mortgage initiative, and other options to help eligible borrowers, see “RISK MANAGEMENT — Credit Risk — Mortgage Credit Risk — Portfolio Management Activities — MHA Program” and “— Loan Workout Activities.”
 
Minimizing Credit Losses
 
We establish guidelines for our servicers to follow and provide them default management tools to use, in part, in determining which type of loan workout would be expected to provide the best opportunity for minimizing our credit losses. We require our single-family seller/servicers to first evaluate problem loans for possible modification under HAMP before considering other workout alternatives. If a borrower is not eligible for a modification under HAMP, our seller/servicers pursue other workout options before considering foreclosure.
 
To help minimize the credit losses related to our guarantee activities, we are focused on:
 
  •  pursuing a variety of loan workouts, including foreclosure alternatives, in an effort to reduce the severity of losses we incur;
 
  •  managing foreclosure timelines to the extent possible, given elongated state timelines;
 
  •  managing our inventory of foreclosed properties to reduce costs and maximize proceeds; and
 
  •  pursuing contractual remedies against originators, lenders, servicers, and insurers, as appropriate.
 
We have contractual arrangements with our seller/servicers under which they agree to provide us with mortgage loans that have been originated under specified underwriting standards. If we subsequently discover that contractual standards were not followed, we can exercise certain contractual remedies to mitigate our credit losses. These contractual remedies include requiring the seller/servicer to repurchase the loan at its current UPB or make us whole for any credit losses realized with respect to the loan. As of March 31, 2011, the UPB of loans subject to repurchase requests issued to our single-family seller/servicers was approximately $3.4 billion, and approximately 38% of these requests were outstanding for more than four months since issuance of our initial repurchase request. The amount we expect to collect on the outstanding requests is significantly less than the UPB amount primarily because many of these requests will likely be satisfied by reimbursement of our realized losses by seller/servicers, or may be rescinded in the course of the contractual appeals process. During 2010, we entered into agreements with certain of our seller/servicers to release specified loans in
 
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their portfolios from certain repurchase obligations in exchange for one-time cash payments. We may enter into similar agreements or seek other remedies in the future. See “RISK MANAGEMENT — Credit Risk — Institutional Credit Risk — Mortgage Seller/Servicers” for further information on our agreements with our seller/servicers.
 
Our credit loss exposure is also partially mitigated by mortgage insurance, which is a form of credit enhancement. Primary mortgage insurance is required to be purchased, at the borrower’s expense, for certain mortgages with higher LTV ratios. We received payments under primary and other mortgage insurance of $587 million and $294 million in the first quarter of 2011 and 2010, respectively, which helped to mitigate our credit losses.
 
In February 2011, FHFA directed Freddie Mac and Fannie Mae to discuss with FHFA and with each other, and wherever feasible to develop, consistent requirements, policies and processes for the servicing of non-performing loans. This directive was designed to create greater consistency in servicing practices and to build on the best practices of each of the GSEs. Pursuant to this directive, on April 28, 2011, FHFA announced a new set of aligned standards for servicing by Freddie Mac and Fannie Mae, which are designed to help servicers do a better job of engaging with homeowners and to bring greater accountability to the servicing industry. The aligned requirements include earlier and more frequent communication with borrowers, consistent requirements for collecting documents from borrowers, consistent timelines for responding to borrowers, a consistent approach to modifications, and consistent timelines for processing foreclosures. This initiative will result in the alignment of the processes for both HAMP and non-HAMP workout solutions, and will be implemented over the course of 2011. We believe this effort will result in certain changes in our non-HAMP loan modification processes which may temporarily result in delays in these activities while the changes are implemented by us and our servicers. Servicers will also be subject to incentives and sanctions with respect to performance under these standards. Ultimately, we expect this effort will help streamline loss mitigation processes for servicers and delinquent borrowers, give servicers consistent guidance to help improve their servicing performance, and lay the foundation for industry benchmarks for responsible servicing that will benefit the housing finance system, servicers and consumers.
 
Maintaining the Credit Quality of New Loan Purchases and Guarantees
 
We continue to focus on maintaining underwriting standards that allow us to purchase and guarantee loans made to qualified borrowers that we believe will provide management and guarantee fee income, over the long-term, that exceeds our anticipated credit-related and administrative expenses on such loans.
 
As of March 31, 2011, more than 40% of our single-family credit guarantee portfolio consisted of mortgage loans originated after 2008. Loans in our single-family credit guarantee portfolio originated after 2008 have experienced better serious delinquency trends in the early years of their terms than loans originated in 2005 through 2008.
 
We believe the credit quality of the single-family loans we have acquired in the first quarter of 2011 (excluding relief refinance mortgages, which represented approximately 30% of our single family purchase volume during the quarter) is significantly better than that of loans we acquired from 2005 through 2008, as measured by original LTV ratios, FICO scores, and income documentation standards. The substantial majority of the single-family mortgages we purchased in the first quarter of 2011 were 30-year and 15-year fixed-rate mortgages. Approximately 85% of our single-family loan purchases in the first quarter of 2011 were refinance mortgages. Relief refinance mortgages with LTV ratios of 80% and above (which we refer to as HARP loans), may not perform as well as other refinance mortgages over time due, in part, to the continued high LTV ratios of these loans.
 
Table 2 presents the composition, loan characteristics, and serious delinquency rates of loans in our single-family credit guarantee portfolio, by year of origination at March 31, 2011.
 
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Table 2 — Single-Family Credit Guarantee Portfolio Data by Year of Origination(1)
 
                                         
    At March 31, 2011  
                            Serious
 
    % of
    Average
    Original
    Current
    Delinquency
 
    Portfolio     Credit Score(2)     LTV Ratio     LTV Ratio(3)     Rate(4)  
 
Year of Origination
                                       
2011
    2 %     752       70 %     68 %     %
2010
    20       755       70       70       0.07  
2009
    21       755       68       71       0.31  
2008
    8       727       74       88       4.91  
2007
    11       707       77       107       11.26  
2006
    8       711       75       106       10.34  
2005
    9       718       73       92       6.05  
2004 and prior
    21       721       71       59       2.47  
                                         
Total
    100 %     734       71       78       3.63  
                                         
(1)  Based on the single-family credit guarantee portfolio, which totaled $1,815 billion at March 31, 2011, and includes relief refinance mortgage loans.
(2)  Based on FICO credit score of the borrower as of the date of loan origination and may not be indicative of the borrowers’ creditworthiness at March 31, 2011.
(3)  We estimate current market values by adjusting the value of the property at origination based on changes in the market value of homes since origination.
(4)  See “RISK MANAGEMENT — Credit Risk — Mortgage Credit Risk — Credit Performance — Delinquencies” for further information about our reported serious delinquency rates.
 
During the first quarter of 2011, the guarantee-related revenue from the mortgage guarantees issued after 2008 exceeded the credit-related and administrative expenses associated with these guarantees. Credit-related expenses consist of our provision for credit losses and REO operations expense. Mortgages originated after 2008 represent an increasingly large proportion of our single-family credit guarantee portfolio, as the amount of older vintages in the portfolio, which have a higher composition of loans with higher-risk characteristics, continues to decline due to liquidations, which include payoffs, repayments, refinancing activity, and foreclosures. We currently expect that, over time, the replacement of older vintages should positively impact the serious delinquency rates and credit-related expenses of our single-family credit guarantee portfolio. However, the rate at which this replacement occurs has slowed in recent quarterly periods, due to a decline in the volume of home purchase mortgage originations and an increase in the proportion of relief refinance mortgage activity. See “Table 14 — Segment Earnings Composition — Single-Family Guarantee Segment” for an analysis of the contribution to Segment Earnings (loss) by loan origination year.
 
Strengthening Our Infrastructure and Improving Overall Efficiency
 
We are working with our Conservator to both enhance the value of our infrastructure and improve our efficiency in order to preserve the taxpayers’ investment. As such, we are investing considerable resources in an effort to improve our existing systems infrastructure. This long-term project will likely take several years to fully implement and focuses on making significant improvements to our systems infrastructure in order to: (a) improve risk management; (b) enhance the service we provide to our customers; and (c) improve operational efficiency. At the end of this effort, we expect to have an infrastructure in place that is more efficient, flexible and well-controlled which will assist us in our continued efforts to focus on reducing administrative expenses and other cost reduction measures.
 
We continue to actively monitor our general and administrative expenses, while also continuing to focus on retaining key talent. During the full year of 2010, we reduced our administrative expenses by $88 million, despite increasing the number of employees in our non-performing asset management group. Our general and administrative expenses continued to decline in the first quarter of 2011.
 
Single-Family Credit Guarantee Portfolio
 
Since the beginning of 2008, on an aggregate basis, we have recorded provision for credit losses associated with single-family loans of approximately $64.3 billion, and have recorded an additional $4.6 billion in losses on loans purchased from our PCs, net of recoveries. The majority of these losses are associated with loans originated in 2005 through 2008. While loans originated in 2005 through 2008 will give rise to additional credit losses that have not yet been incurred and, thus have not been provisioned for, we believe, as of March 31, 2011, that we have reserved for or charged-off the majority of the total expected credit losses for these loans. Nevertheless, various factors, such as continued high unemployment rates or further declines in home prices, could require us to provide for losses on these loans beyond our current expectations.
 
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The UPB of our single-family credit guarantee portfolio increased slightly during the first quarter of 2011 to $1,815 billion at March 31, 2011 from $1,809 billion at December 31, 2010, since new loan purchase and guarantee activity exceeded the amount of liquidations. Table 3 provides certain credit statistics for our single-family credit guarantee portfolio.
 
Table 3 — Credit Statistics, Single-Family Credit Guarantee Portfolio
 
                                         
    As of
    03/31/2011   12/31/2010   09/30/2010   06/30/2010   03/31/2010
 
Payment status —
                                       
One month past due
    1.75 %     2.07 %     2.11 %     2.02 %     1.89 %
Two months past due
    0.65 %     0.78 %     0.80 %     0.77 %     0.79 %
Seriously delinquent(1)
    3.63 %     3.84 %     3.80 %     3.96 %     4.13 %
Non-performing loans (in millions)(2)
  $ 115,083     $ 115,478     $ 112,746     $ 111,758     $ 110,079  
Single-family loan loss reserve (in millions)(3)
  $ 38,558     $ 39,098     $ 37,665     $ 37,384     $ 35,969  
REO inventory (in properties)
    65,159       72,079       74,897       62,178       53,831  
REO assets, net carrying value (in millions)
  $ 6,261     $ 6,961     $ 7,420     $ 6,228     $ 5,411  
                                         
                                         
    For the Three Months Ended
    03/31/2011   12/31/2010   09/30/2010   06/30/2010   03/31/2010
    (in units, unless noted)
 
Seriously delinquent loan additions(1)
    97,646       113,235       115,359       123,175       150,941  
Loan modifications(4)
    35,158       37,203       39,284       49,562       44,228  
Foreclosure starts ratio(5)
    0.58 %     0.73 %     0.75 %     0.61 %     0.64 %
REO acquisitions(6)
    24,707       23,771       39,053       34,662       29,412  
REO disposition severity ratio:(7)
                                       
California
    44.5 %     43.9 %     41.9 %     42.0 %     43.9 %
Florida
    54.8 %     53.0 %     54.9 %     53.8 %     56.2 %
Arizona
    50.8 %     49.5 %     46.6 %     44.3 %     45.3 %
Nevada
    53.1 %     53.1 %     51.6 %     49.4 %     50.7 %
Michigan
    48.3 %     49.7 %     49.2 %     47.2 %     47.6 %
Total U.S.
    43.0 %     41.3 %     41.5 %     39.2 %     40.5 %
Single-family credit losses (in millions)
  $ 3,226     $ 3,086     $ 4,216     $ 3,851     $ 2,907  
(1)  See “RISK MANAGEMENT — Credit Risk — Mortgage Credit Risk — Credit Performance — Delinquencies” for further information about our reported serious delinquency rates.
(2)  Consists of the UPB of loans in our single-family credit guarantee portfolio that have undergone a TDR or that are seriously delinquent.
(3)  Consists of the combination of: (a) our allowance for loan losses on mortgage loans held for investment; and (b) our reserve for guarantee losses associated with non-consolidated single-family mortgage securitization trusts and other guarantee commitments.
(4)  Represents the number of completed modifications under agreement with the borrower during the quarter. Excludes forbearance agreements, repayment plans, and loans in the trial period under HAMP.
(5)  Represents the ratio of the number of loans that entered the foreclosure process during the respective quarter divided by the number of loans in the single-family credit guarantee portfolio at the end of the quarter. Excludes Other Guarantee Transactions and mortgages covered under other guarantee commitments.
(6)  Our REO acquisition volume temporarily slowed in the fourth quarter of 2010 and first quarter of 2011 due to delays in the foreclosure process, including delays related to concerns about deficiencies in foreclosure documentation practices, which reduced our credit losses for these periods.
(7)  Calculated as the amount of our losses recorded on disposition of REO properties during the respective quarterly period, excluding those subject to repurchase requests made to our seller/servicers, divided by the aggregate UPB of the related loans. The amount of losses recognized on disposition of the properties is equal to the amount by which the UPB of the loans exceeds the amount of sales proceeds from disposition of the properties. Excludes sales commissions and other expenses, such as property maintenance and costs, as well as applicable recoveries from credit enhancements, such as mortgage insurance.
 
The number of new serious delinquencies (i.e., seriously delinquent loan additions) declined in each of the last five quarters; however, our single-family credit guarantee portfolio continued to experience a high level of serious delinquencies and foreclosures in the first quarter of 2011 as compared to periods before 2009. Our servicers generally resumed foreclosures and we fully resumed marketing and sales of REO properties during the first quarter of 2011, which led to a high REO disposition volume during the quarter. Our REO inventory (measured in properties) declined in each of the last two quarters. The UPB of our non-performing loans also declined in the first quarter of 2011. This was the first decline in non-performing loans since the first half of 2006. However, the credit losses from our single-family credit guarantee portfolio were higher in the first quarter of 2011 than the first quarter of 2010, due in part to:
 
  •  Losses associated with the continued high volume of foreclosures and foreclosure alternatives. These actions relate to our continued efforts to resolve our significant inventory of seriously delinquent loans. This inventory accumulated in prior periods due to the lengthening in the foreclosure and modification timelines caused by various suspensions of foreclosure transfers, process requirements for HAMP, and constraints in servicers’ capabilities to process large volumes of problem loans. Due to the length of time necessary for servicers either to complete the foreclosure process or pursue foreclosure alternatives on seriously delinquent loans still in our portfolio, we expect our credit losses will continue to remain high even if the volume of new serious delinquencies continues to decline.
 
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  •  Continued negative impact of certain loan groups within the single-family credit guarantee portfolio, such as those underwritten with certain lower documentation standards and interest-only loans, as well as other 2005 through 2008 vintage loans. These groups continue to be large contributors to our credit losses.
 
  •  Continued decline in national home prices, based on our own index, which resulted in continued high loss severity ratios on our dispositions of REO inventory.
 
We believe our REO disposition severity ratio was impacted in the fourth quarter of 2010 and, to a lesser extent in the first quarter of 2011, particularly in the state of Florida, by temporary suspensions of REO sales by us and our seller/servicers in the latter part of 2010 related to concerns about deficiencies in foreclosure documentation practices. See “Mortgage Market and Economic Conditions — Concerns Regarding Deficiencies in Foreclosure Documentation Practices” for further information.
 
Some of our loss mitigation activities create fluctuations in our delinquency statistics. For example, single-family loans that we report as seriously delinquent before they enter the HAMP trial period continue to be reported as seriously delinquent for purposes of our delinquency reporting until the modifications become effective and the loans are removed from delinquent status by our servicers. See “RISK MANAGEMENT — Credit Risk — Mortgage Credit Risk — Credit Performance — Delinquencies” for further information about factors affecting our reported delinquency rates.
 
Conservatorship and Government Support for our Business
 
We have been operating under conservatorship, with FHFA acting as our conservator, since September 6, 2008. The conservatorship and related matters have had a wide-ranging impact on us, including our regulatory supervision, management, business, financial condition and results of operations.
 
We are dependent upon the continued support of Treasury and FHFA in order to continue operating our business. Our ability to access funds from Treasury under the Purchase Agreement is critical to keeping us solvent and avoiding the appointment of a receiver by FHFA under statutory mandatory receivership provisions.
 
While the conservatorship has benefited us, we are subject to certain constraints on our business activities imposed by Treasury due to the terms of, and Treasury’s rights under, the Purchase Agreement and by FHFA, as our Conservator.
 
On March 31, 2011, we received $500 million in funding from Treasury under the Purchase Agreement relating to our net worth deficit as of December 31, 2010. This draw increased the aggregate liquidation preference of the senior preferred stock to $64.7 billion at March 31, 2011 from $64.2 billion at December 31, 2010. At March 31, 2011, our assets exceeded our liabilities under GAAP by $1.2 billion; therefore FHFA will not submit a draw request on our behalf to Treasury under the Purchase Agreement.
 
We pay cash dividends to Treasury at an annual rate of 10%. We have paid cash dividends to Treasury of $11.6 billion life to date, an amount equal to 18% of our aggregate draws under the Purchase Agreement. As of March 31, 2011, our annual cash dividend obligation to Treasury on the senior preferred stock of $6.5 billion exceeded our annual historical earnings in all but one period. As a result, we expect to make additional draws in future periods, even if our operating performance generates net income or comprehensive income.
 
Under the Purchase Agreement, Treasury made a commitment to provide funding, under certain conditions, to eliminate deficits in our net worth. The $200 billion cap on Treasury’s funding commitment will increase as necessary to eliminate any net worth deficits we may have during 2010, 2011, and 2012. We believe that the support provided by Treasury pursuant to the Purchase Agreement currently enables us to maintain our access to the debt markets and to have adequate liquidity to conduct our normal business activities, although the costs of our debt funding could vary.
 
Neither the U.S. government nor any other agency or instrumentality of the U.S. government is obligated to fund our mortgage purchase or financing activities or to guarantee our securities or other obligations.
 
For more information on conservatorship and the Purchase Agreement, see “BUSINESS — Conservatorship and Related Matters” in our 2010 Annual Report.
 
Consolidated Financial Results
 
Net income (loss) was $0.7 billion and $(6.7) billion for the first quarters of 2011 and 2010, respectively. Key highlights of our financial results include:
 
  •  Net interest income for the first quarter of 2011 increased slightly to $4.5 billion from $4.1 billion in the first quarter of 2010, mainly due to lower funding costs, partially offset by a decline in the average balances of mortgage-related securities and mortgage loans.
 
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  •  Provision for credit losses for the first quarter of 2011 decreased to $2.0 billion, compared to $5.4 billion for the first quarter of 2010. The provision for credit losses in the first quarter of 2011 primarily reflects a decline in the number of delinquent loan inflows, and a decline in the rate at which seriously delinquent loans ultimately transition to a loss event. The provision for credit losses in the first quarter of 2010 reflected increases in non-performing loans and serious delinquency rates in that period.
 
  •  Non-interest income (loss) was $(1.3) billion for the first quarter of 2011, compared to $(4.9) billion for the first quarter of 2010. This improvement was primarily due to significantly lower losses on derivatives in the first quarter of 2011, compared to the first quarter of 2010, attributable to the impact of a slight increase in interest rates during the first quarter of 2011 as compared to a decline in interest rates during the first quarter of 2010. The decline in derivative losses was partially offset by higher impairments on mortgage-related securities recognized in earnings in the first quarter of 2011 compared to the first quarter of 2010.
 
  •  Non-interest expense was $0.7 billion in both the first quarter of 2011 and the first quarter of 2010, and reflects increased REO operations expense partially offset by a decline in administrative expenses in the 2011 period, compared to the 2010 period.
 
  •  Total comprehensive income (loss) was $2.7 billion for the first quarter of 2011 compared to $(1.9) billion for the first quarter of 2010. Total comprehensive income for the first quarter of 2011 reflects the net result of the $0.7 billion of net income, and $2.1 billion of changes in AOCI primarily resulting from improved fair values on available-for-sale securities.
 
Mortgage Market and Economic Conditions
 
Overview
 
The housing market recovery experienced continued challenges during the first quarter of 2011 due primarily to weak housing demand. The U.S. real gross domestic product rose by 1.8% on an annualized basis during the period, compared to 3.1% during the fourth quarter of 2010, according to the Bureau of Economic Analysis estimates. Unemployment was 8.8% in March 2011, improving from 9.4% in December 2010, based on data from the U.S. Bureau of Labor Statistics.
 
Single-Family Housing Market
 
We believe the level of home sales in the U.S. is a significant driver of the direction of home prices. Within the industry, existing home sales are important for assessing the rate at which the mortgage market might absorb the inventory of listed, but unsold, homes in the U.S. (including listed REO properties). We believe new home sales can be an indicator of certain economic trends, such as the potential for growth in total U.S. mortgage debt outstanding. Sales of existing homes in the first quarter of 2011 averaged 5.14 million (at a seasonally adjusted annual rate), an improvement of 8% from an average seasonally adjusted annual rate of 4.75 million in the fourth quarter of 2010. New home sales in the first quarter of 2011 averaged 0.29 million homes (at a seasonally adjusted annual rate) declining approximately 2% from an average seasonally adjusted annual rate of 0.30 million homes in the fourth quarter of 2010.
 
We estimate that home prices declined 2.8% nationwide during the first quarter of 2011. This estimate is based on our own index of mortgage loans in our single-family credit guarantee portfolio. Other indices of home prices may have different results, as they are determined using different pools of mortgage loans and calculated under different conventions than our own.
 
Multifamily Housing Market
 
Multifamily market fundamentals continued to improve on a national level during the first quarter of 2011, though certain states and metropolitan areas continue to exhibit weaker than average fundamentals. This improvement continues a trend of several consecutive quarters of favorable movements in key indicators such as vacancy rates and effective rents. Vacancy rates and effective rents are important to loan performance because multifamily loans are generally repaid from the cash flows generated by the underlying property and these factors significantly influence those cash flows. Improving fundamentals and perceived optimism about demand for multifamily housing have helped improve property values in most markets. However, rising interest rates may cause property owners to increase the returns they expect on their multifamily property investments. In turn, this could reduce multifamily property values, which could make it more difficult to refinance multifamily properties when the balloon payment becomes due.
 
Concerns Regarding Deficiencies in Foreclosure Documentation Practices
 
In the fall of 2010, several large single-family seller/servicers announced issues relating to the improper preparation and execution of certain documents used in foreclosure proceedings, including affidavits. As a result, a number of our
 
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seller/servicers, including several of our largest ones, temporarily suspended foreclosure proceedings in the latter part of 2010 in certain states in which they do business, and we temporarily suspended certain REO sales until November 2010. During the first quarter of 2011, we fully resumed marketing and sales of REO properties. While the larger servicers have generally resumed foreclosure proceedings, the rate at which they are completing foreclosures is slower than prior to the suspensions. These issues have caused delays in the foreclosure process in many states and temporarily slowed the pace of our REO acquisitions. We expect the pace of our REO acquisitions to increase in the remainder of 2011, in part due to the resumption of foreclosure activity by servicers. We generally refer to these issues as the concerns about foreclosure documentation practices. See “MD&A — MORTGAGE MARKET AND ECONOMIC CONDITIONS, AND OUTLOOK — Mortgage Market and Economic Conditions — Concerns Regarding Deficiencies in Foreclosure Documentation Practices” in our 2010 Annual Report for further information.
 
Consent Orders with Servicers Regarding Foreclosure and Loss Mitigation Practices
 
On April 13, 2011, the Comptroller of the Currency, the Federal Reserve, the FDIC, and the Office of Thrift Supervision entered into consent orders with fourteen large servicers regarding their foreclosure and loss mitigation practices. These institutions service the majority of the single-family mortgages we own or guarantee. The consent orders require the servicers to submit comprehensive action plans relating to, among other items, use of foreclosure documentation, staffing of foreclosure and loss mitigation activities, oversight of third parties, use of the Mortgage Electronic Registration System, or the MERS® System, and communications with borrowers. We will not be able to assess the impact of these actions on our business until the servicers submit their comprehensive action plans. It is possible that these plans will result in changes to these companies’ mortgage servicing practices that could adversely affect our business.
 
Mortgage Market and Business Outlook
 
Forward-looking statements involve known and unknown risks and uncertainties, some of which are beyond our control. These statements are not historical facts, but rather represent our expectations based on current information, plans, judgments, assumptions, estimates, and projections. Actual results may differ significantly from those described in or implied by such forward-looking statements due to various factors and uncertainties. For example, a number of factors could cause the actual performance of the housing and mortgage markets and the U.S. economy during the remainder of 2011 to be significantly worse than we expect, including adverse changes in consumer confidence, national or international economic conditions and changes in the federal government’s fiscal policies. See “FORWARD-LOOKING STATEMENTS” for additional information.
 
Overview
 
As in the past, we expect key macroeconomic drivers of the economy — such as income growth, unemployment rate, and inflation — will affect the performance of the housing and mortgage markets in 2011. The economy is expected to generate new jobs and rising incomes, contributing to a gradual recovery in housing activity and declines in delinquency rates. However, several developments may adversely affect the prospects for a housing recovery. The current and expected increases in oil prices raise concerns about the overall economic recovery and housing markets as higher oil prices reduce consumers’ cash for other spending. We also expect rates on fixed-rate mortgages to be slightly higher in the second half of 2011, as stronger GDP growth and further labor market improvements generate higher demand for credit and consumer spending. Lastly, many large financial institutions experienced temporary delays in the foreclosure process late in 2010, and we believe the resumption of foreclosures will result in increased distressed sales of REO properties in 2011.
 
Our expectation for home prices, based on our own index, is that national average home prices will continue to decline over the near term before a long-term recovery in housing begins, due to, among other factors: (a) our expectation for a sustained volume of distressed sales, which include short sales and sales by financial institutions of their REO properties; and (b) the likelihood that unemployment rates will remain high.
 
Single-Family
 
We expect our credit losses will likely increase in the near term and, for 2011, remain significantly above historical levels. This is in part due to the substantial number of mortgage loans in our single-family credit guarantee portfolio on which borrowers owe more than their home is currently worth, as well as the substantial backlog of seriously delinquent loans. For the near term, we also expect:
 
  •  loss severity rates to remain relatively high, as market conditions, such as home prices and the rate of home sales, continue to remain weak;
 
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  •  REO operations expense to continue to increase, as single-family REO acquisition volume and property inventory continues to be high;
 
  •  non-performing assets, which include loans deemed TDRs, to continue to remain high;
 
  •  the volume of loan workouts to remain high; and
 
  •  continued high volume of loans in the foreclosure process as well as prolonged foreclosure timelines, which may result in a continued high loan loss reserve balance in the near term and increases in charge-offs in future periods.
 
Multifamily
 
We expect that the continuation of challenging economic conditions, including elevated unemployment in certain states in which we have substantial investments in multifamily mortgage loans, including Nevada, Arizona, and Georgia, may negatively impact our mortgage portfolio performance and may lead to additional non-performing assets. Improvements in loan performance historically lag improvements in broader economic and market trends during market recoveries. As a result, we may continue to experience elevated credit losses in the remainder of 2011 and delinquency rates may increase despite improving fundamentals. In addition, as more market participants re-emerged in the multifamily market during the first quarter of 2011, increased competition from other institutional investors may negatively impact our future purchase volumes as well as the pricing and credit quality of newly originated loans for the remainder of 2011.
 
Long-Term Financial Sustainability
 
We expect to request additional draws under the Purchase Agreement in future periods. Over time, our dividend obligation to Treasury will increasingly drive future draws. Although we may experience period-to-period variability in earnings and comprehensive income, it is unlikely that we will regularly generate net income or comprehensive income in excess of our annual dividends payable to Treasury over the long term. In addition, we are required under the Purchase Agreement to pay a quarterly commitment fee to Treasury, which could contribute to future draws if the fee is not waived in the future. Treasury waived the fee for the first and second quarters of 2011, but it has indicated that it remains committed to protecting taxpayers and ensuring that our future positive earnings are returned to taxpayers as compensation for their investment. The amount of the quarterly commitment fee has not yet been established and could be substantial. As a result of these factors, there is uncertainty as to our long-term financial sustainability.
 
There continues to be significant uncertainty in the current mortgage market environment, and continued high levels of unemployment, weakness in home prices, adverse changes in interest rates, mortgage security prices, spreads and other factors could lead to additional draws. For discussion of other factors that could result in additional draws, see “LIQUIDITY AND CAPITAL RESOURCES — Capital Resources.”
 
There is also significant uncertainty as to whether or when we will emerge from conservatorship, as it has no specified termination date, and as to what changes may occur to our business structure during or following conservatorship, including whether we will continue to exist. While we are not aware of any current plans of our Conservator to significantly change our business model or capital structure in the near-term, there are likely to be significant changes beyond the near-term that we expect to be decided by the Obama Administration and Congress. Our future structure and role will be determined by the Obama Administration and Congress. We have no ability to predict the outcome of these deliberations. As discussed below in “Legislative and Regulatory Developments,” on February 11, 2011, the Obama Administration delivered a report to Congress that lays out the Administration’s plan to reform the U.S. housing finance market.
 
Limits on Mortgage-Related Investments Portfolio
 
Under the terms of the Purchase Agreement and FHFA regulation, our mortgage-related investments portfolio is subject to a cap that decreases by 10% each year until the portfolio reaches $250 billion. As a result, the UPB of our mortgage-related investments portfolio could not exceed $810 billion as of December 31, 2010 and may not exceed $729 billion as of December 31, 2011. FHFA has stated 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 pools.
 
Table 4 presents the UPB of our mortgage-related investments portfolio, for purposes of the limit imposed by the Purchase Agreement and FHFA regulation. 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 web site at www.freddiemac.com and in current reports on Form 8-K we file with the SEC.
 
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We are providing our web site addresses here and elsewhere in this Form 10-Q solely for your information. Information appearing on our web site is not incorporated into this Form 10-Q.
 
The UPB of our mortgage-related investments portfolio declined from December 31, 2010 to March 31, 2011, primarily due to liquidations, partially offset by the purchase of $14.6 billion of seriously delinquent loans from PC trusts.
 
Table 4 — Mortgage-Related Investments Portfolio(1)
 
                 
    March 31, 2011     December 31, 2010  
    (in millions)  
 
Investments segment — Mortgage investments portfolio
  $ 477,446     $ 481,677  
Single-family Guarantee segment — Single-family unsecuritized mortgage loans(2)
    67,882       69,766  
Multifamily segment — Mortgage investments portfolio
    146,710       145,431  
                 
Total mortgage-related investments portfolio
  $ 692,038     $ 696,874  
                 
(1)  Based on UPB and excludes mortgage loans and mortgage-related securities traded, but not yet settled.
(2)  Represents unsecuritized non-performing single-family loans managed by the Single-family Guarantee segment.
 
Legislative and Regulatory Developments
 
On February 11, 2011, the Obama Administration delivered a report to Congress that lays out the Administration’s plan to reform the U.S. housing finance market, including options for structuring the government’s long-term role in a housing finance system in which the private sector is the dominant provider of mortgage credit. The report recommends winding down Freddie Mac and Fannie Mae, and states that the Obama Administration will work with FHFA to determine the best way to responsibly reduce the role of Freddie Mac and Fannie Mae in the market and ultimately wind down both institutions. The report states that these efforts must be undertaken at a deliberate pace, which takes into account the impact that these changes will have on borrowers and the housing market.
 
The report states that the government is committed to ensuring that Freddie Mac and Fannie Mae have sufficient capital to perform under any guarantees issued now or in the future and the ability to meet any of their debt obligations, and further states that the Obama Administration will not pursue policies or reforms in a way that would impair the ability of Freddie Mac and Fannie Mae to honor their obligations. The report states the Obama Administration’s belief that under the companies’ senior preferred stock purchase agreements with Treasury, there is sufficient funding to ensure the orderly and deliberate wind down of Freddie Mac and Fannie Mae, as described in the Administration’s plan.
 
The report identifies a number of policy levers that could be used to wind down Freddie Mac and Fannie Mae, shrink the government’s footprint in housing finance, and help bring private capital back to the mortgage market, including increasing guarantee fees, phasing in a 10% down payment requirement, reducing conforming loan limits, and winding down Freddie Mac and Fannie Mae’s investment portfolios, consistent with the senior preferred stock purchase agreements.
 
These recommendations, if implemented, would have a material impact on our business volumes, market share, results of operations and financial condition. We cannot predict the extent to which these recommendations will be implemented or when any actions to implement them may be taken. However, we are not aware of any current plans of our Conservator to significantly change our business model or capital structure in the near-term.
 
See “LEGISLATIVE AND REGULATORY MATTERS” for information on recent developments in GSE reform legislation and recently initiated rulemakings under the Dodd-Frank Act.
 
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SELECTED FINANCIAL DATA(1)
 
The selected financial data presented below should be reviewed in conjunction with MD&A and our consolidated financial statements and related notes for the three months ended March 31, 2011.
 
                 
    For the Three Months Ended
    March 31,
    2011   2010
    (dollars in millions,
    except share-related amounts)
 
Statements of Income and Comprehensive Income Data
               
Net interest income
  $ 4,540     $ 4,125  
Provision for credit losses
    (1,989 )     (5,396 )
Non-interest income (loss)
    (1,252 )     (4,854 )
Non-interest expense
    (697 )     (667 )
Net income (loss) attributable to Freddie Mac
    676       (6,688 )
Total comprehensive income (loss) attributable to Freddie Mac
    2,740       (1,880 )
Net loss attributable to common stockholders
    (929 )     (7,980 )
Earnings (loss) per common share:
               
Basic
    (0.29 )     (2.45 )
Diluted
    (0.29 )     (2.45 )
Cash dividends per common share
           
Weighted average common shares outstanding (in thousands):(2)
               
Basic
    3,246,985       3,251,295  
Diluted
    3,246,985       3,251,295  
                 
                 
    March 31, 2011   December 31, 2010
    (dollars in millions)
 
Balance Sheets Data
               
Mortgage loans held-for-investment, at amortized cost by consolidated trusts (net of allowance for loan losses)
  $ 1,644,609     $ 1,646,172  
Total assets
    2,244,916       2,261,780  
Debt securities of consolidated trusts held by third parties
    1,510,426       1,528,648  
Other debt
    715,572       713,940  
All other liabilities
    17,681       19,593  
Total Freddie Mac stockholders’ equity (deficit)
    1,237       (401 )
Portfolio Balances(3)
               
Mortgage-related investments portfolio
  $ 692,038     $ 696,874  
Total Freddie Mac Mortgage-Related Securities(4)
    1,689,978       1,712,918  
Total mortgage portfolio(5)
    2,143,472       2,164,859  
Non-performing assets(6)
    124,438       125,405  
                 
                 
    For the Three Months Ended
    March 31,
    2011   2010
 
Ratios(7)
               
Return on average assets(8)(11)
    0.1 %     (1.1 )%
Non-performing assets ratio(9)
    6.4       5.9  
Equity to assets ratio(10)(11)
    0.0       (0.4 )
 (1)  See “NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES” in our 2010 Annual Report for more information regarding our accounting policies.
 (2)  Includes the weighted average number of shares that are associated with the warrant for our common stock issued to Treasury as part of the Purchase Agreement. This warrant is included in basic loss per share for the first quarters of 2011 and 2010, because it is unconditionally exercisable by the holder at a cost of $0.00001 per share.
 (3)  Represents the UPB and excludes mortgage loans and mortgage-related securities traded, but not yet settled.
 (4)  See “Table 26 — Freddie Mac Mortgage-Related Securities” for the composition of this line item.
 (5)  See “Table 11 — Segment Mortgage Portfolio Composition” for the composition of our total mortgage portfolio.
 (6)  See “Table 42 — Non-Performing Assets” for a description of our non-performing assets.
 (7)  The return on common equity ratio is not presented because the simple average of the beginning and ending balances of total Freddie Mac stockholders’ equity (deficit), net of preferred stock (at redemption value), is less than zero for all periods presented. The dividend payout ratio on common stock is not presented because we are reporting a net loss attributable to common stockholders for all periods presented.
 (8)  Ratio computed as annualized net income (loss) attributable to Freddie Mac divided by the simple average of the beginning and ending balances of total assets.
 (9)  Ratio computed as non-performing assets divided by the ending UPB of our total mortgage portfolio, excluding non-Freddie Mac mortgage-related securities.
(10)  Ratio computed as the simple average of the beginning and ending balances of total Freddie Mac stockholders’ equity (deficit) divided by the simple average of the beginning and ending balances of total assets.
(11)  To calculate the simple averages for the three months ended March 31, 2010, the beginning balances of total assets, and total Freddie Mac stockholders’ equity are based on the January 1, 2010 balances 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” in our 2010 Annual Report, so that both the beginning and ending balances reflect changes in accounting principles.
 
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CONSOLIDATED RESULTS OF OPERATIONS
 
The following discussion of our consolidated results of operations should be read in conjunction with our consolidated financial statements, including the accompanying notes. Also see “CRITICAL ACCOUNTING POLICIES AND ESTIMATES” for more information concerning our more significant accounting policies and estimates applied in determining our reported results of operations.
 
Table 5 — Summary Consolidated Statements of Income and Comprehensive Income
 
                 
    Three Months Ended
 
    March 31,  
    2011     2010  
    (in millions)  
 
Net interest income
  $ 4,540     $ 4,125  
Provision for credit losses
    (1,989 )     (5,396 )
                 
Net interest income (loss) after provision for credit losses
    2,551       (1,271 )
                 
Non-interest income (loss):
               
Gains (losses) on extinguishment of debt securities of consolidated trusts
    223       (98 )
Gains (losses) on retirement of other debt
    12       (38 )
Gains (losses) on debt recorded at fair value
    (81 )     347  
Derivative gains (losses)
    (427 )     (4,685 )
Impairment of available-for-sale securities:
               
Total other-than-temporary impairment of available-for-sale securities
    (1,054 )     (417 )
Portion of other-than-temporary impairment recognized in AOCI
    (139 )     (93 )
                 
Net impairment of available-for-sale securities recognized in earnings
    (1,193 )     (510 )
Other gains (losses) on investment securities recognized in earnings
    (120 )     (416 )
Other income
    334       546  
                 
Total non-interest income (loss)
    (1,252 )     (4,854 )
                 
Non-interest expense:
               
Administrative expenses
    (361 )     (405 )
REO operations expense
    (257 )     (159 )
Other expenses
    (79 )     (103 )
                 
Total non-interest expense
    (697 )     (667 )
                 
Income (loss) before income tax benefit
    602       (6,792 )
Income tax benefit
    74       103  
                 
Net income (loss)
    676       (6,689 )
                 
Other comprehensive income (loss), net of taxes and reclassification adjustments:
               
Changes in unrealized gains (losses) related to available-for-sale securities
    1,941       4,646  
Changes in unrealized gains (losses) related to cash flow hedge relationships
    132       172  
Changes in defined benefit plans
    (9 )     (10 )
                 
Total other comprehensive income (loss), net of taxes and reclassification adjustments
    2,064       4,808  
                 
Comprehensive income (loss)
    2,740       (1,881 )
Less: Comprehensive (income) loss attributable to noncontrolling interest
          1  
                 
Total comprehensive income (loss) attributable to Freddie Mac
  $ 2,740     $ (1,880 )
                 
 
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Net Interest Income
 
Table 6 presents an analysis of net interest income, including average balances and related yields earned on assets and incurred on liabilities.
 
Table 6 — Net Interest Income/Yield and Average Balance Analysis
 
                                                 
    Three Months Ended March 31,  
    2011     2010  
          Interest
                Interest
       
    Average
    Income
    Average
    Average
    Income
    Average
 
    Balance(1)(2)     (Expense)(1)     Rate     Balance(1)(2)     (Expense)(1)     Rate  
    (dollars in millions)  
 
Interest-earning assets:
                                               
Cash and cash equivalents
  $ 37,561     $ 16       0.17 %   $ 66,973     $ 17       0.10 %
Federal funds sold and securities purchased under agreements to resell
    47,861       18       0.15       51,645       16       0.12  
Mortgage-related securities:
                                               
Mortgage-related securities(3)
    456,972       5,316       4.65       593,512       7,279       4.91  
Extinguishment of PCs held by Freddie Mac
    (167,528 )     (2,063 )     (4.93 )     (256,951 )     (3,441 )     (5.36 )
                                                 
Total mortgage-related securities, net
    289,444       3,253       4.50       336,561       3,838       4.56  
                                                 
Non-mortgage-related securities(3)
    29,309       30       0.41       20,189       61       1.21  
Mortgage loans held by consolidated trusts(4)
    1,650,567       20,064       4.86       1,787,327       22,732       5.09  
Unsecuritized mortgage loans(4)
    240,557       2,334       3.88       159,780       1,961       4.91  
                                                 
Total interest-earning assets
  $ 2,295,299     $ 25,715       4.48     $ 2,422,475     $ 28,625       4.73  
                                                 
Interest-bearing liabilities:
                                               
Debt securities of consolidated trusts including PCs held by Freddie Mac
  $ 1,665,608     $ (19,466 )     (4.67 )   $ 1,801,525     $ (23,084 )     (5.13 )
Extinguishment of PCs held by Freddie Mac
    (167,528 )     2,063       4.93       (256,951 )     3,441       5.36  
                                                 
Total debt securities of consolidated trusts held by third parties
    1,498,080       (17,403 )     (4.65 )     1,544,574       (19,643 )     (5.09 )
                                                 
Other debt:
                                               
Short-term debt
    194,822       (115 )     (0.24 )     242,938       (141 )     (0.23 )
Long-term debt(5)
    518,034       (3,450 )     (2.66 )     556,907       (4,458 )     (3.20 )
                                                 
Total other debt
    712,856       (3,565 )     (2.00 )     799,845       (4,599 )     (2.30 )
                                                 
Total interest-bearing liabilities
    2,210,936       (20,968 )     (3.79 )     2,344,419       (24,242 )     (4.14 )
Income (expense) related to derivatives(6)
          (207 )     (0.04 )           (258 )     (0.04 )
Impact of net non-interest-bearing funding
    84,363             0.14       78,056             0.13  
                                                 
Total funding of interest-earning assets
  $ 2,295,299     $ (21,175 )     (3.69 )   $ 2,422,475     $ (24,500 )     (4.05 )
                                                 
Net interest income/yield
          $ 4,540       0.79             $ 4,125       0.68  
                                                 
(1)  Excludes mortgage loans and mortgage-related securities traded, but not yet settled.
(2)  We calculate average balances based on amortized cost.
(3)  Interest income (expense) includes accretion of the portion of impairment charges recognized in earnings expected to be recovered.
(4)  Non-performing loans, where interest income is generally recognized when collected, are included in average balances.
(5)  Includes current portion of long-term debt.
(6)  Represents changes in fair value of derivatives in cash flow hedge relationships that were previously deferred in AOCI and have been reclassified to earnings as the associated hedged forecasted issuance of debt affects earnings.
 
Net interest income and net interest yield increased by $415 million and 11 basis points, respectively, during the three months ended March 31, 2011, compared to the three months ended March 31, 2010, due to: (a) lower funding costs from the replacement of debt at lower rates; and (b) the impact of a change in practice announced in February 2010 to purchase substantially all 120 day delinquent loans from PC trusts, as the average funding rate of the other debt used to purchase such loans from PC trusts is significantly less than the average funding rate of the debt securities of consolidated trusts held by third parties. These factors were partially offset by the reduction in the average balance of higher-yielding mortgage-related assets due to continued liquidations and limited purchase activity.
 
Interest income that we did not recognize, which we refer to as foregone interest income, and reversals of previously recognized interest income, net of cash received, related to non-performing loans was $1.0 billion during the three months ended March 31, 2011, compared to $1.1 billion during the three months ended March 31, 2010.
 
During the three months ended March 31, 2011, spreads on our debt and our access to the debt markets remained favorable relative to historical levels. For more information, see “LIQUIDITY AND CAPITAL RESOURCES — Liquidity.”
 
Provision for Credit Losses
 
Since the beginning of 2008, on an aggregate basis, we have recorded provision for credit losses associated with single-family loans of approximately $64.3 billion, and have recorded an additional $4.6 billion in losses on loans
 
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purchased from our PCs, net of recoveries. The majority of these losses are associated with loans originated in 2005 through 2008. While loans originated in 2005 through 2008 will give rise to additional credit losses that have not yet been incurred, and thus have not been provisioned for, we believe, as of March 31, 2011, that we have reserved for or charged-off the majority of the total expected credit losses for these loans. Nevertheless, various factors, such as continued high unemployment rates or further declines in home prices, could require us to provide for losses on these loans beyond our current expectations. See “Table 3 — Credit Statistics, Single-Family Credit Guarantee Portfolio” for certain quarterly credit statistics for our single-family credit guarantee portfolio.
 
Our provision for credit losses decreased to $2.0 billion in the first quarter of 2011, compared to $5.4 billion in the first quarter of 2010, due to a decline in the number of delinquent loan inflows, and a decline in the rate at which seriously delinquent loans ultimately transition to a loss event. While the quarterly amount of our provision for credit losses declined for the last several consecutive quarters, our quarterly amount of charge-offs, net of recoveries remained elevated. We believe the level of our charge-offs will continue to remain high in 2011 due to the large number of single-family non-performing loans that will likely be resolved during the year. As of March 31, 2011 and December 31, 2010, the UPB of our single-family non-performing loans was $115.1 billion and $115.5 billion, respectively; these amounts include $32.2 billion and $26.6 billion, respectively, of single-family TDRs that are reperforming, or less than three months past due. As of March 31, 2011 and December 31, 2010, the UPB of multifamily non-performing loans was $3.0 billion and $2.9 billion, respectively. Although still at historically high levels, the UPB of our single-family non-performing loans declined slightly during the first quarter of 2011. See “RISK MANAGEMENT — Credit Risk — Mortgage Credit Risk” for further information on our single-family credit guarantee portfolio, including credit performance, charge-offs, and growth in the balance of our non-performing assets.
 
In the first quarter of 2011, we also continued to experience high volumes of loan modifications involving concessions to borrowers, which are considered TDRs. Impairment analysis for TDRs requires giving recognition in the provision for credit losses to the excess of our recorded investment in the loan over the present value of the expected future cash flows. This generally results in a higher allowance for loan losses for TDRs than for loans that are not TDRs. We expect the percentage of modifications that qualify as TDRs in 2011 will remain high, since the majority of our modifications are anticipated to include a significant reduction in the contractual interest rate, which represents a concession to the borrower.
 
The total number of seriously delinquent loans declined during the first quarter of 2011, but has remained high due to the continued weakness in home prices, persistently high unemployment, extended foreclosure timelines and foreclosure suspensions in many states, and challenges faced by servicers processing large volumes of problem loans. Our seller/servicers have an active role in our loan workout activities, including under the MHA Program, and a decline in their performance could result in a failure to realize the anticipated benefits of our loss mitigation plans. In an effort to help mitigate such risk, we began making significant investments in systems and personnel in the last months of 2010 to help our seller/servicers manage their performance. We believe this will help us to better realize the benefits of our loss mitigation plans, though it is too early to determine if this will be successful.
 
Our provision (benefit) for credit losses associated with our multifamily mortgage portfolio was $(60) million and $29 million for the first quarters of 2011 and 2010, respectively. Our loan loss reserve associated with our multifamily mortgage portfolio was $747 million and $828 million as of March 31, 2011 and December 31, 2010, respectively. The decrease in the reserves was driven by positive market trends in vacancy rates and effective rents reflected over the past several consecutive quarters, as well as stabilizing or improved property values and improved borrower credit profiles. However, some states in which we have substantial investments in multifamily mortgage loans, including Nevada, Arizona, and Georgia, continue to exhibit weaker than average fundamentals.
 
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 extinguish the debt security differs from its carrying value. For the three months ended March 31, 2011 and 2010, we extinguished debt securities of consolidated trusts with a UPB of $24.8 billion and $2.1 billion, respectively (representing our purchase of single-family PCs with a corresponding UPB amount), and our gains (losses) on extinguishment of these debt securities of consolidated trusts were $223 million and $(98) million, respectively. The gains in the first quarter of 2011 were due to the repurchases of our debt securities at a discount resulting from an increase in interest rates during the period. See “Table 18 — Total Mortgage-Related Securities
 
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Purchase Activity” for additional information regarding purchases of PCs, including those issued by consolidated PC trusts.
 
Gains (Losses) on Retirement of Other Debt
 
Gains (losses) on retirement of other debt were $12 million and $(38) million during the three months ended March 31, 2011 and 2010, respectively. We recognized gains on debt retirements in the first quarter of 2011 primarily due to the repurchase of other debt securities at a discount. We also recognized fewer losses on debt calls and puts in the first quarter of 2011 compared to the first quarter of 2010 due to a decreased level of debt call activity in the first quarter of 2011.
 
Gains (Losses) on Debt Recorded at Fair Value
 
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, 2011, we recognized losses on debt recorded at fair value of $81 million primarily due to the U.S. dollar weakening relative to the Euro. For the three months ended March 31, 2010, we recognized gains on debt recorded at fair value of $347 million primarily due to 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.
 
Derivative Gains (Losses)
 
Table 7 presents derivative gains (losses) reported in our consolidated statements of income and comprehensive income. See “NOTE 11: DERIVATIVES — Table 11.2 — Gains and Losses on Derivatives” for information about gains and losses related to specific categories of derivatives. Changes in fair value and interest accruals on derivatives not in hedge accounting relationships are recorded as derivative gains (losses) in our consolidated statements of income and comprehensive income. At March 31, 2011 and December 31, 2010, we did not have any derivatives in hedge accounting relationships; however, there are amounts recorded in AOCI related to discontinued cash flow hedges. Amounts recorded in AOCI associated with these closed cash flow hedges are reclassified to earnings when the forecasted transactions affect earnings. If it is probable that the forecasted transaction will not occur, then the deferred gain or loss associated with the forecasted transaction is reclassified into earnings immediately.
 
While derivatives are an important aspect of our management of interest-rate risk, they generally increase the volatility of reported net income (loss), because, while fair value changes in derivatives affect net income, fair value changes in several of the types of assets and liabilities being hedged do not affect net income.
 
Table 7 — Derivative Gains (Losses)
 
                 
    Derivative Gains (Losses)  
    Three Months Ended
 
    March 31,  
    2011     2010  
    (in millions)  
 
Interest-rate swaps
  $ 1,723     $ (2,334 )
Option-based derivatives(1)
    (807 )     (582 )
Other derivatives(2)
    (94 )     (420 )
Accrual of periodic settlements(3)
    (1,249 )     (1,349 )
                 
Total
  $ (427 )   $ (4,685 )
                 
(1)  Primarily includes purchased call and put swaptions and purchased interest rate caps and floors.
(2)  Includes futures, foreign currency swaps, commitments, swap guarantee derivatives, and credit derivatives. Foreign-currency swaps are defined as swaps in which net settlement is based on one leg calculated in a foreign-currency and the other leg calculated in U.S. dollars. Commitments include: (a) our commitments to purchase and sell investments in securities; (b) our commitments to purchase mortgage loans; and (c) our commitments to purchase and extinguish or issue debt securities of our consolidated trusts.
(3)  Includes imputed interest on zero-coupon swaps.
 
Gains (losses) on derivatives not accounted for in hedge accounting relationships are principally driven by changes in: (a) swap and forward interest rates and implied volatility; and (b) the mix and volume of derivatives in our derivatives portfolio.
 
During the three months ended March 31, 2011, we recognized losses on derivatives of $0.4 billion primarily due to $1.2 billion of losses related to the accrual of periodic settlements on interest-rate swaps as we continued to be in a net pay-fixed swap position during the first quarter of 2011, partially offset by the improvement in derivative fair values as interest rates increased. As a result, we recognized fair value gains of $4.0 billion on our pay-fixed swaps, partially offset by fair value losses on our receive-fixed swaps of $2.2 billion. We recognized fair value losses of $0.8 billion on our
 
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option-based derivatives, resulting from losses on our purchased call swaptions primarily due to the increase in forward interest rates during the three months ended March 31, 2011.
 
During the three months ended March 31, 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 of $4.7 billion on our pay-fixed swaps, partially offset by gains on our receive-fixed swap positions of $2.4 billion. We also recorded losses of $1.0 billion on our purchased put swaptions.
 
Investment Securities-Related Activities
 
Impairments of Available-For-Sale Securities
 
We recorded net impairments of available-for-sale securities recognized in earnings of $1.2 billion and $510 million during the three months ended March 31, 2011 and 2010, respectively. See “CONSOLIDATED BALANCE SHEETS ANALYSIS — Investments in Securities — Mortgage-Related Securities — Other-Than-Temporary Impairments on Available-For-Sale Mortgage-Related Securities” and “NOTE 7: INVESTMENTS IN SECURITIES” for information regarding the accounting principles for investments in debt and equity securities and the other-than-temporary impairments recorded during the three months ended March 31, 2011 and 2010.
 
Other Gains (Losses) on Investment Securities Recognized in Earnings
 
Other gains (losses) on investment securities recognized in earnings primarily consists of gains (losses) on trading securities. We recognized $(200) million and $(417) million related to gains (losses) on trading securities during the three months ended March 31, 2011 and 2010, respectively.
 
During the three months ended March 31, 2011 and 2010, the losses on trading securities were primarily due to the movement of securities with unrealized gains towards maturity. During the three months ended March 31, 2011, these losses were partially offset by gains due to tightening of OAS levels on agency securities, and during the three months ended March 31, 2010, these losses were partially offset by fair value gains on our non-interest-only securities classified as trading primarily due to decreased interest rates.
 
Other Income
 
Table 8 summarizes the significant components of other income.
 
Table 8 — Other Income
 
                 
    Three Months Ended
 
    March 31,  
    2011     2010  
    (in millions)  
 
Other income (losses):
               
Guarantee-related income
  $ 54     $ 59  
Gains (losses) on sale of mortgage loans
    95       95  
Gains (losses) on mortgage loans recorded at fair value
    (33 )     21  
Recoveries on loans impaired upon purchase
    125       169  
All other
    93       202  
                 
Total other income
  $ 334     $ 546  
                 
 
Other income declined during the first quarter of 2011, compared to the first quarter of 2010, primarily due to lower recoveries on loans impaired upon purchase, a decline in all other income during the first quarter of 2011, and the shift to net losses on mortgage loans recorded at fair value in the first quarter of 2011.
 
During the first quarters of 2011 and 2010, we recognized recoveries on loans impaired upon purchase of $125 million and $169 million, respectively. Our recoveries on loans impaired upon purchase declined in the first quarter of 2011, compared to the first quarter of 2010, due to a lower volume of foreclosure transfers associated with loans impaired upon purchase.
 
We principally recognize recoveries on impaired loans purchased prior to January 1, 2010, due to a change in accounting guidance effective on that date. Consequently, our recoveries on loans impaired upon purchase will generally decline over time.
 
All other income declined to $93 million in the first quarter of 2011 from $202 million in the first quarter of 2010. All other income was higher in the first quarter of 2010 primarily due to reduced expectations of losses from certain legal claims that were previously recognized.
 
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Non-Interest Expense
 
Table 9 summarizes the components of non-interest expense.
 
Table 9 — Non-Interest Expense
 
                 
    Three Months Ended
 
    March 31,  
    2011     2010  
    (in millions)  
 
Administrative expenses(1):
               
Salaries and employee benefits
  $ 207     $ 234  
Professional services
    56       81  
Occupancy expense
    15       16  
Other administrative expenses
    83       74  
                 
Total administrative expenses
    361       405  
REO operations expense
    257       159  
Other expenses
    79       103  
                 
Total non-interest expense
  $ 697     $ 667  
                 
(1)  In the first quarter of 2011, we reclassified certain expenses from other expenses to professional services expense. Prior period amounts have been reclassified to conform to the current presentation.
 
Administrative Expenses
 
Administrative expenses decreased in the first quarter of 2011 compared to the first quarter of 2010, due in part to our ongoing focus on cost reduction measures, particularly with regard to salaries and employee benefits and professional services costs. Administrative expenses declined during 2010 and we expect these expenses will continue to decline for the full year of 2011 when compared to 2010.
 
REO Operations Expense
 
The table below presents the components of our REO operations expense for the first quarters of 2011 and 2010, and REO inventory and disposition information.
 
Table 10 — REO Operations Expense, REO Inventory, and REO Dispositions
 
                 
    Three Months Ended
 
    March 31,  
    2011     2010  
    (dollars in millions)  
 
REO operations expense:
               
Single-family:
               
REO property expenses(1)
  $ 308     $ 232  
Disposition (gains) losses, net(2)(3)
    126       13  
Change in holding period allowance, dispositions
    (155 )     (67 )
Change in holding period allowance, inventory(4)
    151       137  
Recoveries(5)
    (173 )     (159 )
                 
Total single-family REO operations expense
    257       156  
Multifamily REO operations (income) expense
          3  
                 
Total REO operations expense
  $ 257     $ 159  
                 
REO inventory (in properties), at March 31:
               
Single-family
    65,159       53,831  
Multifamily
    15       8  
                 
Total
    65,174       53,839  
                 
REO property dispositions (in properties)
    31,628       21,969  
(1)  Consists of costs incurred to acquire, maintain or protect a property after it is acquired in a foreclosure transfer, such as legal fees, insurance, taxes, and cleaning and other maintenance charges.
(2)  Represents the difference between the disposition proceeds, net of selling expenses, and the fair value of the property on the date of the foreclosure transfer.
(3)  In the first quarter of 2011, we reclassified expenses related to the disposition of REO underlying Other Guarantee Transactions from REO property expense to disposition (gains) losses, net. Prior periods have been revised to conform to the current presentation.
(4)  Represents the (increase) decrease in the estimated fair value of properties that were in inventory during the period.
(5)  Includes recoveries from primary mortgage insurance, pool insurance and seller/servicer repurchases.
 
Total REO operations expense was $257 million in the first quarter of 2011 as compared to $159 million in the first quarter of 2010. This increase was primarily due to higher property expenses associated with larger REO inventories and higher disposition losses. Net disposition losses increased in the first quarter of 2011, compared to the first quarter of 2010, as we completed a higher volume of property dispositions in 2011 and home prices declined on a national basis. We
 
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currently expect REO property expenses to continue to increase due to expected continued high levels of REO acquisitions and inventory in the remainder of 2011.
 
The pace of our REO acquisitions was slowed by delays in the foreclosure process arising from concerns about foreclosure documentation practices, particularly in states that require a judicial foreclosure process. The acquisition slowdown, coupled with high disposition levels, led to an approximate 10% reduction in REO property inventory from December 31, 2010 to March 31, 2011. We expect the pace of our REO acquisitions to increase in the remainder of 2011 in part due to the resumption of foreclosure activity by servicers. For more information on how concerns about foreclosure documentation practices could adversely affect our REO operations (income) expense, see “RISK FACTORS — Operational Risks — We have incurred and will continue to incur expenses and we may otherwise be adversely affected by deficiencies in foreclosure practices, as well as related delays in the foreclosure process” in our 2010 Annual Report. See “RISK MANAGEMENT— Credit Risk — Mortgage Credit Risk — Credit Performance — Non-Performing Assets” for additional information about our REO activity.
 
Other Expenses
 
Other expenses primarily consist of losses on loans purchased and other miscellaneous expenses. Our losses on loans purchased were $4 million during the first quarter of 2011 compared to $17 million during the first quarter of 2010. 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.
 
Income Tax Benefit
 
For the three months ended March 31, 2011 and 2010, we reported an income tax benefit of $74 million and $103 million, respectively. See “NOTE 13: INCOME TAXES” for additional information.
 
Total Comprehensive Income (Loss)
 
Our total comprehensive income (loss) was $2.7 billion and $(1.9) billion for the first quarters of 2011 and 2010, respectively, consisting of: (a) a net income (loss) of $676 million and $(6.7) billion, respectively; and (b) $2.1 billion and $4.8 billion of changes in AOCI, respectively, primarily resulting from improved fair values on available-for-sale securities. See “CONSOLIDATED BALANCE SHEETS ANALYSIS — Total Equity (Deficit)” for additional information regarding changes in AOCI.
 
Segment Earnings
 
Our operations consist of three reportable segments, which are based on the type of business activities each performs — Investments, Single-family Guarantee, and Multifamily. Certain activities that are not part of a reportable segment are included in the All Other category.
 
The Investments segment reflects results from our investment, funding and hedging activities. In our Investments segment, we invest principally in mortgage-related securities and single-family performing mortgage loans funded by other debt issuances and hedged using derivatives. Segment Earnings for this segment consist primarily of the returns on these investments, less the related funding, hedging, and administrative expenses.
 
The Single-family Guarantee segment reflects results from our single-family credit guarantee activities. In our Single-family Guarantee segment, we purchase single-family mortgage loans originated by our seller/servicers in the primary mortgage market. In most instances, we use the mortgage securitization process to package the purchased mortgage loans into guaranteed mortgage-related securities. We guarantee the payment of principal and interest on the mortgage-related securities in exchange for management and guarantee fees. Segment Earnings for this segment consist primarily of management and guarantee fee revenues, including amortization of upfront fees, less the related credit costs (i.e., provision for credit losses), administrative expenses, allocated funding costs, and amounts related to net float benefits or expenses.
 
The Multifamily segment reflects results from our investment and guarantee activities in multifamily mortgage loans and securities. We purchase multifamily mortgage loans primarily for purposes of aggregation and then securitization. Although we hold CMBS that we purchased for investment, we have not purchased significant amounts of non-agency CMBS for investment since 2008. The Multifamily segment does not issue REMIC securities but does issue Other Structured Securities, Other Guarantee Transactions, and other guarantee commitments. Segment Earnings for this segment primarily includes management and guarantee fee income and the interest earned on assets related to multifamily investment activities, net of allocated funding costs. The Multifamily segment reflects the impact of changes in fair value
 
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of CMBS and held-for-sale loans associated only with factors other than changes in interest rates, such as credit and liquidity.
 
We evaluate segment performance and allocate resources based on a Segment Earnings approach, subject to the conduct of our business under the direction of the Conservator. The financial performance of our segments is measured based on each segment’s contribution to GAAP net income (loss) and GAAP total comprehensive income (loss). The sum of Segment Earnings for each segment and the All Other category equals GAAP net income (loss) attributable to Freddie Mac. Likewise, the sum of total comprehensive income (loss) for each segment and the All Other category equals GAAP total comprehensive income (loss) attributable to Freddie Mac.
 
The All Other category consists of material corporate level expenses that are: (a) infrequent in nature; and (b) based on management decisions outside the control of the management of our reportable segments. By recording these types of activities to the All Other category, we believe the financial results of our three reportable segments reflect the decisions and strategies that are executed within the reportable segments and provide greater comparability across time periods.
 
In presenting Segment Earnings, we make significant reclassifications to certain financial statement line items in order to reflect a measure of net interest income on investments, and a measure of management and guarantee income on guarantees, that is in line with 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 income and comprehensive income; and (b) allocating certain revenues and expenses, including certain returns on assets and funding costs, and all administrative expenses to our three reportable segments.
 
As a result of these reclassifications and allocations, Segment Earnings for our reportable segments differs significantly from, and should not be used as a substitute for, net income (loss) as determined in accordance with GAAP. Our definition of Segment Earnings may differ from similar measures used by other companies. However, we believe that Segment Earnings provides us with meaningful metrics to assess the financial performance of each segment and our company as a whole.
 
See “NOTE 17: SEGMENT REPORTING” in our 2010 Annual Report for further information regarding our segments, including the descriptions and activities of the segments and the reclassifications and allocations used to present Segment Earnings.
 
            20 Freddie Mac


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Table 11 provides information about our various segment mortgage portfolios at March 31, 2011 and December 31, 2010. For a discussion of each segment’s portfolios, see “Segment Earnings — Results.”
 
Table 11 — Segment Mortgage Portfolio Composition(1)
 
                 
    March 31, 2011     December 31, 2010  
    (in millions)  
 
Segment portfolios:
               
Investments — Mortgage investments portfolio:
               
Single-family unsecuritized mortgage loans(2)
  $ 88,301     $ 79,097  
Freddie Mac mortgage-related securities
    256,283       263,152  
Non-agency mortgage-related securities
    94,592       99,639  
Non-Freddie Mac agency mortgage-related securities
    38,270       39,789  
                 
Total Investments — Mortgage investments portfolio
    477,446       481,677  
                 
Single-family Guarantee — Managed loan portfolio:(3)
               
Single-family unsecuritized mortgage loans(4)
    67,882       69,766  
Single-family Freddie Mac mortgage-related securities held by us
    256,283       261,508  
Single-family Freddie Mac mortgage-related securities held by third parties
    1,416,882       1,437,399  
Single-family other guarantee commitments(5)
    9,990       8,632  
                 
Total Single-family Guarantee — Managed loan portfolio
    1,751,037       1,777,305  
                 
Multifamily — Guarantee portfolio:(3)
               
Multifamily Freddie Mac mortgage-related securities held by us
    2,197       2,095  
Multifamily Freddie Mac mortgage-related securities held by third parties
    14,615       11,916  
Multifamily other guarantee commitments(5)
    9,947       10,038  
                 
Total Multifamily — Guarantee portfolio
    26,759       24,049  
                 
Multifamily — Mortgage investments portfolio:(3)
               
Multifamily investment securities portfolio
    62,558       59,548  
Multifamily loan portfolio
    84,152       85,883  
                 
Total Multifamily — Mortgage investments portfolio
    146,710       145,431  
                 
Total Multifamily portfolio
    173,469       169,480  
                 
Less: Freddie Mac single-family and multifamily securities(6)
    (258,480 )     (263,603 )
                 
Total mortgage portfolio
  $ 2,143,472     $ 2,164,859  
                 
(1)  Based on UPB and excludes mortgage loans and mortgage-related securities traded, but not yet settled.
(2)  Excludes unsecuritized non-performing single-family loans managed by the Single-family Guarantee segment. However, the Single-family Guarantee segment continues to earn management and guarantee fees associated with unsecuritized single-family loans in the Investments segment.
(3)  The balances of the mortgage-related securities in these portfolios are based on the UPB of the security, whereas the balances of our single-family credit guarantee and multifamily mortgage portfolios presented in this report are based on the UPB of the mortgage loans underlying the related security. The differences in the loan and security balances result from the timing of remittances to security holders, which is typically 45 or 75 days after the mortgage payment cycle of fixed-rate and ARM PCs, respectively.
(4)  Represents unsecuritized non-performing single-family loans managed by the Single-family Guarantee segment.
(5)  Represents the UPB of mortgage-related assets held by third parties for which we provide our guarantee without our securitization of the related assets.
(6)  Freddie Mac single-family mortgage-related securities held by us are included in both our Investments segment’s mortgage investments portfolio and our Single-family Guarantee segment’s managed loan portfolio, and Freddie Mac multifamily mortgage-related securities held by us are included in both the multifamily investment securities portfolio and the multifamily guarantee portfolio. Therefore, these amounts are deducted in order to reconcile to our total mortgage portfolio.
 
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Segment Earnings — Results
 
Investments
 
Table 12 presents the Segment Earnings of our Investments segment.
 
Table 12 — Segment Earnings and Key Metrics — Investments(1)
 
                 
    Three Months Ended
 
    March 31,  
    2011     2010  
    (dollars in millions)  
 
Segment Earnings:
               
Net interest income
  $ 1,653     $ 1,311  
Non-interest income (loss):
               
Net impairment of available-for-sale securities
    (1,029 )     (376 )
Derivative gains (losses)
    1,103       (2,702 )
Other non-interest income (loss)
    236       (22 )
                 
Total non-interest income (loss)
    310       (3,100 )
                 
Non-interest expense:
               
Administrative expenses
    (95 )     (122 )
Other non-interest expense
          (7 )
                 
Total non-interest expense
    (95 )     (129 )
                 
Segment adjustments(2)
    203       510  
                 
Segment Earnings (loss) before income tax benefit
    2,071       (1,408 )
Income tax benefit
    66       97  
                 
Segment Earnings (loss), net of taxes, including noncontrolling interest
    2,137       (1,311 )
Less: Net (income) loss — noncontrolling interest
          (2 )
                 
Segment Earnings (loss), net of taxes
    2,137       (1,313 )
Total other comprehensive income, net of taxes
    1,126       3,120  
                 
Total comprehensive income
  $ 3,263     $ 1,807  
                 
Key metrics — Investments:
               
Portfolio balances:
               
Average balances of interest-earning assets:(3)(4)(5)
               
Mortgage-related securities(6)
  $ 399,113     $ 530,865  
Non-mortgage-related investments(7)
    114,732       138,806  
Unsecuritized single-family loans
    85,515       43,559  
                 
Total average balances of interest-earning assets
  $ 599,360     $ 713,230  
                 
Return:
               
Net interest yield — Segment Earnings basis (annualized)
    1.10%       0.74%  
(1)  For reconciliations of the Segment Earnings line items to the comparable line items in our consolidated financial statements prepared in accordance with GAAP, see “NOTE 15: SEGMENT REPORTING — Table 15.2 — Segment Earnings and Reconciliation to GAAP Results.”
(2)  For a description of our segment adjustments, see “NOTE 15: SEGMENT REPORTING — Segment Earnings.”
(3)  Excludes mortgage loans and mortgage-related securities traded, but not yet settled.
(4)  Excludes non-performing single-family mortgage loans.
(5)  We calculate average balances based on amortized cost.
(6)  Includes our investments in single-family PCs and certain Other Guarantee 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.
 
Our total comprehensive income for our Investments segment was $3.3 billion and $1.8 billion for the three months ended March 31, 2011 and 2010, respectively, consisting of: (a) Segment Earnings (loss) of $2.1 billion and $(1.3) billion, respectively; and (b) $1.1 billion and $3.1 billion of changes in AOCI, respectively.
 
The UPB of the Investments segment mortgage investments portfolio declined by 3.5% on an annualized basis from $482 billion at December 31, 2010 to $477 billion at March 31, 2011, compared to a decline of 30.5% on an annualized basis from December 31, 2009 to March 31, 2010.
 
We held $294.6 billion of agency securities and $94.6 billion of non-agency mortgage-related securities as of March 31, 2011 compared to $302.9 billion of agency securities and $99.6 billion of non-agency mortgage-related securities as of December 31, 2010. The decline in UPB of agency securities is due mainly to liquidations, including prepayments and select sales. The decline in UPB of non-agency mortgage-related securities is due mainly to the receipt of monthly remittances of principal repayments from both the recoveries of liquidated loans and, to a lesser extent, voluntary repayments of the underlying collateral, representing a partial return of our investments in these securities. See “CONSOLIDATED BALANCE SHEETS ANALYSIS — Investments in Securities” for additional information regarding our mortgage-related securities.
 
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Segment Earnings net interest income and net interest yield increased $342 million and 36 basis points, respectively, during the three months ended March 31, 2011, compared to the three months ended March 31, 2010. The primary driver was lower funding costs, primarily due to the replacement of debt at lower rates. These lower funding costs were partially offset by the reduction in the average balance of higher-yielding mortgage-related assets, due to continued liquidations.
 
Segment Earnings non-interest income (loss) increased by $3.4 billion to $310 million during the three months ended March 31, 2011, compared to $(3.1) billion during the three months ended March 31, 2010. Non-interest income for the three months ended March 31, 2011 was primarily attributable to derivative gains, partially offset by net impairments of available-for-sale securities. Non-interest loss for the three months ended March 31, 2010 was primarily driven by derivative losses and net impairments of available-for-sale securities.
 
Impairments recorded in our Investments segment increased by $653 million during the three months ended March 31, 2011, compared to the three months ended March 31, 2010. See “CONSOLIDATED BALANCE SHEETS ANALYSIS — Investments in Securities — Mortgage-Related Securities — Other-Than-Temporary Impairments on Available-For-Sale Mortgage-Related Securities” for additional information on our impairments.
 
We recorded derivative gains (losses) for this segment of $1.1 billion in the three months ended March 31, 2011, compared to $(2.7) billion in the three months ended March 31, 2010. While derivatives are an important aspect of our management of interest-rate risk, they generally increase the volatility of reported Segment Earnings, because, while fair value changes in derivatives affect Segment Earnings, fair value changes in several of the types of assets and liabilities being hedged do not affect Segment Earnings. During the three months ended March 31, 2011, longer-term swap interest rates increased, resulting in fair value gains on our pay-fixed swaps that were partially offset by fair value losses on our receive-fixed swaps and purchased call swaptions. During the three months ended March 31, 2010, longer-term swap interest rates decreased, resulting in losses on our pay-fixed interest-rate swaps partially offset by fair value gains on our receive-fixed swaps. See “Non-Interest Income (Loss) — Derivative Gains (Losses)” for additional information on our derivatives.
 
Our Investments segment’s change in AOCI for the three months ended March 31, 2011 was $1.1 billion compared to $3.1 billion for the three months ended March 31, 2010. Net unrealized losses in AOCI on our available-for-sale securities decreased by $1.0 billion during the three months ended March 31, 2011, primarily attributable to the recognition in earnings of other-than-temporary impairments on our non-agency mortgage-related securities. Net unrealized losses in AOCI on our available-for-sale securities decreased by $3.0 billion during the three months ended March 31, 2010, primarily attributable to fair value gains related to the movement of securities with unrealized losses towards maturity.
 
The objectives set forth for us under our charter and conservatorship, restrictions set forth in the Purchase Agreement and restrictions imposed by FHFA have negatively impacted, and will continue to negatively impact, our Investments segment results. For example, our mortgage-related investments portfolio is subject to a cap that decreases by 10% each year until the portfolio reaches $250 billion. This will likely cause a corresponding reduction in our net interest income from these assets and therefore negatively affect our Investments segment results. FHFA also stated its expectation that any net additions to our mortgage-related investments portfolio would be related to purchasing seriously delinquent mortgages out of PC pools. We are also subject to limits on the amount of mortgage assets we can sell in any calendar month without review and approval by FHFA and, if FHFA so determines, Treasury.
 
For information on the impact of the requirement to reduce the mortgage-related investments portfolio limit by 10% annually, see “NOTE 2: CONSERVATORSHIP AND RELATED MATTERS — Impact of the Purchase Agreement and FHFA Regulation on the Mortgage-Related Investments Portfolio.”
 
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Single-Family Guarantee
 
Table 13 presents the Segment Earnings of our Single-family Guarantee segment.
 
Table 13 — Segment Earnings and Key Metrics — Single-Family Guarantee(1)
 
                 
    Three Months Ended
 
    March 31,  
    2011     2010  
    (dollars in millions)  
 
Segment Earnings:
               
Net interest income
  $ 100     $ 59  
Provision for credit losses
    (2,284 )     (6,041 )
Non-interest income:
               
Management and guarantee income
    870       848  
Other non-interest income
    211       210  
                 
Total non-interest income
    1,081       1,058  
                 
Non-interest expense:
               
Administrative expenses
    (215 )     (229 )
REO operations expense
    (257 )     (156 )
Other non-interest expense
    (66 )     (79 )
                 
Total non-interest expense
    (538 )     (464 )
                 
Segment adjustments(2)
    (185 )     (213 )
                 
Segment Earnings (loss) before income tax benefit (expense)
    (1,826 )     (5,601 )
Income tax benefit
    6       5  
                 
Segment Earnings (loss), net of taxes
  $ (1,820 )   $ (5,596 )
Total other comprehensive income (loss), net of taxes
    (4 )     (4 )
                 
Total comprehensive income (loss)
  $ (1,824 )   $ (5,600 )
                 
Key metrics — Single-family Guarantee:
               
Balances and Growth (in billions, except rate):
               
Average balance of single-family credit guarantee portfolio
  $ 1,819     $ 1,874  
Issuance — Single-family credit guarantees(3)
  $ 96     $ 94  
Fixed-rate products — Percentage of purchases(4)
    94 %     98 %
Liquidation rate — Single-family credit guarantees (annualized)(5)
    28 %     35 %
Management and Guarantee Fee Rate (in bps, annualized):
               
Contractual management and guarantee fees
    13.6       13.3  
Amortization of delivery fees
    5.5       4.8  
                 
Segment Earnings management and guarantee income
    19.1       18.1  
                 
Credit:
               
Serious delinquency rate, at end of period
    3.63 %     4.13 %
REO inventory, at end of period (number of properties)
    65,159       53,831  
Single-family credit losses, in bps (annualized)(6)
    71.0       62.3  
Market:
               
Single-family mortgage debt outstanding (total U.S. market, in billions)(7)
  $ 10,070     $ 10,226  
30-year fixed mortgage rate(8)
    4.9 %     5.1 %
(1)  For reconciliations of the Segment Earnings line items to the comparable line items in our consolidated financial statements prepared in accordance with GAAP, see “NOTE 15: SEGMENT REPORTING — Table 15.2 — Segment Earnings and Reconciliation to GAAP Results.”
(2)  For a description of our segment adjustments, see “NOTE 15: SEGMENT REPORTING — Segment Earnings.”
(3)  Based on UPB.
(4)  Excludes Other Guarantee Transactions, and includes purchases of interest-only mortgages with fixed interest rates.
(5)  Includes our purchases of delinquent loans from PCs. On February 10, 2010, we announced that we would begin purchasing substantially all 120 days or more delinquent mortgages from our PC pools. See “NOTE 5: INDIVIDUALLY IMPAIRED AND NON-PERFORMING LOANS” for more information.
(6)  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 sum of the average balance of our single-family credit guarantee portfolio.
(7)  Source: Federal Reserve Flow of Funds Accounts of the United States of America dated March 10, 2011. The outstanding amount for March 31, 2011 reflects the balance as of December 31, 2010, which is the latest available information.
(8)  Based on Freddie Mac’s Primary Mortgage Market Survey rate for the last week in the period, which represents the national average mortgage commitment rate to a qualified borrower exclusive of any fees and points required by the lender. This commitment rate applies only to financing on conforming mortgages with LTV ratios of 80%.
 
Financial Results
 
For the first quarters of 2011 and 2010, total comprehensive (loss) for our Single-family Guarantee segment, which is comprised almost entirely of Segment Earnings (loss), was $(1.8) billion and $(5.6) billion, respectively. Segment Earnings (loss) improved in the first quarter of 2011, compared to the first quarter of 2010, primarily due to a decline in provision for credit losses, partially offset by an increase in REO operations expense.
 
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 delivery fees.
 
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Segment Earnings management and guarantee income increased slightly in the first quarter of 2011 compared to the first quarter of 2010, primarily due to an increase in the amortization of delivery fees. Increased amortization of delivery fees reflects the impact of higher delivery fees associated with loans purchased after 2008 combined with continued high prepayment rates on guaranteed mortgages in the first quarter of 2011 as mortgage rates remained low and refinancing activity remained high.
 
During the first quarters of 2011 and 2010, our Segment Earnings provision for credit losses for the Single-family Guarantee segment was $2.3 billion and $6.0 billion, respectively. Segment Earnings provision for credit losses decreased in the first quarter of 2011, compared to the first quarter of 2010, primarily due to a decline in the number of delinquent loan inflows, and a decline in the rate at which delinquent loans ultimately transition to a loss event.
 
Table 14 provides summary information about the composition of Segment Earnings (loss) for this segment in the first quarter of 2011.
 
Table 14 — Segment Earnings Composition — Single-Family Guarantee Segment
 
                                         
    Three Months Ended March 31, 2011  
    Segment Earnings
             
    Management and
             
    Guarantee Income(1)     Credit Expenses(2)        
          Average
          Average
       
    Amount     Rate     Amount     Rate(3)     Net Amount(4)  
    (dollars in millions, rates in bps)  
 
Year of origination(5):
                                       
2011
  $ 26       15.0     $ (3 )     3.2     $ 23  
2010
    184       20.6       (54 )     5.8       130  
2009
    170       18.5       (50 )     5.3       120  
2008
    110       24.6       (211 )     57.0       (101 )
2007
    101       18.8       (884 )     180.3       (783 )
2006
    59       17.0       (763 )     208.3       (704 )
2005
    66       16.6       (403 )     96.6       (337 )
2004 and prior
    154       18.4       (173 )     18.8       (19 )
                                         
Total
  $ 870       19.1     $ (2,541 )     55.9       (1,671 )
                                         
Administrative expenses
                                    (215 )
Net interest income
                                    100  
Income tax benefit and other non-interest income and (expense), net(6)
                                    (34 )
                                         
Segment Earnings (loss), net of taxes
                                  $ (1,820 )
                                         
(1)  Includes amortization of delivery fees of $252 million for the three months ended March 31, 2011.
(2)  Consists of the aggregate of the Segment Earnings provision for credit losses and Segment Earnings REO operations expense.
(3)  Based on the average securitized balance of the single-family credit guarantee portfolio. Historical rates of average credit expenses may not be representative of future results.
(4)  Calculated as Segment Earnings management and guarantee income less credit expenses.
(5)  Segment Earnings management and guarantee income is presented by year of guarantee origination, whereas credit expenses are presented based on year of loan origination.
(6)  Includes segment adjustments.
 
We currently believe our management and guarantee fee rates for guarantee issuances after 2008, when coupled with the higher credit quality of the mortgages within our new guarantee issuances, will provide management and guarantee fee income, over the long term, that exceeds our anticipated credit-related and administrative expenses associated with the underlying loans. However, our management and guarantee fee rates associated with guarantee issuances in 2005 through 2008 have not been adequate to provide related income to cover the credit and administrative expenses associated with such loans. We also believe that the management and guarantee fees associated with originations after 2008 will not be sufficient to offset the future expenses associated with our 2005 to 2008 guarantee issuances. Consequently, we expect to continue reporting net losses for the Single-family Guarantee segment at least through 2011.
 
Key Metrics
 
The UPB of the Single-family Guarantee managed loan portfolio was $1.75 trillion at March 31, 2011 compared to $1.78 trillion at December 31, 2010. The slight decline in this portfolio was primarily attributable to liquidations of Freddie Mac mortgage-related securities, which are due to high levels of refinancing, and our repurchases of delinquent loans from PC pools during the first quarter of 2011. The annualized liquidation rate on our securitized single-family credit guarantees was 28.1% for the first quarter of 2011, compared to 34.7% in the first quarter of 2010.
 
Refinance volumes continued to be high due to continued low interest rates, and represented 85% of our single-family mortgage purchase volume during the first quarter of 2011. Relief refinance mortgages represented approximately 30% and 24% of our single-family mortgage purchase volume during the first quarters of 2011 and 2010, respectively. Due to increasing interest rates and improving economic conditions we believe that, overall and as a percentage of our
 
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purchase volume, refinance loan volume should decline substantially, and mortgages originated for home purchases should increase during the remainder of 2011.
 
The serious delinquency rate on our single-family credit guarantee portfolio decreased slightly to 3.63% as of March 31, 2011 from 3.84% as of December 31, 2010 due to a high volume of loan modifications and foreclosure transfers, as well as a slowdown in new serious delinquencies. As of March 31, 2011, more than 40% of our single-family credit guarantee portfolio is comprised of mortgage loans originated after 2008. These new vintages reflect a combination of changes in underwriting practices and a higher composition of fixed-rate and refinanced mortgage products, and represent an increasingly large proportion of our single-family credit guarantee portfolio. The proportion of the portfolio represented by older vintages, which have a higher composition of loans with higher-risk characteristics, continues to decline principally due to liquidations resulting from repayments, payoffs, and refinancing activity as well as those resulting from foreclosure events and foreclosure alternatives. We currently expect that, over time, the replacement of older vintages should positively impact the serious delinquency rates and credit-related expenses of our single-family credit guarantee portfolio. However, the rate at which this replacement occurs has slowed in recent quarterly periods, due to a decline in the volume of home purchase mortgage originations and an increase in the proportion of relief refinance mortgage activity. Although the volume of new serious delinquencies declined in each of the last five quarters, our serious delinquency rate remains high, reflecting continued stress in the housing and labor markets.
 
Single-family credit losses as a percentage of the average balance of the single-family credit guarantee portfolio, increased to 71 basis points in the first quarter of 2011, compared to 62 basis points in the first quarter of 2010. Charge-offs, excluding recoveries, associated with single-family loans increased to $3.7 billion in the first quarter of 2011, compared to $3.4 billion in the first quarter of 2010, primarily due to a decline in home prices and increased short sale activity during the first quarter of 2011, partially offset by a lower volume of foreclosure transfers, as compared to the first quarter of 2010. See “RISK MANAGEMENT — Credit Risk — Mortgage Credit Risk” for further information on our single-family credit guarantee portfolio, including credit performance, charge-offs, and growth in the balance of our non-performing assets.
 
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Multifamily
 
Table 15 presents the Segment Earnings of our Multifamily segment.
 
Table 15 — Segment Earnings and Key Metrics — Multifamily(1)
 
                 
    Three Months Ended
 
    March 31,  
    2011     2010  
    (dollars in millions)  
 
Segment Earnings:
               
Net interest income
  $ 279     $ 238  
Benefit (provision) for credit losses
    60       (29 )
Non-interest income:
               
Management and guarantee income
    28       24  
Security impairments
    (135 )     (55 )
Derivative gains (losses)
    2       5  
Other non-interest income
    187       108  
                 
Total non-interest income
    82       82  
                 
Non-interest expense:
               
Administrative expenses
    (51 )     (54 )
REO operations expense
          (3 )
Other non-interest expense
    (13 )     (17 )
                 
Total non-interest expense
    (64 )     (74 )
                 
Segment Earnings before income tax benefit
    357       217  
Income tax benefit
    2       1  
                 
Segment Earnings, net of taxes, including noncontrolling interest
    359       218  
Less: Net (income) loss — noncontrolling interest
          3  
                 
Segment Earnings, net of taxes
    359       221  
Total other comprehensive income, net of taxes
    942       1,692  
                 
Total comprehensive income
  $ 1,301     $ 1,913  
                 
Key metrics — Multifamily:
               
Balances and Growth:
               
Average balance of Multifamily loan portfolio
  $ 85,779     $ 83,456  
Average balance of Multifamily guarantee portfolio
  $ 25,312     $ 18,179  
Average balance of Multifamily investment securities portfolio
  $ 62,842     $ 62,501  
Liquidation rate — Multifamily loan portfolio (annualized)
    5.8 %     2.5 %
Growth rate (annualized)
    3.6 %     8.2 %
Yield and Rate:
               
Net interest yield — Segment Earnings basis (annualized)
    0.75 %     0.65 %
Average Management and guarantee fee rate, in bps (annualized)(2)
    46.8       52.8  
Credit:
               
Delinquency rate(3)
    0.36 %     0.22 %
Loan loss reserves at period end
  $ 747     $ 842  
Loan loss reserves, in bps
    67.4       81.5  
Credit losses, in bps (annualized)(4)
    4.2       8.2  
(1)  For reconciliations of Segment Earnings line items to the comparable line items in our consolidated financial statements prepared in accordance with GAAP, see “NOTE 15: SEGMENT REPORTING — Table 15.2 — Segment Earnings and Reconciliation to GAAP Results.”
(2)  Represents Multifamily Segment Earnings — management and guarantee income, excluding prepayment and certain other fees, divided by the sum of the average balance of the multifamily guarantee portfolio and the average balance of guarantees associated with the HFA initiative, excluding certain bonds under the NIBP.
(3)  See “RISK MANAGEMENT — Credit Risk — Mortgage Credit Risk — Credit Performance — Delinquencies” for information on our reported multifamily delinquency rate.
(4)  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 sum of the combined average balances of our multifamily loan portfolio and multifamily guarantee portfolio.
 
Our total comprehensive income (loss) for our Multifamily segment was $1.3 billion and $1.9 billion for the first quarters of 2011 and 2010, respectively, consisting of: (a) Segment Earnings of $0.4 billion and $0.2 billion, respectively; and (b) $0.9 billion and $1.7 billion of changes in AOCI, respectively, primarily resulting from improved fair values related to credit risk on available-for-sale securities.
 
Segment Earnings for our Multifamily segment increased to $359 million for the first quarter of 2011 compared to $221 million for the first quarter of 2010, primarily due to increased net interest income and a recognized benefit for credit losses in the first quarter of 2011. We currently expect to generate positive Segment Earnings in the Multifamily segment in 2011.
 
Net interest income increased $41 million, or 17%, for the first quarter of 2011 compared to the first quarter of 2010, primarily attributable to growth in the multifamily loan portfolio with higher interest rates relative to allocated funding costs in the first quarter of 2011.
 
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Segment Earnings non-interest income for the Multifamily segment was unchanged in the first quarter of 2011 compared to the first quarter of 2010. Within Segment Earnings non-interest income, we experienced higher security impairments on CMBS that were offset primarily by fair value gains on mortgage loans during the first quarter of 2011, compared to the first quarter of 2010. CMBS impairments during the first quarters of 2011 and 2010 totaled $135 million and $55 million, respectively. We recognized $83 million in gain on sales of $3.4 billion in UPB of multifamily loans during the first quarter of 2011, compared to $107 million of gain on sales of $1.8 billion in UPB of multifamily loans during the first quarter of 2010. Gains on sales of multifamily loans in the multifamily segment are presented net of changes in fair value due to changes in interest rates.
 
Multifamily market fundamentals, including vacancy rates and effective rents, continued to improve nationally and in most states and metropolitan areas during the first quarter of 2011. These improving fundamentals continued to help stabilize property values in a number of markets. While multifamily market fundamentals reflect positive trends for much of the nation, certain states in which we have substantial investments in multifamily mortgage loans, including Nevada, Arizona, and Georgia, continue to exhibit weaker than average fundamentals and elevated unemployment and may negatively impact our mortgage portfolio performance and may lead to additional non-performing assets. For further information on delinquencies, including geographical and other concentrations, see “NOTE 17: CONCENTRATION OF CREDIT AND OTHER RISKS.”
 
Our Multifamily segment recognized a benefit for credit losses of $60 million in the first quarter of 2011 compared to a provision for credit losses of $29 million in the first quarter of 2010. Our loan loss reserve associated with our multifamily mortgage portfolio was $747 million and $828 million as of March 31, 2011 and December 31, 2010, respectively. The decrease in our loan loss reserve in the first quarter of 2011 was driven by positive trends in vacancy rates and effective rents reflected over the past several consecutive quarters, as well as stabilizing or improved property values and improved borrower credit profiles. For loans where we identified deteriorating collateral performance characteristics, such as estimated current LTV ratio and DSCRs, we evaluate each individual loan, using estimates of property value, to determine if a specific loan loss reserve is needed. Although we use the most recently available results of our multifamily borrowers to assess a property’s value, there may be a significant lag in reporting as they prepare their results in the normal course of business.
 
The delinquency rate for loans in the multifamily mortgage portfolio was 0.36% and 0.26% as of March 31, 2011 and December 31, 2010, respectively. As of March 31, 2011, our delinquent multifamily loans are concentrated in Georgia and Texas. Loans in these two states represented approximately 17% of the loans in our multifamily mortgage portfolio and approximately 37% of our multifamily delinquent loans, both on a UPB basis, as of March 31, 2011. As of March 31, 2011, approximately one-half of the multifamily loans, measured both in terms of number of loans and on a UPB basis, that were two or more monthly payments past due had credit enhancements that we currently believe will reduce our expected losses on those loans. The multifamily delinquency rate of credit-enhanced loans as of March 31, 2011 and December 31, 2010, was 0.75% and 0.85%, respectively, while the delinquency rate for non-credit-enhanced loans was 0.25% and 0.12%, respectively. See “RISK MANAGEMENT — Credit Risk — Mortgage Credit Risk — Credit Performance — Delinquencies” for further information about our reported multifamily delinquency rates, including factors that can positively impact such rates.
 
Multifamily credit losses as a percentage of the combined average balance of our multifamily loan and guarantee portfolios decreased from 8.2 basis points in the first quarter of 2010 to 4.2 basis points in the first quarter of 2011, driven by decreased charge-offs and REO operations expense for the first quarter of 2011. Charge-offs, excluding recoveries, associated with multifamily loans declined to $12 million in the first quarter of 2011, compared to $18 million in the first quarter of 2010, due to a lower number of foreclosures in the 2011 period. Although our charge-offs were low for the first quarter of 2011, we expect that our charge-offs will increase in the remainder of 2011.
 
The UPB of the total multifamily portfolio increased to $173.5 billion at March 31, 2011 from $169.5 billion at December 31, 2010, due primarily to increased guarantees of securities issued during the first quarter of 2011 as part of our CME securitization program as well as the transfer of certain housing revenue bonds to the Multifamily Segment that were previously managed by the Investments segment. We issued $3.0 billion and $3.2 billion of Freddie Mac mortgage-related securities and other guarantee commitments related to multifamily mortgage loans in the first quarters of 2011 and 2010, respectively. Increased competition in certain markets has exerted and may continue to exert downward pressure on pricing and credit for new activity in the remainder of 2011, and could negatively impact our future purchase volumes. Our primary multifamily business strategy in 2011 is to purchase loans and subsequently securitize them under our CME securitization program, which supports liquidity for the multifamily market and affordability for multifamily rental housing.
 
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CONSOLIDATED BALANCE SHEETS ANALYSIS
 
The following discussion of our consolidated balance sheets should be read in conjunction with our consolidated financial statements, including the accompanying notes. Also, see “CRITICAL ACCOUNTING POLICIES AND ESTIMATES” for more information concerning our more significant accounting policies and estimates applied in determining our reported financial position.
 
Cash and Cash Equivalents, Federal Funds Sold and Securities Purchased Under Agreements to Resell
 
Cash and cash equivalents, federal funds sold and securities purchased under agreements to resell, and other liquid assets discussed in “Investments in Securities — Non-Mortgage-Related Securities,” are important to our cash flow and asset and liability management, and our ability to provide liquidity and stability to the mortgage market. We use these assets to help manage recurring cash flows and meet our other cash management needs. We consider federal funds sold to be overnight unsecured trades executed with commercial banks that are members of the Federal Reserve System. Securities purchased under agreements to resell principally consist of short-term contractual agreements such as reverse repurchase agreements involving Treasury and agency securities. The short-term assets related to our consolidated VIEs are comprised primarily of restricted cash and cash equivalents and investments in securities purchased under agreements to resell. These short-term assets related to our consolidated VIEs decreased by $19.9 billion from December 31, 2010 to March 31, 2011, primarily due to a relative decline in refinancing activities as a result of the increase in mortgage rates during the period.
 
Excluding amounts related to our consolidated VIEs, we held $34.3 billion and $37.0 billion of cash and cash equivalents, $5.8 billion and $1.4 billion of federal funds sold, and $20.5 billion and $15.8 billion of securities purchased under agreements to resell at March 31, 2011 and December 31, 2010, respectively. The aggregate increase in these assets is largely related to an increase in forecasted debt redemptions. In addition, excluding amounts related to our consolidated VIEs, we held on average $32.0 billion of cash and cash equivalents and $28.6 billion of federal funds sold and securities purchased under agreements to resell during the three months ended March 31, 2011.
 
Investments in Securities
 
Table 16 provides detail regarding our investments in securities as of March 31, 2011 and December 31, 2010. Table 16 does not include our holdings of single-family PCs and certain Other Guarantee Transactions. For information on our holdings of such securities, see “Table 11 — Segment Mortgage Portfolio Composition.”
 
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Table 16 — Investments in Securities
 
                 
    Fair Value  
    March 31, 2011     December 31, 2010  
    (in millions)  
 
Investments in securities:
               
Available-for-sale:
               
Available-for-sale mortgage-related securities:
               
Freddie Mac(1)
  $ 85,744     $ 85,689  
Subprime
    33,344       33,861  
CMBS
    57,944       58,087  
Option ARM
    6,989       6,889  
Alt-A and other
    12,937       13,168  
Fannie Mae
    22,844       24,370  
Obligations of states and political subdivisions
    8,875       9,377  
Manufactured housing
    878       897  
Ginnie Mae
    283       296  
                 
Total available-for-sale mortgage-related securities
    229,838       232,634  
                 
Total investments in available-for-sale securities
    229,838       232,634  
                 
Trading:
               
Trading mortgage-related securities:
               
Freddie Mac(1)
    15,951       13,437  
Fannie Mae
    18,586       18,726  
Ginnie Mae
    167       172  
Other
    26       31  
                 
Total trading mortgage-related securities
    34,730       32,366  
                 
Trading non-mortgage-related securities:
               
Asset-backed securities
    94       44  
Treasury bills
    9,397       17,289  
Treasury notes
    16,123       10,122  
FDIC-guaranteed corporate medium-term notes
    1,009       441  
                 
Total trading non-mortgage-related securities
    26,623       27,896  
                 
Total investments in trading securities
    61,353       60,262  
                 
Total investments in securities
  $ 291,191     $ 292,896  
                 
(1)  For information on the types of instruments that are included, see “NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES — Investments in Securities” in our 2010 Annual Report.
 
Non-Mortgage-Related Securities
 
Our investments in non-mortgage-related securities provide an additional source of liquidity for us. We held investments in non-mortgage-related securities of $26.6 billion and $27.9 billion as of March 31, 2011 and December 31, 2010, respectively. Our holdings of non-mortgage-related securities at March 31, 2011 decreased slightly compared to December 31, 2010 while continuing to meet required liquidity and contingency levels.
 
We did not hold any available-for-sale non-mortgage-related securities during the three months ended March 31, 2011 and did not record a net impairment of available-for-sale securities recognized in earnings during the three months ended March 31, 2010 on our non-mortgage-related securities.
 
Mortgage-Related Securities
 
We are primarily a buy-and-hold investor in mortgage-related securities, which consist of securities issued by Fannie Mae, Ginnie Mae, and other financial institutions. We also invest in our own mortgage-related securities. However, single-family PCs and certain Other Guarantee Transactions we purchase are not accounted for as investments in securities because we recognize the underlying mortgage loans on our consolidated balance sheets through consolidation of the related trusts.
 
Table 17 provides the UPB of our investments in mortgage-related securities classified as available-for-sale or trading on our consolidated balance sheets. Table 17 does not include our holdings of single-family PCs and certain Other Guarantee Transactions. For further information on our holdings of such securities, see “Table 11 — Segment Mortgage Portfolio Composition.”
 
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Table 17 — Characteristics of Mortgage-Related Securities on Our Consolidated Balance Sheets
 
                                                 
    March 31, 2011     December 31, 2010  
    Fixed
    Variable
          Fixed
    Variable
       
    Rate     Rate(1)     Total     Rate     Rate(1)     Total  
    (in millions)  
 
Freddie Mac mortgage-related securities:(2)
                                               
Single-family
  $ 81,067     $ 9,018     $ 90,085     $ 79,955     $ 8,118     $ 88,073  
Multifamily
    503       1,694       2,197       339       1,756       2,095  
                                                 
Total Freddie Mac mortgage-related securities
    81,570       10,712       92,282       80,294       9,874       90,168  
                                                 
Non-Freddie Mac mortgage-related securities:
                                               
Agency securities:(3)
                                               
Fannie Mae:
                                               
Single-family
    20,732       17,140       37,872       21,238       18,139       39,377  
Multifamily
    163       87       250       228       88       316  
Ginnie Mae:
                                               
Single-family
    284       114       398       296       117       413  
Multifamily
    27             27       27             27  
                                                 
Total agency securities
    21,206       17,341       38,547       21,789       18,344       40,133  
                                                 
Non-agency mortgage-related securities:
                                               
Single-family:(4)
                                               
Subprime
    351       52,492       52,843       363       53,855       54,218  
Option ARM
          15,232       15,232             15,646       15,646  
Alt-A and other
    2,333       15,977       18,310       2,405       16,438       18,843  
CMBS
    21,002       36,857       57,859       21,401       37,327       58,728  
Obligations of states and political subdivisions(5)
    9,359       24       9,383       9,851       26       9,877  
Manufactured housing
    904       145       1,049       930       150       1,080  
                                                 
Total non-agency mortgage-related securities(6)
    33,949       120,727       154,676       34,950       123,442       158,392  
                                                 
Total UPB of mortgage-related securities
  $ 136,725     $ 148,780       285,505     $ 137,033     $ 151,660       288,693  
                                                 
Premiums, discounts, deferred fees, impairments of UPB and other basis adjustments
                    (11,959 )                     (11,839 )
Net unrealized (losses) on mortgage-related securities, pre-tax
                    (8,978 )                     (11,854 )
                                                 
Total carrying value of mortgage-related securities
                  $ 264,568                     $ 265,000  
                                                 
(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)  We are subject to the credit risk associated with the mortgage loans underlying our Freddie Mac mortgage-related securities. Mortgage loans underlying our issued single-family PCs and certain Other Guarantee Transactions are recognized on our consolidated balance sheets as held-for-investment mortgage loans, at amortized cost. 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” in our 2010 Annual Report for further information.
(3)  Agency 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)  For information about how these securities are rated, see “Table 22 — Ratings of Non-Agency Mortgage-Related Securities Backed by Subprime, Option ARM, Alt-A and Other Loans, and CMBS.”
(5)  Consists of housing revenue bonds. Approximately 50% of these securities held at both March 31, 2011 and December 31, 2010 were AAA-rated as of those dates, based on the lowest rating available.
(6)  Credit ratings for most non-agency mortgage-related securities are designated by no fewer than two nationally recognized statistical rating organizations. Approximately 22% and 23% of total non-agency mortgage-related securities held at March 31, 2011 and December 31, 2010, respectively, were AAA-rated as of those dates, based on the UPB and the lowest rating available.
 
The total UPB of our investments in mortgage-related securities on our consolidated balance sheets decreased from $288.7 billion at December 31, 2010 to $285.5 billion at March 31, 2011 primarily as a result of liquidations exceeding our purchase activity during the three months ended March 31, 2011.
 
Table 18 summarizes our mortgage-related securities purchase activity for the three months ended March 31, 2011 and 2010. The purchase activity includes single-family PCs and certain Other Guarantee Transactions issued by trusts that we consolidated. Purchases of single-family PCs and certain Other Guarantee Transactions issued by trusts that we consolidated are recorded as an extinguishment of debt securities of consolidated trusts held by third parties on our consolidated balance sheets.
 
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Table 18 — Total Mortgage-Related Securities Purchase Activity(1)
 
                 
    Three Months Ended
 
    March 31,  
    2011     2010  
    (in millions)  
 
Non-Freddie Mac mortgage-related securities purchased for resecuritization:
               
Ginnie Mae Certificates
  $ 16     $ 13  
Non-agency mortgage-related securities purchased for Other Guarantee Transactions(2)
    2,879       5,621  
                 
Total Non-Freddie Mac mortgage-related securities purchased for resecuritization
    2,895       5,634  
                 
Non-Freddie Mac mortgage-related securities purchased as investments in securities:
               
Agency securities:
               
Fannie Mae:
               
Fixed-rate
    1,019        
Variable-rate
    168       47  
                 
Total agency securities
    1,187       47  
                 
Total non-Freddie Mac mortgage-related securities purchased as investments in securities
    1,187       47  
                 
Total non-Freddie Mac mortgage-related securities purchased
  $ 4,082     $ 5,681  
                 
Freddie Mac mortgage-related securities purchased:
               
Single-family:
               
Fixed-rate
  $ 36,679     $ 4,840  
Variable-rate
    2,542       203  
Multifamily:
               
Fixed-rate
    25       25  
Variable-rate
          31  
                 
Total Freddie Mac mortgage-related securities purchased
  $ 39,246     $ 5,099  
                 
(1)  Based on UPB. Excludes mortgage-related securities traded but not yet settled.
(2)  Purchases for the three months ended March 31, 2010 include HFA bonds we acquired and resecuritized under the NIBP. See “NOTE 3: CONSERVATORSHIP AND RELATED MATTERS” in our 2010 Annual Report for further information on this component of the HFA Initiative.
 
We did not purchase any non-agency mortgage-related securities during the first quarters of 2011 or 2010, other than purchases for resecuritization as Other Guarantee Transactions.
 
Unrealized Losses on Available-For-Sale Mortgage-Related Securities
 
At March 31, 2011, our gross unrealized losses, pre-tax, on available-for-sale mortgage-related securities were $20.2 billion, compared to $23.1 billion at December 31, 2010. This improvement in unrealized losses was primarily due to an increase in fair value on non-agency mortgage-related securities, as spreads tightened on CMBS, coupled with fair value gains related to the movement of non-agency mortgage-related securities with unrealized losses towards maturity. Additionally, net unrealized losses recorded in AOCI decreased due to the recognition in earnings of other-than-temporary impairments on our non-agency mortgage-related securities. We believe the unrealized losses related to these securities at March 31, 2011 were mainly attributable to poor underlying collateral performance, limited liquidity and large risk premiums in the market for residential non-agency mortgage-related securities. All available-for-sale securities in an unrealized loss position are evaluated to determine if the impairment is other-than-temporary. See “Total Equity (Deficit)” and “NOTE 7: INVESTMENTS IN SECURITIES” for additional information regarding unrealized losses on our available-for-sale securities.
 
Higher-Risk Components of Our Investments in Mortgage-Related Securities
 
As discussed below, we have exposure to subprime, option ARM, interest-only, and Alt-A and other loans as part of our investments in mortgage-related securities as follows:
 
  •  Single-family non-agency mortgage-related securities: We hold non-agency mortgage-related securities backed by subprime, option ARM, and Alt-A and other loans.
 
  •  Single-family Freddie Mac mortgage-related securities: We hold certain Other Guarantee Transactions as part of our investments in securities. There are subprime and option ARM loans underlying some of these Other Guarantee Transactions. For more information on single-family loans with certain higher-risk characteristics underlying our issued securities, see “RISK MANAGEMENT — Credit Risk — Mortgage Credit Risk.”
 
Non-Agency Mortgage-Related Securities Backed by Subprime, Option ARM, and Alt-A Loans
 
We categorize our investments in non-agency mortgage-related securities as subprime, option ARM, or Alt-A if the securities were identified as such based on information provided to us when we entered into these transactions. We have not identified option ARM, CMBS, obligations of states and political subdivisions, and manufactured housing securities as either subprime or Alt-A securities. Tables 19 and 20 present information about our holdings of these securities. Since the
 
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first quarter of 2008, we have not purchased any non-agency mortgage-related securities backed by subprime, option ARM, or Alt-A loans.
 
Table 19 — Non-Agency Mortgage-Related Securities Backed by Subprime First Lien, Option ARM, and Alt-A Loans and Certain Related Credit Statistics(1)
 
                                         
    As of
    3/31/2011   12/31/2010   09/30/2010   06/30/2010   03/31/2010
    (dollars in millions)
 
UPB:
                                       
Subprime first lien
  $ 52,403     $ 53,756     $ 55,250     $ 56,922     $ 58,912  
Option ARM
    15,232       15,646       16,104       16,603       17,206  
Alt-A(2)
    15,487       15,917       16,406       16,909       17,476  
Gross unrealized losses, pre-tax:(3)
                                       
Subprime first lien
  $ 12,481     $ 14,026     $ 16,446     $ 17,757     $ 18,462  
Option ARM
    3,170       3,853       4,815       5,770       6,147  
Alt-A(2)
    1,941       2,096       2,542       3,335       3,539  
Present value of expected credit losses:
                                       
Subprime first lien
  $ 6,612     $ 5,937     $ 4.364     $ 3,311     $ 4,444  
Option ARM
    4,993       4,850       4,208       3,534       3,769  
Alt-A(2)
    2,401       2,469       2,101       1,653       1,635  
Collateral delinquency rate:(4)
                                       
Subprime first lien
    44 %     45 %     45 %     46 %     49 %
Option ARM
    44       44       44       45       46  
Alt-A(2)
    26       27       26       26       27  
Cumulative collateral loss:(5)
                                       
Subprime first lien
    19 %     18 %     17 %     16 %     15 %
Option ARM
    14       13       11       10       9  
Alt-A(2)
    7       6       6       5       5  
Average credit enhancement:(6)
                                       
Subprime first lien
    24 %     25 %     25 %     26 %     28 %
Option ARM
    11       12       12       13       15  
Alt-A(2)
    8       9       9       10       10  
(1)  See “Ratings of Non-Agency Mortgage-Related Securities” for additional information about these securities.
(2)  Excludes non-agency mortgage-related securities backed by other loans, which are primarily comprised of securities backed by home equity lines of credit.
(3)  Represents the aggregate of the amount by which amortized cost, after other-than-temporary impairments, exceeds fair value measured at the individual lot level.
(4)  Determined based on the number of loans that are two monthly payments or more past due that underlie the securities using information obtained from a third-party data provider.
(5)  Based on the actual losses incurred on the collateral underlying these securities. Actual losses incurred on the securities that we hold are significantly less than the losses on the underlying collateral as presented in this table, as non-agency mortgage-related securities backed by subprime first lien, option ARM, and Alt-A loans were structured to include credit enhancements, particularly through subordination and other structural enhancements.
(6)  Reflects the ratio of the current principal amount of the securities issued by a trust that will absorb losses in the trust before any losses are allocated to securities that we own. Percentage generally calculated based on: (a) the total UPB of securities subordinate to the securities we own, divided by (b) the total UPB of all of the securities issued by the trust (excluding notional balances). Only includes credit enhancement provided by subordinated securities; excludes credit enhancement provided by monoline bond insurance, overcollateralization and other forms of credit enhancement.
 
Table 20 — Non-Agency Mortgage-Related Securities Backed by Subprime, Option ARM, Alt-A and Other Loans(1)
 
                                         
    Three Months Ended
    3/31/2011   12/31/2010   09/30/2010   06/30/2010   03/31/2010
    (in millions)
 
Net impairment of available-for-sale securities recognized in earnings:
                                       
Subprime — first and second liens
  $ 734     $ 1,207     $ 213     $ 17     $ 332  
Option ARM
    281       668       577       48       102  
Alt-A and other
    40       372       296       333       19  
Principal repayments and cash shortfalls:(2)
                                       
Subprime — first and second liens:
                                       
Principal repayments
  $ 1,361     $ 1,512     $ 1,685     $ 2,001     $ 2,117  
Principal cash shortfalls
    14       6       8       12       13  
Option ARM:
                                       
Principal repayments
  $ 315     $ 347     $ 377     $ 435     $ 449  
Principal cash shortfalls
    100       111       122       80       32  
Alt-A and other:
                                       
Principal repayments
  $ 452     $ 537     $ 582     $ 653     $ 617  
Principal cash shortfalls
    81       62       56       67       22  
(1)  See “Ratings of Non-Agency Mortgage-Related Securities” for additional information about these securities.
(2)  In addition to the contractual interest payments, we receive monthly remittances of principal repayments from both the recoveries of liquidated loans and, to a lesser extent, voluntary repayments of the underlying collateral of these securities representing a partial return of our investment in these securities.
 
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As discussed below, we recognized impairment in earnings on our holdings of such securities during the three months ended March 31, 2011 and 2010. See “Table 21 — Net Impairment on Available-For-Sale Mortgage-Related Securities Recognized in Earnings” for more information.
 
For purposes of our impairment analysis, our estimate of the present value of expected future credit losses on our portfolio of non-agency mortgage-related securities increased to $15.2 billion at March 31, 2011 from $14.3 billion at December 31, 2010. All of this amount has been reflected in our net impairment of available-for-sale securities recognized in earnings in this and prior periods. The increase in our estimate of the present value of expected future credit losses resulted primarily from our expectation of slower prepayments, and to a lesser extent from deteriorating delinquency data on the underlying loans, decreases in actual and forward home prices, and higher forward interest rates.
 
Since the beginning of 2007, we have incurred actual principal cash shortfalls of $903 million on impaired non-agency mortgage-related securities, of which $199 million related to the three months ended March 31, 2011. Many of the trusts that issued non-agency mortgage-related securities we hold were structured so that realized collateral losses in excess of structural credit enhancements are not passed on to investors until the investment matures. We currently estimate that the future expected principal and interest shortfalls on non-agency mortgage-related securities we hold will be significantly less than the fair value declines experienced on these securities.
 
The investments in non-agency mortgage-related securities we hold backed by subprime first lien, option ARM, and Alt-A loans were structured to include credit enhancements, particularly through subordination and other structural enhancements. Bond insurance is an additional credit enhancement covering some of the non-agency mortgage-related securities. These credit enhancements are the primary reasons we expect our actual losses, through principal or interest shortfalls, to be less than the underlying collateral losses in aggregate. It is difficult to estimate the point at which structural credit enhancements will be exhausted. During the three months ended March 31, 2011, we continued to experience the depletion of structural credit enhancements on selected securities backed by subprime first lien, option ARM, and Alt-A loans due to poor performance of the underlying collateral. For more information, see “RISK MANAGEMENT — Credit Risk — Institutional Credit Risk — Bond Insurers.”
 
Other-Than-Temporary Impairments on Available-For-Sale Mortgage-Related Securities
 
Table 21 provides information about the mortgage-related securities for which we recognized other-than-temporary impairments for the three months ended March 31, 2011 and 2010.
 
Table 21 — Net Impairment on Available-For-Sale Mortgage-Related Securities Recognized in Earnings
 
                                 
    Three Months Ended  
    March 31, 2011     March 31, 2010  
          Net Impairment of
          Net Impairment of
 
          Available-For-Sale
          Available-For-Sale
 
          Securities Recognized
          Securities Recognized
 
    UPB     in Earnings     UPB     in Earnings  
    (in millions)  
 
Subprime:
                               
2006 & 2007 first lien
  $ 34,370     $ 712     $ 19,084     $ 317  
Other years — first and second liens(1)
    1,089       22       643       15  
                                 
Total subprime — first and second liens(1)
    35,459       734       19,727       332  
                                 
Option ARM:
                               
2006 & 2007
    9,929       232       7,251       88  
Other years
    2,170       49       223       14  
                                 
Total option ARM
    12,099       281       7,474       102  
                                 
Alt-A:
                               
2006 & 2007
    2,416       15       1,625       9  
Other years
    3,728       23       292       2  
                                 
Total Alt-A
    6,144       38       1,917       11  
                                 
Other loans
    520       2       491       8  
                                 
Total subprime, option ARM, Alt-A and other loans
    54,222       1,055       29,609       453  
CMBS
    1,404       135       1,629       55  
Manufactured housing
    314       3       83       2  
                                 
Total available-for-sale mortgage-related securities
  $ 55,940     $ 1,193     $ 31,321     $ 510  
                                 
(1) Includes all second liens.
 
We recorded net impairment of available-for-sale mortgage-related securities recognized in earnings of $1.2 billion and $510 million during the three months ended March 31, 2011 and 2010, respectively, as our estimate of the present value of expected future credit losses on certain individual securities increased during the periods. Included in these net
 
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impairments are $1.1 billion and $453 million of impairments related to securities backed by subprime, option ARM, and Alt-A and other loans during the three months ended March 31, 2011 and 2010, respectively.
 
The credit performance of loans underlying our holdings of non-agency mortgage-related securities has declined since 2007. This decline has been particularly severe for subprime, option ARM, and Alt-A and other loans. Economic factors impacting the performance of our investments in non-agency mortgage-related securities include high unemployment, a large inventory of seriously delinquent mortgage loans and unsold homes, tight credit conditions, and weak consumer confidence, which contributed to poor performance during the three months ended March 31, 2011 and 2010. In addition, subprime, option ARM, and Alt-A and other loans backing the securities we hold have significantly greater concentrations in the states that are undergoing the greatest economic stress, such as California and Florida. Loans in these states undergoing economic stress are more likely to become seriously delinquent and the credit losses associated with such loans are likely to be higher than in other states.
 
We rely on monoline bond insurance, including secondary coverage, to provide credit protection on some of our investments in non-agency mortgage-related securities. We have determined that there is substantial uncertainty surrounding certain monoline bond insurers’ ability to pay our future claims on expected credit losses related to our non-agency mortgage-related security investments. This uncertainty contributed to the impairments recognized in earnings during the three months ended March 31, 2011 and 2010. See “NOTE 17: CONCENTRATION OF CREDIT AND OTHER RISKS — Bond Insurers” for additional information.
 
While it is reasonably possible that collateral losses on our available-for-sale mortgage-related securities where we have not recorded an impairment charge in earnings could exceed our credit enhancement levels, we do not believe that those conditions were likely at March 31, 2011. Based on our conclusion that we do not intend to sell our remaining available-for-sale mortgage-related securities in an unrealized loss position and it is not more likely than not that we will be required to sell these securities before a sufficient time to recover all unrealized losses and our consideration of other available information, we have concluded that the reduction in fair value of these securities was temporary at March 31, 2011 and as such has been recorded in AOCI.
 
Our assessments concerning other-than-temporary impairment require significant judgment and the use of models, and are subject to potentially significant change due to changes in the performance of the individual securities and in mortgage market conditions. Depending on the structure of the individual mortgage-related security and our estimate of collateral losses relative to the amount of credit support available for the tranches we own, a change in collateral loss estimates can have a disproportionate impact on the loss estimate for the security. Additionally, servicer performance, loan modification programs and backlogs, bankruptcy reform and other forms of government intervention in the housing market can significantly affect the performance of these securities, including the timing of loss recognition of the underlying loans and thus the timing of losses we recognize on our securities. Foreclosure processing suspensions can also affect our losses. For example, while defaulted loans remain in the trusts prior to completion of the foreclosure process, the subordinate classes of securities issued by the securitization trusts may continue to receive interest payments, rather than absorbing default losses. This may reduce the amount of funds available for the tranches we own. Given the extent of the housing and economic downturn, it is difficult to estimate the future performance of mortgage loans and mortgage-related securities with high assurance, and actual results could differ materially from our expectations. Furthermore, various market participants could arrive at materially different conclusions regarding estimates of future cash shortfalls. For more information on how delays in the foreclosure process, including delays related to concerns about deficiencies in foreclosure documentation practices, could adversely affect the values of, and the losses on, the non-agency mortgage-related securities we hold, see “RISK FACTORS — Operational Risks — We have incurred and will continue to incur expenses and we may otherwise be adversely affected by deficiencies in foreclosure practices, as well as related delays in the foreclosure process” in our 2010 Annual Report.
 
Ratings of Non-Agency Mortgage-Related Securities
 
Table 22 shows the ratings of non-agency mortgage-related securities backed by subprime, option ARM, Alt-A and other loans, and CMBS held at March 31, 2011 based on their ratings as of March 31, 2011 as well as those held at December 31, 2010 based on their ratings as of December 31, 2010 using the lowest rating available for each security.
 
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Table 22 — Ratings of Non-Agency Mortgage-Related Securities Backed by Subprime, Option ARM, Alt-A and Other Loans, and CMBS
 
                                         
                      Gross
    Monoline
 
          Percentage
    Amortized
    Unrealized
    Insurance
 
Credit Ratings as of March 31, 2011
  UPB     of UPB     Cost     Losses     Coverage(1)  
    (dollars in millions)  
 
Subprime loans:
                                       
AAA-rated
  $ 1,433       3 %   $ 1,433     $ (97 )   $ 23  
Other investment grade
    3,069       6       3,069       (367 )     400  
Below investment grade(2)
    48,341       91       41,328       (12,029 )     1,779  
                                         
Total
  $ 52,843       100 %   $ 45,830     $ (12,493 )   $ 2,202  
                                         
Option ARM loans:
                                       
AAA-rated
  $       %   $     $     $  
Other investment grade
    116       1       116       (13 )     116  
Below investment grade(2)
    15,116       99       10,018       (3,157 )     48  
                                         
Total
  $ 15,232       100 %   $ 10,134     $ (3,170 )   $ 164  
                                         
Alt-A and other loans:
                                       
AAA-rated
  $ 769       4 %   $ 773     $ (43 )   $ 7  
Other investment grade
    2,198       12       2,217       (268 )     353  
Below investment grade(2)
    15,343       84       12,105       (1,904 )     2,365  
                                         
Total
  $ 18,310       100 %   $ 15,095     $ (2,215 )   $ 2,725  
                                         
CMBS:
                                       
AAA-rated
  $ 27,331       47 %   $ 27,386     $ (27 )   $ 42  
Other investment grade
    26,525       46       26,496       (468 )     1,654  
Below investment grade(2)
    4,003       7       3,577       (998 )     1,702  
                                         
Total
  $ 57,859       100 %   $ 57,459     $ (1,493 )   $ 3,398  
                                         
Total subprime, option ARM, Alt-A and other loans, and CMBS:
                                       
AAA-rated
  $ 29,533       21 %   $ 29,592     $ (167 )   $ 72  
Other investment grade
    31,908       22       31,898       (1,116 )     2,523  
Below investment grade(2)
    82,803       57       67,028       (18,088 )     5,894  
                                         
Total
  $ 144,244       100 %   $ 128,518     $ (19,371 )   $ 8,489  
                                         
Total investments in mortgage-related securities
  $ 285,505                                  
Percentage of subprime, option ARM, Alt-A and other loans, and CMBS of total investments in mortgage-related securities
    51 %                                
                                         
                                         
Credit Ratings as of December 31, 2010
                             
Subprime loans:
                                       
AAA-rated
  $ 2,085       4 %   $ 2,085     $ (199 )   $ 31  
Other investment grade
    3,407       6       3,408       (436 )     449  
Below investment grade(2)
    48,726       90       42,423       (13,421 )     1,789  
                                         
Total
  $ 54,218       100 %   $ 47,916     $ (14,056 )   $ 2,269  
                                         
Option ARM loans:
                                       
AAA-rated
  $       %   $     $     $  
Other investment grade
    139       1       140       (18 )     129  
Below investment grade(2)
    15,507       99       10,586       (3,835 )     50  
                                         
Total
  $ 15,646       100 %   $ 10,726     $ (3,853 )   $ 179  
                                         
Alt-A and other loans:
                                       
AAA-rated
  $ 1,293       7 %   $ 1,301     $ (87 )   $ 7  
Other investment grade
    2,761       15       2,765       (362 )     368  
Below investment grade(2)
    14,789       78       11,498       (2,002 )     2,443  
                                         
Total
  $ 18,843       100 %   $ 15,564     $ (2,451 )   $ 2,818  
                                         
CMBS:
                                       
AAA-rated
  $ 28,007       48 %   $ 28,071     $ (52 )   $ 42  
Other investment grade
    26,777       45       26,740       (676 )     1,655  
Below investment grade(2)
    3,944       7       3,653       (1,191 )     1,704  
                                         
Total
  $ 58,728       100 %   $ 58,464     $ (1,919 )   $ 3,401  
                                         
Total subprime, option ARM, Alt-A and other loans, and CMBS:
                                       
AAA-rated
  $ 31,385       21 %   $ 31,457     $ (338 )   $ 80  
Other investment grade
    33,084       23       33,053       (1,492 )     2,601  
Below investment grade(2)
    82,966       56       68,160       (20,449 )     5,986  
                                         
Total
  $ 147,435       100 %   $ 132,670     $ (22,279 )   $ 8,667  
                                         
Total investments in mortgage-related securities
  $ 288,693                                  
Percentage of subprime, option ARM, Alt-A and other loans, and CMBS of total investments in mortgage-related securities
    51 %                                
(1)  Represents the amount of UPB covered by monoline bond insurance coverage. This amount does not represent the maximum amount of losses we could recover, as the monoline insurance also covers interest.
(2)  Includes securities with S&P credit ratings below BBB– and certain securities that are no longer rated.
 
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Mortgage Loans
 
The UPB of mortgage loans on our consolidated balance sheet increased to $1,888 billion as of March 31, 2011 from $1,885 billion as of December 31, 2010. See “NOTE 4: MORTGAGE LOANS AND LOAN LOSS RESERVES” for further detail about the mortgage loans on our consolidated balance sheets.
 
The UPB of unsecuritized single-family mortgage loans increased by $7.3 billion, to $156.2 billion at March 31, 2011 from $148.9 billion at December 31, 2010, primarily due to our purchases of seriously delinquent and modified loans from the mortgage pools underlying our PCs. As guarantor, we 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 is known as our repurchase option, and we also exercise this option when we modify a mortgage. See “NOTE 5: INDIVIDUALLY IMPAIRED AND NON-PERFORMING LOANS” for more information on our purchases of single-family loans from PC pools.
 
The UPB of unsecuritized multifamily mortgage loans was $84.2 billion at March 31, 2011 and $85.9 billion at December 31, 2010. Our multifamily loan activity in the first quarters of 2011 and 2010 primarily consisted of purchases of loans intended for securitization and sales through Other Guarantee Transactions as part of our CME securitization program. We expect to continue to purchase and subsequently securitize multifamily loans in 2011 under our CME securitization program, which supports liquidity for the multifamily market and affordability for multifamily rental housing, as our primary multifamily business strategy in 2011.
 
Table 23 summarizes our purchase and guarantee activity in mortgage loans for the three months ended March 31, 2011 and 2010. This activity consists of: (a) mortgage loans underlying consolidated single-family PCs and certain Other Guarantee Transactions (regardless of whether such securities are held by us or third parties); (b) unsecuritized single-family and multifamily mortgage loans; and (c) mortgage loans underlying our mortgage-related financial guarantees which are not consolidated on our balance sheets.
 
Table 23 — Mortgage Loan Purchase and Other Guarantee Commitment Activity(1)
 
                                 
    Three Months Ended March 31,  
    2011     2010  
    Purchase
    % of
    Purchase
    % of
 
    Amount     Purchases     Amount     Purchases  
    (dollars in millions)  
 
Mortgage loan purchases and guarantee issuances:
                               
Single-family:
                               
30-year or more amortizing fixed-rate
  $ 62,898       62 %   $ 65,614       72 %
20-year amortizing fixed-rate
    6,715       7       3,358       4  
15-year amortizing fixed-rate
    22,110       22       15,114       17  
Adjustable-rate(2)
    5,741       6       1,858       2  
Interest-only(3)
                321       <1  
FHA/VA and other governmental
    87       <1       2,783       3  
                                 
Total single-family(4)
    97,551       97 %     89,048       98 %
                                 
Multifamily
    3,049       3       2,113       2  
                                 
Total mortgage loan purchases and other guarantee commitment activity(5)
  $ 100,600       100 %   $ 91,161       100 %
                                 
Percentage of mortgage purchases and other guarantee commitment activity with credit enhancements(6)
    7 %             13 %        
 (1)  Based on UPB. Excludes mortgage loans traded but not yet settled. Excludes net additions of seriously delinquent loans and balloon/reset mortgages purchased out of PC pools. Includes other guarantee commitments associated with mortgage loans. See endnote (5) for further information.
 (2)  Includes amortizing ARMs with 1-, 3-, 5-, 7- and 10-year initial fixed-rate periods. We did not purchase any option ARM loans during the first quarter of 2011 or 2010.
 (3)  Represents loans where the borrower pays interest only for a period of time before the borrower begins making principal payments. Includes both fixed-rate and variable-rate interest-only loans.
 (4)  Includes $7.3 billion and $5.9 billion of mortgage loans in excess of $417,000, which we refer to as conforming jumbo mortgages, for the three months ended March 31, 2011 and 2010, respectively.
 (5)  Includes issuances of other guarantee commitments on single-family loans of $1.8 billion and $2.8 billion and issuances of other guarantee commitments on multifamily loans of $0.2 billion and $0.6 billion during the three months ended March 31, 2011 and 2010, respectively, which include our unsecuritized guarantees of HFA bonds under the TCLFP in the first quarter of 2010.
 (6)  See “NOTE 4: MORTGAGE LOANS AND LOAN LOSS RESERVES — Credit Protection and Other Forms of Credit Enhancement” for further details on credit enhancement of mortgage loans in our single-family credit guarantee portfolio.
 
See “RISK MANAGEMENT — Credit Risk — Mortgage Credit Risk” and “NOTE 17: CONCENTRATION OF CREDIT AND OTHER RISKS — Table 17.2 — Certain Higher-Risk Categories in the Single-Family Credit Guarantee Portfolio” for information about mortgage loans in our single-family credit guarantee portfolio that we believe have higher-risk characteristics.
 
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Derivative Assets and Liabilities, Net
 
The composition of our derivative portfolio changes from period to period as a result of derivative purchases, terminations, or assignments prior to contractual maturity and expiration of the derivatives at their contractual maturity. We classify net derivative interest receivable or payable, trade/settle receivable or payable, and cash collateral held or posted on our consolidated balance sheets to derivative assets, net and derivative liabilities, net. See “NOTE 11: DERIVATIVES” for additional information regarding our derivatives.
 
At March 31, 2011, the net fair value of our total derivative portfolio was $(0.7) billion, as compared to $(1.1) billion at December 31, 2010. The increase in the net fair value of our total derivative portfolio was primarily due to increasing longer-term swap interest rates. See “NOTE 11: DERIVATIVES — Table 11.1 — Derivative Assets and Liabilities at Fair Value” for our notional or contractual amounts and related fair values of our total derivative portfolio by product type at March 31, 2011 and December 31, 2010. Also see “CONSOLIDATED RESULTS OF OPERATIONS — Non-Interest Income (Loss) — Derivative Gains (Losses)” for a description of gains (losses) on our derivative positions.
 
Table 24 shows the fair value for each derivative type and the maturity profile of our derivative positions as of March 31, 2011. A positive fair value in Table 24 for each derivative type is the estimated amount, prior to netting by counterparty, that we would be entitled to receive if the derivatives of that type were terminated. A negative fair value for a derivative type is the estimated amount, prior to netting by counterparty, that we would owe if the derivatives of that type were terminated. See “Table 30 — Derivative Counterparty Credit Exposure” for additional information regarding derivative counterparty credit exposure. Table 24 also provides the weighted average fixed rate of our pay-fixed and receive-fixed swaps.
 
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Table 24 — Derivative Fair Values and Maturities
 
                                                 
    March 31, 2011  
                Fair Value(1)  
    Notional or
    Total Fair
    Less than
    1 to 3
    Greater than 3
    In Excess
 
    Contractual Amount(2)     Value(3)     1 Year     Years     and up to 5 Years     of 5 Years  
    (dollars in millions)  
 
Interest-rate swaps:
                                               
Receive-fixed:
                                               
Swaps
  $ 230,197     $ 432     $ 185     $ 262     $ 272     $ (287 )
Weighted average fixed rate(4)
                    1.36 %     1.18 %     2.42 %     3.68 %
Forward-starting swaps(5)
    19,596       141             8       (1 )     134  
Weighted average fixed rate(4)
                          1.37 %     1.57 %     4.50 %
                                                 
Total receive-fixed
    249,793       573       185       270       271       (153 )
                                                 
Basis (floating to floating)
    3,375       3                   3        
Pay-fixed:
                                               
Swaps
    299,011       (13,473 )     (178 )     (1,144 )     (2,761 )     (9,390 )
Weighted average fixed rate(4)
                    3.21 %     2.44 %     3.24 %     4.07 %
Forward-starting swaps(5)
    31,004       (2,682 )                       (2,682 )
Weighted average fixed rate(4)
                                      4.96 %
                                                 
Total pay-fixed
    330,015       (16,155 )     (178 )     (1,144 )     (2,761 )     (12,072 )
                                                 
Total interest-rate swaps
    583,183       (15,579 )     7       (874 )     (2,487 )     (12,225 )
                                                 
Option-based:
                                               
Call swaptions
                                               
Purchased
    104,850       7,172       3,319       1,127       1,340       1,386  
Written
    23,775       (566 )     (4 )     (415 )     (147 )      
Put swaptions
                                               
Purchased
    60,475       1,819       56       615       462       686  
Written
    6,000       (1 )     (1 )                  
Other option-based derivatives(6)
    44,884       1,388       (4 )                 1,392  
                                                 
Total option-based
    239,984       9,812       3,366       1,327       1,655       3,464  
                                                 
Futures
    157,197       (97 )     (97 )                  
Foreign-currency swaps
    2,138       281       88       193              
Commitments(7)
    15,877                                
Swap guarantee derivatives
    3,731       (36 )           (1 )     (1 )     (34 )
                                                 
Subtotal
    1,002,110       (5,619 )   $ 3,364     $ 645     $ (833 )   $ (8,795 )
                                                 
Credit derivatives
    11,664       2                                  
                                                 
Subtotal
    1,013,774       (5,617 )                                
Derivative interest receivable (payable), net
            (1,596 )                                
Trade/settle receivable (payable), net
            3                                  
Derivative collateral (held) posted, net
            6,518                                  
                                                 
Total
  $ 1,013,774     $ (692 )                                
                                                 
(1)  Fair value is categorized based on the period from March 31, 2011 until the contractual maturity of the derivative.
(2)  Notional or contractual amounts are used to calculate the periodic settlement amounts to be received or paid and generally do not represent actual amounts to be exchanged. Notional or contractual amounts are not recorded as assets or liabilities on our consolidated balance sheets.
(3)  The value of derivatives on our consolidated balance sheets is reported as derivative assets, net and derivative liabilities, net, and includes derivative interest receivable or (payable), net, trade/settle receivable or (payable), net and derivative cash collateral (held) or posted, net.
(4)  Represents the notional weighted average rate for the fixed leg of the swaps.
(5)  Represents interest-rate swap agreements that are scheduled to begin on future dates ranging from less than one year to fifteen years.
(6)  Primarily includes purchased interest rate caps and floors.
(7)  Commitments include: (a) our commitments to purchase and sell investments in securities; (b) our commitments to purchase mortgage loans; and (c) our commitments to purchase and extinguish or issue debt securities of our consolidated trusts.
 
            39 Freddie Mac


Table of Contents

Table 25 summarizes the changes in derivative fair values.
 
Table 25 — Changes in Derivative Fair Values
 
                 
    Three Months Ended
 
    March 31,(1)  
    2011     2010  
    (in millions)  
 
Beginning balance, at January 1 — Net asset (liability)
  $ (6,560 )   $ (2,267 )
Net change in:
               
Commitments(2)
    20       10  
Credit derivatives
    (5 )     (2 )
Swap guarantee derivatives
          (1 )
Other derivatives:(3)
               
Changes in fair value
    986       (3,302 )
Fair value of new contracts entered into during the period(4)
    233       56  
Contracts realized or otherwise settled during the period
    (291 )     380  
                 
Ending balance, at December 31 — Net asset (liability)
  $ (5,617 )   $ (5,126 )
                 
(1)  The value of derivatives on our consolidated balance sheets is reported as derivative assets, net and derivative liabilities, net, and includes derivative interest receivable (payable), net, trade/settle receivable (payable), net and derivative cash collateral (held) posted, net. Refer to “Table 24 — Derivative Fair Values and Maturities” for reconciliation of fair value to the amounts presented on our consolidated balance sheets as of March 31, 2011. Fair value excludes derivative interest receivable or (payable), net of $(1.5) billion, trade/settle receivable or (payable), net of $3 million, and derivative cash collateral posted, net of $5.7 billion at March 31, 2010.
(2)  Commitments include: (a) our commitments to purchase and sell investments in securities; (b) our commitments to purchase mortgage loans; and (c) our commitments to purchase and extinguish or issue debt securities of our consolidated trusts.
(3)  Includes fair value changes for interest-rate swaps, option-based derivatives, futures, and foreign-currency swaps.
(4)  Consists primarily of cash premiums paid or received on options.
 
REO, Net
 
As a result of borrower default on mortgage loans that we own, or for which we have issued our financial guarantee, we acquire properties which are recorded as REO assets on our consolidated balance sheets. The balance of our REO, net, declined to $6.4 billion at March 31, 2011 from $7.1 billion at December 31, 2010. The pace of our REO acquisitions temporarily slowed beginning in the fourth quarter of 2010 due to delays in the foreclosure process, including delays related to concerns about deficiencies in foreclosure documentation practices. These delays in foreclosures continued in the first quarter of 2011, particularly in states that require a judicial foreclosure process. While foreclosure proceedings generally resumed during the first quarter of 2011, the rate of foreclosure completion is slower than prior to the suspensions. We expect our REO inventory to grow in the remainder of 2011. See “RISK MANAGEMENT — Credit Risk — Mortgage Credit Risk — Credit Performance — Non-Performing Assets” for additional information about our REO activity.
 
Deferred Tax Assets, Net
 
In connection with our entry into conservatorship, we determined that it was more likely than not that a portion of our net deferred tax assets would not be realized due to our inability to generate sufficient taxable income and, therefore, we recorded a valuation allowance. After evaluating all available evidence, including our losses, the events and developments related to our conservatorship, volatility in the economy, and related difficulty in forecasting future profit levels, we reached a similar conclusion in all subsequent quarters, including in the first quarter of 2011. Our valuation allowance decreased by $91 million during the first quarter of 2011 to $33.3 billion, primarily due to the reversal of temporary differences during the period. As of March 31, 2011, after consideration of the valuation allowance, we had a net deferred tax asset of $4.5 billion, primarily representing the tax effect of unrealized losses on our available-for-sale securities. We believe the deferred tax asset related to these unrealized losses is more likely than not to be realized because of our assertion that we have the intent and ability to hold our available-for-sale securities until any temporary unrealized losses are recovered.
 
IRS Examinations
 
The IRS completed its examinations of tax years 1998 to 2007. We received Statutory Notices from the IRS assessing $3.0 billion of additional income taxes and penalties for the 1998 to 2005 tax years. We filed a petition with the U.S. Tax Court on October 22, 2010 in response to the Statutory Notices. The principal matter of controversy involves questions of timing and potential penalties regarding our tax accounting method for certain hedging transactions. The IRS responded to our petition with the U.S. Tax Court on December 21, 2010. We currently believe adequate reserves have been provided for settlement on reasonable terms. For additional information, see “NOTE 13: INCOME TAXES.”
 
            40 Freddie Mac


Table of Contents

Other Assets
 
Other assets consist of the guarantee asset related to non-consolidated trusts and other guarantee commitments, accounts and other receivables, and other miscellaneous assets. Other assets decreased to $8.1 billion as of March 31, 2011 from $10.9 billion as of December 31, 2010 primarily because of a decrease in servicer receivables resulting from lower loan liquidations on mortgage loans held by consolidated trusts. See “NOTE 21: SELECTED FINANCIAL STATEMENT LINE ITEMS” for additional information.
 
Total Debt, Net
 
PCs and Other Guarantee Transactions issued by our consolidated trusts and held by third parties are recognized as debt securities of consolidated trusts held by third parties on our consolidated balance sheets. Debt securities of consolidated trusts held by third parties represents our liability to third parties that hold beneficial interests in our consolidated trusts. The debt securities of our consolidated trusts may be prepaid without penalty at any time.
 
Other debt consists of unsecured short-term and long-term debt securities we issue to third parties to fund our business activities. It is classified as either short-term or long-term based on the contractual maturity of the debt instrument. See “LIQUIDITY AND CAPITAL RESOURCES” for a discussion of our management activities related to other debt.
 
            41 Freddie Mac


Table of Contents

Table 26 presents the UPB for Freddie Mac issued mortgage-related securities by the underlying mortgage product type based on the UPB of the securities.
 
Table 26 — Freddie Mac Mortgage-Related Securities(1)(2)
 
                                                 
    March 31, 2011     December 31, 2010  
    Issued by
    Issued by
          Issued by
    Issued by
       
    Consolidated
    Non-Consolidated
          Consolidated
    Non-Consolidated
       
    Trusts     Trusts     Total     Trusts     Trusts     Total  
    (in millions)  
 
Single-family:
                                               
30-year or more amortizing fixed-rate
  $ 1,192,471     $     $ 1,192,471     $ 1,213,448     $     $ 1,213,448  
20-year amortizing fixed-rate
    67,076             67,076       65,210             65,210  
15-year amortizing fixed-rate
    249,148             249,148       248,702             248,702  
Adjustable-rate(3)
    62,160             62,160       61,269             61,269  
Interest-only(4)
    72,630             72,630       79,835             79,835  
FHA/VA and other governmental
    3,570             3,570       3,369             3,369  
                                                 
Total single-family
    1,647,055             1,647,055       1,671,833             1,671,833  
                                                 
Multifamily
          4,560       4,560             4,603       4,603  
                                                 
Total single-family and multifamily
    1,647,055       4,560       1,651,615       1,671,833       4,603       1,676,436  
                                                 
Other Guarantee Transactions:
                                               
HFA bonds:(5)
                                               
Single-family
          6,152       6,152             6,168       6,168  
Multifamily
          1,146       1,146             1,173       1,173  
                                                 
Total HFA bonds
          7,298       7,298             7,341       7,341  
Other:
                                               
Single-family(6)
    14,979       4,146       19,125       15,806       4,243       20,049  
Multifamily
          11,107       11,107