Derivative Instruments

9 Months Ended

Sep. 30, 2012

Derivative Instruments and Hedging Activities Disclosure [Abstract]

Derivative Instruments

Derivative Instruments

Derivative instruments are an integral part of our strategy in managing interest rate risk. Derivative instruments may be privately negotiated contracts, which are often referred to as over-the-counter derivatives, or they may be listed and traded on an exchange. We typically do not settle the notional amount of our risk management derivatives; rather, notional amounts provide the basis for calculating actual payments or settlement amounts. The derivatives we use for interest rate risk management purposes consist primarily of interest rate swaps and interest rate options. Our foreign currency swaps are used to manage foreign exchange risk.

We enter into forward purchase and sale commitments that lock in the future delivery of mortgage loans and mortgage-related securities at a fixed price or yield. Certain commitments to purchase mortgage loans and purchase or sell mortgage-related securities meet the criteria of a derivative. We typically settle the notional amount of our mortgage commitments that are accounted for as derivatives.

We recognize all derivatives as either assets or liabilities in our condensed consolidated balance sheets at their fair value on a trade date basis. Fair value amounts, which are netted to the extent a legal right of offset exists and is enforceable by law at the counterparty level and are inclusive of the right or obligation associated with the cash collateral posted or received, are recorded in “Other assets” or “Other liabilities” in our condensed consolidated balance sheets. We present cash flows from derivatives as operating activities in our condensed consolidated statements of cash flows.

Notional and Fair Value Position of our Derivatives

The following table displays the notional amount and estimated fair value of our asset and liability derivative instruments as of September 30, 2012 and December 31, 2011.

	As of September 30, 2012										As of December 31, 2011
	Asset Derivatives					Liability Derivatives					Asset Derivatives					Liability Derivatives
	Notional Amount		Estimated Fair Value			Notional Amount		Estimated Fair Value			Notional Amount		Estimated Fair Value			Notional Amount		Estimated Fair Value
	(Dollars in millions)
Risk management derivatives:
Swaps:
Pay-fixed	$	5,375	$	80		$	244,217	$	(20,619	)	$	30,950	$	102		$	155,807	$	(17,391	)
Receive-fixed	286,365		10,971			9,075		(27		)	170,668		8,118			59,027		(93		)
Basis	21,822		163			3,100		(1		)	382		122			9,240		(44		)
Foreign currency	811		195			391		(43		)	581		155			451		(62		)
Swaptions:
Pay-fixed	33,400		105			26,625		(162		)	48,600		165			47,750		(194		)
Receive-fixed	19,470		4,317			26,625		(2,517		)	33,695		6,371			47,750		(3,238		)
Other(1)	7,395		28			12		—			8,214		52			75		—
Total gross risk management derivatives	374,638		15,859			310,045		(23,369		)	293,090		15,085			320,100		(21,022		)
Accrued interest receivable (payable)	—		1,224			—		(1,602		)	—		920			—		(1,238		)
Netting adjustment(2)	—		(16,826		)	—		24,596			—		(15,829		)	—		21,898
Total net risk management derivatives	$	374,638	$	257		$	310,045	$	(375	)	$	293,090	$	176		$	320,100	$	(362	)

Mortgage commitment derivatives:
Mortgage commitments to purchase whole loans	$	16,260	$	255	$	4,209	$	(6	)	$	9,710	$	73	$	422	$	—
Forward contracts to purchase mortgage-related securities	48,212		804		7,447		(14		)	32,707		309		2,570		(6		)
Forward contracts to sell mortgage-related securities	6,414		12		96,999		(1,638		)	1,370		3		54,656		(548		)
Total mortgage commitment derivatives	$	70,886	$	1,071	$	108,655	$	(1,658	)	$	43,787	$	385	$	57,648	$	(554	)
Derivatives at fair value	$	445,524	$	1,328	$	418,700	$	(2,033	)	$	336,877	$	561	$	377,748	$	(916	)

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⁽¹⁾  Includes interest rate caps, futures, swap credit enhancements and mortgage insurance contracts that we account for as derivatives. The mortgage insurance contracts have payment provisions that are not based on a notional amount.

⁽²⁾  The netting adjustment represents the effect of the legal right to offset under legally enforceable master netting agreements to settle with the same counterparty on a net basis, including cash collateral posted and received. Cash collateral posted was $7.8 billion and $6.8 billion as of September 30, 2012 and December 31, 2011, respectively. No cash collateral was received as of September 30, 2012 and $779 million was received as of December 31, 2011.

A majority of our derivative contracts contain provisions that require our senior unsecured debt to maintain a minimum credit rating from S&P and Moody’s. If our senior unsecured debt credit ratings were downgraded to established thresholds in our derivatives contracts, which range from A+ to BBB+, we could be required to provide additional collateral to or terminate transactions with certain counterparties. The aggregate fair value of all derivatives with credit-risk-related contingent features that were in a net liability position as of September 30, 2012 was $7.9 billion, for which we posted collateral of $7.8 billion in the normal course of business. Had all of the credit-risk-related contingency features underlying these agreements been triggered, an additional $116 million would have been required to be posted as collateral or to immediately settle our positions based on the individual agreements and our fair value position as of September 30, 2012.

The aggregate fair value of all derivatives with credit risk-related contingent features that were in a net liability position as of December 31, 2011 was $7.2 billion, for which we posted collateral of $6.8 billion in the normal course of business. Had all of the credit risk-related contingency features underlying these agreements been triggered, an additional $362 million would have been required to be posted as collateral or to immediately settle our positions based on the individual agreements and our fair value position as of December 31, 2011.

We record all derivative gains and losses, including accrued interest, in “Fair value losses, net” in our condensed consolidated statements of operations and comprehensive income (loss). The following table displays, by type of derivative instrument, the fair value gains and losses, net on our derivatives for the three and nine months ended September 30, 2012 and 2011.

	For the						For the
	Three Months						Nine Months
	Ended September 30,						Ended September 30,
	2012			2011			2012			2011
	(Dollars in millions)
Risk management derivatives:
Swaps:
Pay-fixed	$	(2,272	)	$	(11,334	)	$	(6,955	)	$	(16,206	)
Receive-fixed	1,511			4,577			4,185			7,105
Basis	42			75			98			104
Foreign currency	61			31			70			114
Swaptions:
Pay-fixed	51			533			108			805
Receive-fixed	123			2,091			374			2,591
Other(1)	(24		)	(40		)	(30		)	(80		)
Total risk management derivatives fair value losses, net	(508		)	(4,067		)	(2,150		)	(5,567		)
Mortgage commitment derivatives fair value losses, net	(816		)	(188		)	(1,583		)	(226		)
Total derivatives fair value losses, net	$	(1,324	)	$	(4,255	)	$	(3,733	)	$	(5,793	)

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⁽¹⁾  Includes interest rate caps, futures, swap credit enhancements and mortgage insurance contracts.

Derivative Counterparty Credit Exposure

Our derivative counterparty credit exposure relates principally to interest rate and foreign currency derivative contracts. We are exposed to the risk that a counterparty in a derivative transaction will default on payments due to us. If there is a default, we may need to acquire a replacement derivative from a different counterparty at a higher cost or may be unable to find a suitable replacement. We estimate our exposure to credit loss on derivative instruments by calculating the replacement cost, on a present value basis, to settle at current market prices all outstanding derivative contracts in a net gain position at the counterparty level where the right of legal offset exists. For derivative instruments where the right of legal offset does not exist, we calculate the replacement cost of the outstanding derivative contracts in a gain position at the transaction level. We manage our exposure by requiring counterparties to post collateral, which includes cash, U.S. Treasury securities, agency debt and agency mortgage-related securities.

The table below displays our counterparty credit exposure on outstanding risk management derivative instruments in a gain position by counterparty credit ratings, as well as the notional amount outstanding and the number of counterparties for all risk management derivatives as of September 30, 2012 and December 31, 2011.

	As of September 30, 2012
	Credit Rating(1)
	AA+/ AA/AA-		A+/A/A-		BBB+/BBB/BBB-		Subtotal(2)		Other(3)		Total
	(Dollars in millions)
Credit loss exposure(4)	$	—	$	118	$	83	$	201	$	28	$	229
Less: Collateral held(5)	—		116		82		198		—		198
Exposure net of collateral	$	—	$	2	$	1	$	3	$	28	$	31
Additional information:
Notional amount	$	19,038	$	617,668	$	47,513	$	684,219	$	464	$	684,683
Number of counterparties	4		14		4		22
	As of December 31, 2011
	Credit Rating(1)
	AA+/AA/AA-		A+/A/A-		BBB+/BBB/BBB-		Subtotal(2)		Other(3)		Total
	(Dollars in millions)
Credit loss exposure(4)	$	—	$	885	$	—	$	885	$	51	$	936
Less: Collateral held(5)	—		840		—		840		—		840
Exposure net of collateral	$	—	$	45	$	—	$	45	$	51	$	96
Additional information:
Notional amount	$	63,294	$	546,967	$	—	$	610,261	$	2,929	$	613,190
Number of counterparties	6		10		—		16

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⁽¹⁾  We manage collateral requirements based on the lower credit rating of the legal entity, as issued by S&P and Moody’s. The credit rating reflects the equivalent S&P’s rating for any ratings based on Moody’s scale.

⁽²⁾  We had credit loss exposure to eight and four counterparties for interest rate and foreign currency derivatives counterparties as of September 30, 2012 and December 31, 2011, respectively. Those interest rate and foreign currency derivatives had notional balances of $8.5 billion and $127.5 billion as of September 30, 2012 and December 31, 2011, respectively.

⁽³⁾  Includes mortgage insurance contracts and swap credit enhancements accounted for as derivatives.

⁽⁴⁾  Represents the exposure to credit loss on derivative instruments, which we estimate using the fair value of all outstanding derivative contracts in a gain position. We net derivative gains and losses with the same counterparty where a legal right of offset exists under an enforceable master netting agreement. This table excludes mortgage commitments accounted for as derivatives.

⁽⁵⁾  Represents both cash and non-cash collateral posted by our counterparties to us. Does not include collateral held in excess of exposure. We reduce the value of non-cash collateral in accordance with the counterparty agreements to help ensure recovery of any loss through the disposition of the collateral.