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Investments in Securities
6 Months Ended
Jun. 30, 2012
Investments, Debt and Equity Securities [Abstract]  
Investments in Securities
Investments in Securities
Trading Securities
Trading securities are recorded at fair value with subsequent changes in fair value recorded as “Fair value losses, net” in our condensed consolidated statements of operations and comprehensive income (loss). The following table displays our investments in trading securities as of June 30, 2012 and December 31, 2011.
 
As of
 
June 30,
 
December 31,
 
2012
 
2011
 
(Dollars in millions)
Mortgage-related securities:
 
 
 
 
 
Fannie Mae
$
6,819

 
 
$
7,424

 
Freddie Mac
2,974

 
 
2,732

 
Ginnie Mae
282

 
 
287

 
Alt-A private-label securities
1,296

 
 
1,349

 
Subprime private-label securities
1,226

 
 
1,280

 
CMBS
9,930

 
 
10,411

 
Mortgage revenue bonds
689

 
 
724

 
Other mortgage-related securities
118

 
 
143

 
Total
23,334

 
 
24,350

 
Non-mortgage-related securities:
 
 
 
 
 
U.S. Treasury securities
27,064

 
 
47,737

 
Asset-backed securities
537

 
 
2,111

 
Total
27,601

 
 
49,848

 
Total trading securities
$
50,935

 
 
$
74,198

 
The following table displays information about our net trading gains and losses for the three and six months ended June 30, 2012 and 2011.
 
For the Three
 
For the Six
 
Months Ended
 
Months Ended
 
June 30,
 
June 30,
 
2012
 
2011
 
2012
 
2011
 
 
(Dollars in millions)
Net trading gains (losses):
 
 
 
 
 
 
 
 
 
 
 
Mortgage-related securities
 
$
(12
)
 
 
$
131

 
 
$
284

 
 
$
360

Non-mortgage-related securities
 
(2
)
 
 
4

 
 
(14
)
 
 

Total
 
$
(14
)
 
 
$
135

 
 
$
270

 
 
$
360

Net trading gains (losses) recorded in the period related to securities still held at period end:
 
 
 
 
 
 
 
 
 
 
 
Mortgage-related securities
 
$
(4
)
 
 
$
131

 
 
$
330

 
 
$
354

Non-mortgage-related securities
 
2

 
 
7

 
 
(4
)
 
 
8

Total
 
$
(2
)
 
 
$
138

 
 
$
326

 
 
$
362

Available-for-Sale Securities
We measure available-for-sale (“AFS”) securities at fair value with unrealized gains and losses recorded as a component of “Other comprehensive income,” net of tax, and we record realized gains and losses from the sale of AFS securities in “Investment gains, net” in our condensed consolidated statements of operations and comprehensive income (loss).
The following table displays the gross realized gains, losses and proceeds on sales of AFS securities for the three and six months ended June 30, 2012 and 2011.
 
For the Three
 
For the Six
 
Months Ended
 
Months Ended
 
June 30,
 
June 30,
 
2012
 
2011
 
2012
 
2011
 
(Dollars in millions)
Gross realized gains
$
9

 
$
73

 
$
27

 
$
133

Gross realized losses
1

 
47

 
10

 
53

Total proceeds (1)
132

 
839

 
400

 
1,229

__________
s

(1) 
Excludes proceeds from the initial sale of securities from new portfolio securitizations included in “Note 2, Consolidations and Transfers of Financial Assets.”
The following table displays the amortized cost, gross unrealized gains and losses and fair value by major security type for AFS securities we held as of June 30, 2012 and December 31, 2011.
  
 
As of June 30, 2012
  
Total Amortized Cost (1)
 
Gross Unrealized Gains
 
Gross Unrealized Losses - OTTI (2)
 
Gross Unrealized Losses - Other (3)
 
Total Fair Value
  
 
(Dollars in millions)
Fannie Mae
 
$
12,100

 
 
 
$
1,101

 
 
 
$
(2
)
 
 
 
$
(11
)
 
 
$
13,188

Freddie Mac
 
10,143

 
 
 
840

 
 
 

 
 
 

 
 
10,983

Ginnie Mae
 
710

 
 
 
119

 
 
 

 
 
 

 
 
829

Alt-A private-label securities
 
12,187

 
 
 
267

 
 
 
(1,084
)
 
 
 
(187
)
 
 
11,183

Subprime private-label securities
 
8,695

 
 
 
51

 
 
 
(1,110
)
 
 
 
(406
)
 
 
7,230

CMBS(4)
 
13,251

 
 
 
458

 
 
 

 
 
 
(41
)
 
 
13,668

Mortgage revenue bonds
 
9,295

 
 
 
175

 
 
 
(54
)
 
 
 
(59
)
 
 
9,357

Other mortgage-related securities
 
3,524

 
 
 
82

 
 
 
(27
)
 
 
 
(323
)
 
 
3,256

Total
 
$
69,905

 
 
 
$
3,093

 
 
 
$
(2,277
)
 
 
 
$
(1,027
)
 
 
$
69,694


 
 
As of December 31, 2011
 
Total Amortized Cost (1)
 
Gross Unrealized Gains
 
Gross Unrealized Losses - OTTI (2)
 
Gross Unrealized Losses - Other (3)
 
Total Fair Value
 
 
(Dollars in millions)
Fannie Mae
 
$
15,486

 
 
 
$
1,381

 
 
 
$
(3
)
 
 
 
$
(14
)
 
 
$
16,850

Freddie Mac
 
11,906

 
 
 
917

 
 
 

 
 
 

 
 
12,823

Ginnie Mae
 
775

 
 
 
127

 
 
 

 
 
 

 
 
902

Alt-A private-label securities
 
13,314

 
 
 
233

 
 
 
(1,618
)
 
 
 
(246
)
 
 
11,683

Subprime private-label securities
 
9,556

 
 
 
17

 
 
 
(1,534
)
 
 
 
(453
)
 
 
7,586

CMBS(4)
 
13,949

 
 
 
181

 
 
 

 
 
 
(104
)
 
 
14,026

Mortgage revenue bonds
 
10,172

 
 
 
202

 
 
 
(56
)
 
 
 
(64
)
 
 
10,254

Other mortgage-related securities
 
3,687

 
 
 
92

 
 
 
(39
)
 
 
 
(282
)
 
 
3,458

Total
 
$
78,845

 
 
 
$
3,150

 
 
 
$
(3,250
)
 
 
 
$
(1,163
)
 
 
$
77,582

__________
s

(1) 
Amortized cost consists of unpaid principal balance, unamortized premiums, discounts and other cost basis adjustments as well as the credit component of other-than-temporary impairments recognized in our condensed consolidated statements of operations and comprehensive income (loss).
(2) 
Represents the noncredit component of other-than-temporary impairment losses recorded in “Accumulated other comprehensive loss” as well as cumulative changes in fair value of securities for which we previously recognized the credit component of an other-than-temporary impairment.
(3) 
Represents the gross unrealized losses on securities for which we have not recognized an other-than-temporary impairment.
(4) 
Amortized cost includes $610 million and $686 million as of June 30, 2012 and December 31, 2011, respectively, of increase to the carrying amount from previous fair value hedge accounting.
The following table displays additional information regarding gross unrealized losses and fair value by major security type for AFS securities in an unrealized loss position that we held as of June 30, 2012 and December 31, 2011.
 
 
As of June 30, 2012
 
Less Than 12 Consecutive Months
 
12 Consecutive Months or Longer
 
Gross Unrealized Losses
 
Fair Value
 
Gross Unrealized Losses
 
Fair Value
 
 
(Dollars in millions)
Fannie Mae
 
$
(2
)
 
 
$
350

 
 
$
(11
)
 
 
$
248

Alt-A private-label securities
 
(22
)
 
 
911

 
 
(1,249
)
 
 
5,945

Subprime private-label securities
 
(13
)
 
 
284

 
 
(1,503
)
 
 
5,999

CMBS
 
(5
)
 
 
854

 
 
(36
)
 
 
526

Mortgage revenue bonds
 
(31
)
 
 
513

 
 
(82
)
 
 
1,085

Other mortgage-related securities
 
(9
)
 
 
358

 
 
(341
)
 
 
1,532

Total
 
$
(82
)
 
 
$
3,270

 
 
$
(3,222
)
 
 
$
15,335

 
 
 
 
 
 
 
 
 
 
 
 
 
 
As of December 31, 2011
 
Less Than 12 Consecutive Months
 
12 Consecutive Months or Longer
 
Gross Unrealized Losses
 
Fair Value
 
Gross Unrealized Losses
 
Fair Value
 
 
(Dollars in millions)
Fannie Mae
 
$
(4
)
 
 
$
519

 
 
$
(13
)
 
 
$
208

Alt-A private-label securities
 
(133
)
 
 
1,414

 
 
(1,731
)
 
 
6,525

Subprime private-label securities
 
(73
)
 
 
471

 
 
(1,914
)
 
 
6,686

CMBS
 
(20
)
 
 
1,458

 
 
(84
)
 
 
2,790

Mortgage revenue bonds
 
(4
)
 
 
114

 
 
(116
)
 
 
1,971

Other mortgage-related securities
 
(21
)
 
 
547

 
 
(300
)
 
 
1,588

Total
 
$
(255
)
 
 
$
4,523

 
 
$
(4,158
)
 
 
$
19,768

Other-Than-Temporary Impairments
We recognize the credit component of other-than-temporary impairments of our debt securities in “Net other-than-temporary impairments” and the noncredit component in “Other comprehensive income” in our condensed consolidated statements of operations and comprehensive income (loss) for those securities that we do not intend to sell and for which it is not more likely than not that we will be required to sell before recovery.
The fair value of our securities varies from period to period due to changes in interest rates, in the performance of the underlying collateral and in the credit performance of the underlying issuer, among other factors. As of June 30, 2012, $3.2 billion of the $3.3 billion of gross unrealized losses on AFS securities had existed for a period of 12 consecutive months or longer. Gross unrealized losses on AFS securities as of June 30, 2012 include unrealized losses on securities with other-than-temporary impairment in which a portion of the impairment remains in “Accumulated other comprehensive loss.” The securities with unrealized losses for 12 consecutive months or longer, on average, had a fair value as of June 30, 2012 that was 83% of their amortized cost basis. Based on our review for impairments of AFS securities, which includes an evaluation of the collectibility of cash flows and any intent or requirement to sell the securities, we have concluded that we do not have an intent to sell and we believe it is not more likely than not that we will be required to sell the securities. Additionally, our projections of cash flows indicate that we will recover these unrealized losses over the lives of the securities.
The following table displays our net other-than-temporary impairments by major security type recognized in our condensed consolidated statements of operations and comprehensive income (loss) for the three and six months ended June 30, 2012 and 2011.
 
For the Three Months Ended
 
For the Six Months Ended
 
June 30,
 
June 30,
 
2012
 
2011
 
2012
 
2011
 
 
(Dollars in millions)
Alt-A private-label securities
 
$
312

 
 
 
$
53

 
 
$
355

 
 
$
91

Subprime private-label securities
 
284

 
 
 

 
 
303

 
 

Other
 
3

 
 
 
3

 
 
5

 
 
9

Net other-than-temporary impairments
 
$
599

 
 
 
$
56

 
 
$
663

 
 
$
100


The net other-than-temporary impairment recorded in the three and six months ended June 30, 2012 increased compared with the three and six months ended June 30, 2011, driven primarily by a decrease in the net present value of projected cash flows on our Alt-A and subprime private-label securities due to higher projected loss severity rates on loans underlying these securities. The net present value of projected cash flows decreased because we updated our assumptions due to recent observable market trends, including extending the time it takes to liquidate the loans and increasing loss severity rates for loans where the servicer stopped advancing payments.
The following table displays activity related to the unrealized credit component on debt securities held by us and recognized in our condensed consolidated statements of operations and comprehensive income (loss) for the three and six months ended June 30, 2012 and 2011. A related unrealized noncredit component has been recognized in “Other comprehensive income (loss).”
  
For the Three Months Ended
 
For the Six
Months Ended
  
June 30,
 
June 30,
  
2012
 
2011
 
2012
 
2011
  
(Dollars in millions)
Balance, beginning of period
$
8,870

 
$
8,040

 
$
8,915

 
$
8,215

Additions for the credit component on debt securities for which OTTI was not previously recognized
2

 

 
2

 
8

Additions for credit losses on debt securities for which OTTI was previously recognized
597

 
56

 
661

 
92

Reductions for securities no longer in portfolio at period end
(2
)
 

 
(2
)
 

Reductions for amortization resulting from changes in cash flows expected to be collected over the remaining life of the securities
(101
)
 
(220
)
 
(210
)
 
(439
)
Balance, end of period
$
9,366

 
$
7,876

 
$
9,366

 
$
7,876

As of June 30, 2012, those debt securities with other-than-temporary impairment for which we recognized in our condensed consolidated statements of operations and comprehensive income (loss) the amount of loss related to credit consisted predominantly of Alt-A and subprime securities. We evaluate Alt-A (including option adjustable rate mortgage (“ARM”)) and subprime private-label securities for other-than-temporary impairment by discounting the projected cash flows from econometric models to estimate the portion of loss in value attributable to credit. Separate components of a third-party model project regional home prices, unemployment and interest rates. The model combines these factors with available current information regarding attributes of loans in pools backing the private-label mortgage-related securities to project prepayment speeds, conditional default rates, loss severities and delinquency rates. It incorporates detailed information on security-level subordination levels and cash flow priority of payments to project security level cash flows. We have recorded other-than-temporary impairments for the three and six months ended June 30, 2012 based on this analysis. For securities we determined were not other-than-temporarily impaired, we concluded that either the bond had no projected credit loss or if we projected a loss, that the present value of expected cash flows was greater than the security’s cost basis.
The following table displays the modeled attributes, including default rates and severities, which are used to determine whether our senior interests in certain non-agency mortgage-related securities will experience a cash shortfall as of June 30, 2012. Assumption of voluntary prepayment rates is also an input to the present value of expected losses.
 
As of June 30, 2012
 
 
 
Alt-A
 
Subprime
 
Option ARM
 
Fixed Rate
 
Variable Rate
 
Hybrid Rate
 
(Dollars in millions)
 
Vintage Year
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
2004 & Prior:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Unpaid principal balance
$
1,518

 
 
$
460

 
 
 
$
3,101

 
 
 
$
459

 
 
 
$
2,107

 
Weighted average collateral default(1)
41.0
%
 
 
39.9
%
 
 
 
13.3
%
 
 
 
30.3
%
 
 
 
17.8
%
 
Weighted average collateral severities(2)
70.2

 
 
60.5

 
 
 
54.7

 
 
 
53.5

 
 
 
47.8

 
Weighted average voluntary prepayment rates(3)
6.3

 
 
5.7

 
 
 
11.3

 
 
 
6.0

 
 
 
8.9

 
Average credit enhancement(4)
51.3

 
 
13.6

 
 
 
12.1

 
 
 
22.9

 
 
 
10.0

 
2005
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Unpaid principal balance
$
155

 
 
$
1,235

 
 
 
$
1,097

 
 
 
$
499

 
 
 
$
2,191

 
Weighted average collateral default(1)
68.4
%
 
 
54.8
%
 
 
 
39.7
%
 
 
 
52.3
%
 
 
 
38.8
%
 
Weighted average collateral severities(2)
76.3

 
 
67.8

 
 
 
66.1

 
 
 
64.4

 
 
 
55.4

 
Weighted average voluntary prepayment rates(3)
2.3

 
 
4.4

 
 
 
6.8

 
 
 
4.9

 
 
 
5.6

 
Average credit enhancement(4)
65.5

 
 
22.3

 
 
 
1.0

 
 
 
14.9

 
 
 
4.9

 
2006
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Unpaid principal balance
$
11,025

 
 
$
1,084

 
 
 
$
492

 
 
 
$
1,488

 
 
 
$
1,548

 
Weighted average collateral default(1)
71.4
%
 
 
69.6
%
 
 
 
40.5
%
 
 
 
57.9
%
 
 
 
37.4
%
 
Weighted average collateral severities(2)
78.2

 
 
69.2

 
 
 
67.5

 
 
 
64.4

 
 
 
57.9

 
Weighted average voluntary prepayment rates(3)
2.2

 
 
3.1

 
 
 
5.6

 
 
 
3.8

 
 
 
5.5

 
Average credit enhancement(4)
15.4

 
 
16.2

 
 
 
0.5

 
 
 
0.7

 
 
 

 
2007 & After:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Unpaid principal balance
$
582

 
 
$

 
 
 
$

 
 
 
$

 
 
 
$
108

 
Weighted average collateral default(1)
67.7
%
 
 
N/A

 
 
 
N/A

 
 
 
N/A

 
 
 
40.9
%
 
Weighted average collateral severities(2)
71.4

 
 
N/A

 
 
 
N/A

 
 
 
N/A

 
 
 
59.9

 
Weighted average voluntary prepayment rates(3)
1.9

 
 
N/A

 
 
 
N/A

 
 
 
N/A

 
 
 
6.5

 
Average credit enhancement(4)
31.3

 
 
N/A

 
 
 
N/A

 
 
 
N/A

 
 
 
24.4

 
Total
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Unpaid principal balance
$
13,280

 
 
$
2,779

 
 
 
$
4,690

 
 
 
$
2,446

 
 
 
$
5,954

 
Weighted average collateral default(1)
67.7
%
 
 
58.1
%
 
 
 
22.3
%
 
 
 
51.6
%
 
 
 
31.1
%
 
Weighted average collateral severities(2)
77.0

 
 
67.2

 
 
 
58.7

 
 
 
62.4

 
 
 
53.4

 
Weighted average voluntary prepayment rates(3)
2.7

 
 
4.1

 
 
 
9.7

 
 
 
4.5

 
 
 
6.8

 
Average credit enhancement(4)
20.8

 
 
18.5

 
 
 
8.3

 
 
 
7.7

 
 
 
5.8

 
__________

(1) 
The expected remaining cumulative default rate of the collateral pool backing the securities, as a percentage of the current collateral unpaid principal balance, weighted by security unpaid principal balance.
(2) 
The expected remaining loss given default of the collateral pool backing the securities, calculated as the ratio of remaining cumulative loss divided by cumulative defaults, weighted by security unpaid principal balance.
(3) 
The average monthly voluntary prepayment rate, weighted by security unpaid principal balance.
(4) 
The average percent current credit enhancement provided by subordination of other securities. Excludes excess interest projections and monoline bond insurance.
Maturity Information
The following table displays the amortized cost and fair value of our AFS securities by major security type and remaining maturity, assuming no principal prepayments, as of June 30, 2012. Contractual maturity of mortgage-backed securities is not a reliable indicator of their expected life because borrowers generally have the right to prepay their obligations at any time.
  
 
As of June 30, 2012
  
Total Amortized Cost
 
Total
Fair
Value
 
One Year or Less
 
After One Year Through Five Years
 
After Five Years Through Ten Years
 
After Ten Years
  
 
 
Amortized Cost
 
Fair Value
 
Amortized Cost
 
Fair Value
 
Amortized Cost
 
Fair Value
 
Amortized Cost
 
Fair Value
  
(Dollars in millions)
Fannie Mae
 
$
12,100

 
 
$
13,188

 
 
$

 
 
$

 
 
$
18

 
 
$
19

 
 
$
1,327

 
 
$
1,409

 
 
$
10,755

 
 
$
11,760

Freddie Mac
 
10,143

 
 
10,983

 
 
3

 
 
3

 
 
51

 
 
55

 
 
937

 
 
1,007

 
 
9,152

 
 
9,918

Ginnie Mae
 
710

 
 
829

 
 

 
 

 
 
2

 
 
2

 
 
4

 
 
4

 
 
704

 
 
823

Alt-A private-label securities
 
12,187

 
 
11,183

 
 

 
 

 
 
1

 
 
1

 
 
204

 
 
209

 
 
11,982

 
 
10,973

Subprime private-label securities
 
8,695

 
 
7,230

 
 

 
 

 
 

 
 

 
 

 
 

 
 
8,695

 
 
7,230

CMBS
 
13,251

 
 
13,668

 
 
62

 
 
65

 
 
9,590

 
 
9,929

 
 
3,304

 
 
3,401

 
 
295

 
 
273

Mortgage revenue bonds
 
9,295

 
 
9,357

 
 
56

 
 
58

 
 
338

 
 
346

 
 
711

 
 
728

 
 
8,190

 
 
8,225

Other mortgage-related securities
 
3,524

 
 
3,256

 
 

 
 

 
 

 
 

 
 

 
 
11

 
 
3,524

 
 
3,245

Total
 
$
69,905

 
 
$
69,694

 
 
$
121

 
 
$
126

 
 
$
10,000

 
 
$
10,352

 
 
$
6,487

 
 
$
6,769

 
 
$
53,297

 
 
$
52,447

Accumulated Other Comprehensive Loss
The following table displays our accumulated other comprehensive loss by major categories as of June 30, 2012 and December 31, 2011.
 
As of
 
June 30,
 
December 31,
 
2012
 
2011
 
(Dollars in millions)
 
Net unrealized gains on available-for-sale securities for which we have not recorded other-than-temporary impairment, net of tax
$
1,174

 
 
$
1,152

 
Net unrealized losses on available-for-sale securities for which we have recorded other-than-temporary impairment, net of tax
(1,300
)
 
 
(1,953
)
 
Other losses
(419
)
 
 
(434
)
 
Accumulated other comprehensive loss
$
(545
)
 
 
$
(1,235
)
 
The following table displays the activity in other comprehensive income (loss), net of tax, by major categories for the three and six months ended June 30, 2012 and 2011.
 
For the Three Months Ended
 
For the Six
Months Ended
 
June 30,
 
June 30,
 
2012
 
2011
 
2012
 
2011
 
(Dollars in millions)
Comprehensive income (loss):
 
 
 
 
 
 
 
Net income (loss)
$
5,119

 
$
(2,892
)
 
$
7,837

 
$
(9,363
)
Other comprehensive income (loss), net of tax effect:
 
 
 
 
 
 
 
Changes in net unrealized (losses) gains on available-for-sale securities (net of tax of $46 and $19, respectively, for the three months ended and net of tax of $150 and $68, respectively, for the six months ended)
(64
)
 
(34
)
 
255

 
127

Reclassification adjustment for other-than-temporary impairments recognized in net income (loss) (net of tax of $210 and $15, respectively, for the three months ended and $232 and $28, respectively, for the six months ended)
389

 
40

 
431

 
72

Reclassification adjustment for gains included in net income (loss) (net of tax of $3 for the three months ended and net of tax of $6 and $11, respectively, for the six months ended)
(5
)
 
(7
)
 
(11
)
 
(21
)
Other
8

 
3

 
15

 
5

Other comprehensive income
328

 
2

 
690

 
183

Total comprehensive income (loss)
$
5,447

 
$
(2,890
)
 
$
8,527

 
$
(9,180
)