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Derivative Instruments
 12 Months Ended
Dec. 31, 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. When deciding whether to use derivatives, we consider a number of factors, such as cost, efficiency, the effect on our liquidity, results of operations, and our overall interest rate risk management strategy. We use derivatives when we believe they will provide greater relative value or more efficient execution of our strategy than debt securities. 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 contracts that fall into the following broad categories:
•
Interest rate swap contracts. An interest rate swap is a transaction between two parties in which each party agrees to exchange payments tied to different interest rates or indices for a specified period of time, generally based on a notional amount of principal. The types of interest rate swaps we use include pay-fixed swaps, receive-fixed swaps and basis swaps.
•
Interest rate option contracts. These contracts primarily include pay-fixed swaptions, receive-fixed swaptions, cancelable swaps and interest rate caps. A swaption is an option contract that allows us or a counterparty to enter into a pay-fixed or receive-fixed swap at some point in the future.
We enter into forward commitments to purchase mortgage loans and to purchase or sell mortgage-related securities that lock in the future delivery of these instruments at a fixed price or yield. Certain commitments to purchase mortgage loans and purchase or sell mortgage-related securities meet the criteria to be accounted for as derivatives. We typically settle the notional amount of our mortgage loan commitments that are accounted for as a derivative.
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 December 31, 2012 and 2011.

 
As of December 31, 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
$
19,450

 
$
270

 
$
239,017

 
$
(18,237
)
 
$
30,950

 
$
102

 
$
155,807

 
$
(17,391
)
Receive-fixed
231,346

 
10,514

 
57,190

 
(200
)
 
170,668

 
8,118

 
59,027

 
(93
)
Basis
23,199

 
151

 
1,700

 
—

 
382

 
122

 
9,240

 
(44
)
Foreign currency
686

 
193

 
509

 
(45
)
 
581

 
155

 
451

 
(62
)
Swaptions:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Pay-fixed
33,050

 
102

 
36,225

 
(184
)
 
48,600

 
165

 
47,750

 
(194
)
Receive-fixed
15,970

 
3,572

 
36,225

 
(2,279
)
 
33,695

 
6,371

 
47,750

 
(3,238
)
Other(1)
7,374

 
26

 
13

 
(1
)
 
8,214

 
52

 
75

 
—

Total gross risk management derivatives
331,075

 
14,828

 
370,879

 
(20,946
)
 
293,090

 
15,085

 
320,100

 
(21,022
)
Accrued interest receivable (payable)
—

 
1,242

 
—

 
(1,508
)
 
—

 
920

 
—

 
(1,238
)
Netting adjustment(2)
—

 
(15,791
)
 
—

 
22,046

 
—

 
(15,829
)
 
—

 
21,898

Total net risk management derivatives
$
331,075

 
$
279

 
$
370,879

 
$
(408
)
 
$
293,090

 
$
176

 
$
320,100

 
$
(362
)
Mortgage commitment derivatives:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Mortgage commitments to purchase whole loans
$
12,360

 
$
27

 
$
5,232

 
$
(8
)
 
$
9,710

 
$
73

 
$
422

 
$
—

Forward contracts to purchase mortgage-related securities
34,545

 
103

 
12,557

 
(23
)
 
32,707

 
309

 
2,570

 
(6
)
Forward contracts to sell mortgage-related securities
18,886

 
26

 
75,477

 
(266
)
 
1,370

 
3

 
54,656

 
(548
)
Total mortgage commitment derivatives
$
65,791

 
$
156

 
$
93,266

 
$
(297
)
 
$
43,787

 
$
385

 
$
57,648

 
$
(554
)
Derivatives at fair value
$
396,866

 
$
435

 
$
464,145

 
$
(705
)
 
$
336,877

 
$
561

 
$
377,748

 
$
(916
)
__________
(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 $6.3 billion and $6.8 billion as of December 31, 2012 and 2011, respectively. No cash collateral was received as of December 31, 2012 and $779 million was received as of December 31, 2011.
A majority of our derivative instruments 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 were to fall below established thresholds in our derivatives agreements, 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 December 31, 2012 was $6.4 billion, for which we posted collateral of $6.3 billion in the normal course of business. Had all of the credit-risk-related contingency features underlying these agreements been triggered, an additional $159 million of collateral 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, 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 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 years ended December 31, 2012, 2011 and 2010.
 
For the Year Ended December 31,
 
2012
 
2011
 
2010
 
(Dollars in millions)
Risk management derivatives:
 
 
 
 
 
Swaps:
 
 
 
 
 
Pay-fixed
$
(6,681
)
 
$
(18,040
)
 
$
(17,573
)
Receive-fixed
4,052

 
7,939

 
14,382

Basis
99

 
86

 
17

Foreign currency
75

 
156

 
157

Swaptions:
 
 
 
 
 
Pay-fixed
132

 
860

 
(2,026
)
Receive-fixed
410

 
2,932

 
3,327

Other(1)
(25
)
 
(72
)
 
(91
)
Total risk management derivatives fair value losses, net
(1,938
)
 
(6,139
)
 
(1,807
)
Mortgage commitment derivatives fair value losses, net
(1,688
)
 
(423
)
 
(1,193
)
Total derivatives fair value losses, net
$
(3,626
)
 
$
(6,562
)
 
$
(3,000
)
__________
(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 derivative contracts. We are exposed to the risk that a counterparty in a derivative transaction will default on payments due to us which may require us to obtain a replacement derivative from a different counterparty at a higher cost or may be unable to find a suitable replacement. We manage our counterparty credit exposure mainly through master netting arrangements which allow us to net derivative assets and liabilities with the same counterparty and by requiring counterparties to post collateral, which includes cash, U.S. Treasury securities, agency debt and agency mortgage-related securities.