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Derivative Instruments
 3 Months Ended
Mar. 31, 2013
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 (“OTC”) 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.
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 March 31, 2013 and December 31, 2012.

As of March 31, 2013
 
As of December 31, 2012

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
$
32,285

 
$
775

 
$
226,697

 
$
(15,712
)
 
$
19,450

 
$
270

 
$
239,017

 
$
(18,237
)
Receive-fixed
199,209

 
8,740

 
110,705

 
(572
)
 
231,346

 
10,514

 
57,190

 
(200
)
Basis
18,699

 
124

 
8,200

 
(1
)
 
23,199

 
151

 
1,700

 
—

Foreign currency
577

 
149

 
539

 
(67
)
 
686

 
193

 
509

 
(45
)
Swaptions:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Pay-fixed
32,550

 
114

 
50,575

 
(300
)
 
33,050

 
102

 
36,225

 
(184
)
Receive-fixed
15,720

 
3,332

 
50,575

 
(2,209
)
 
15,970

 
3,572

 
36,225

 
(2,279
)
Other(1)
6,859

 
36

 
12

 
—

 
7,374

 
26

 
13

 
(1
)
Total gross risk management derivatives
305,899

 
13,270

 
447,303

 
(18,861
)
 
331,075

 
14,828

 
370,879

 
(20,946
)
Accrued interest receivable (payable)
—

 
1,361

 
—

 
(1,494
)
 
—

 
1,242

 
—

 
(1,508
)
Netting adjustment(2)
—

 
(14,334
)
 
—

 
19,911

 
—

 
(15,791
)
 
—

 
22,046

Total net risk management derivatives
$
305,899

 
$
297

 
$
447,303

 
$
(444
)
 
$
331,075

 
$
279

 
$
370,879

 
$
(408
)
Mortgage commitment derivatives:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Mortgage commitments to purchase whole loans
$
8,981

 
$
29

 
$
4,432

 
$
(12
)
 
$
12,360

 
$
27

 
$
5,232

 
$
(8
)
Forward contracts to purchase mortgage-related securities
38,738

 
154

 
9,761

 
(24
)
 
34,545

 
103

 
12,557

 
(23
)
Forward contracts to sell mortgage-related securities
15,553

 
39

 
72,213

 
(300
)
 
18,886

 
26

 
75,477

 
(266
)
Total mortgage commitment derivatives
$
63,272

 
$
222

 
$
86,406

 
$
(336
)
 
$
65,791

 
$
156

 
$
93,266

 
$
(297
)
Derivatives at fair value
$
369,171

 
$
519

 
$
533,709

 
$
(780
)
 
$
396,866

 
$
435

 
$
464,145

 
$
(705
)
__________
(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 $5.6 billion and $6.3 billion as of March 31, 2013 and December 31, 2012, respectively. No cash collateral was received as of March 31, 2013 and December 31, 2012.
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 March 31, 2013 was $5.7 billion, for which we posted collateral of $5.6 billion in the normal course of business. Had all of the credit-risk-related contingency features underlying these agreements been triggered, an additional $145 million would have been required to be posted as collateral or immediately settle our positions based on the individual agreements and our fair value position as of March 31, 2013.
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 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.
We record all derivative gains and losses, including accrued interest, in “Fair value gains, net” in our condensed consolidated statements of operations and comprehensive income. The following table displays, by type of derivative instrument, the fair value gains and losses, net on our derivatives for the three months ended March 31, 2013 and 2012.
 
For the
 
Three Months
 
Ended March 31,
 
2013
 
2012
 
(Dollars in millions)
Risk management derivatives:
 
 
 
Swaps:
 
 
 
Pay-fixed
$
1,392

 
$
1,175

Receive-fixed
(928
)
 
(918
)
Basis
(17
)
 
38

Foreign currency
(66
)
 
1

Swaptions:
 
 
 
Pay-fixed
17

 
(22
)
Receive-fixed
21

 
(94
)
Other(1)
12

 
(1
)
Total risk management derivatives fair value gains, net
431

 
179

Mortgage commitment derivatives fair value gains (losses), net
131

 
(205
)
Total derivatives fair value gains (losses), net
$
562

 
$
(26
)
__________
(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 seek a replacement derivative from a different counterparty at a higher cost, or we 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.
See “Note 15, Netting Arrangements” for information on our rights to offset assets and liabilities as of March 31, 2013 and December 31, 2012.