2010   Financial Report of the United States Government

Notes to the Financial Statements

Note 11. Investments in and Liabilities to Government Sponsored Enterprises and Other Financial and Housing Market Stabilization

Fannie Mae and Freddie Mac are stockholder-owned GSEs. Congress established the GSEs to increase the supply of mortgage loans and to reduce the accompanying costs. A key Fannie Mae and Freddie Mac business responsibility is to package purchased mortgages into securities. These securities are subsequently sold to investors. Proceeds from sales are used to buy additional mortgages and keep money flowing through the mortgage markets.

Increasingly difficult conditions in the housing market challenged the soundness and profitability of Fannie Mae and Freddie Mac, thereby undermining the entire housing market. This led Congress to pass the Housing and Economic Recovery Act of 2008 (HERA). This Act created the new Federal Housing Finance Agency (FHFA), with enhanced regulatory authority over the GSEs, and provided the Secretary of the Treasury with certain authorities intended to ensure the financial stability of the GSEs, if necessary.

On September 7, 2008, FHFA placed the GSEs under conservatorship and Treasury entered into a Senior Preferred Stock Purchase Agreement (SPSPA) with each GSE. These actions were taken to preserve the GSEs’ assets, ensure a sound and solvent financial condition, and mitigate systemic risks that contributed to current market instability. The actions taken by Treasury are temporary, and are intended to provide financial stability until Fannie Mae and Freddie Mac can return to normal operations or until the Administration and Congress address how they should be structured going forward. As of September 30, 2010, there are no plans to bring these organizations into the government. The FHFA director may terminate the conservatorship if safe and solvent conditions can be established. Per SFFAC No. 2, Entity and Display, these entities meet the criteria of “bailed out” entities under paragraph 50. Accordingly, the Federal Government has not consolidated them into the financial statements, but included disclosure of the relationship(s) with the entities and any actual or potential material costs or liabilities in the consolidated financial statements.

In November 2008, the Federal Reserve announced it would purchase up to $500 billion in agency MBS and since extended it to $1.25 trillion by the end of the first quarter of 2010. In March 2010, the Federal Reserve completed purchases of $1.25 trillion in agency-guaranteed MBS under the large-scale asset purchase programs (LSAPs), but continued to conduct transactions to facilitate orderly settlement of outstanding purchases. As of August 19, 2010, the settlement of all remaining outstanding MBS from these purchases was completed.

Senior Preferred Stock Purchase Agreements (SPSPA)

Under the SPSPAs, Treasury initially received from each GSE: (1) 1,000,000 shares of non-voting variable liquidation preference senior preferred stock with a liquidation preference value of $1,000 per share and (2) a non-transferable warrant for the purchase at a nominal cost of 79.9 percent of common stock on a fully-diluted basis. The warrants expire on September 7, 2028.

The senior preferred stock accrues dividends at 10.0 percent per year, payable quarterly. This rate shall increase to 12 percent if, in any quarter, the dividends are not paid in cash, until all accrued dividends have been paid. GSE Senior Preferred Stock dividends of $12.1 billion and $4.3 billion were received as of September 30, 2010, and September 30, 2009, respectively, and are included in earned revenue on the Statement of Net Cost. In addition, beginning on March 31, 2011, the GSEs are scheduled to begin paying Treasury a periodic commitment fee on a quarterly basis. This fee will be initially set by December 31, 2010, based on mutual agreement between Treasury and each GSE in consultation with the Chairman of the Federal Reserve Board. The fee shall be established for 5-year periods, and may be waived by Treasury for one year at a time if warranted by adverse mortgage market conditions. It may be paid in cash or may be added to the liquidation preference.

These initial agreements, which have no expiration date, provide that Treasury will disburse funds to the GSEs if at the end of any quarter the FHFA determines that the liabilities of either GSE exceed its assets. The maximum amount available to each GSE under this agreement was $100 billion and was increased to $200 billion in May 2009. In December 2009, the Department amended the SPSPAs to replace the $200 billion per GSE funding commitment cap with a formulaic cap for the next 3 years that will adjust upwards quarterly by the cumulative amount of any losses realized by either GSE and downward by the cumulative amount of any gains, but not below $200 billion per GSE, and will become fixed at the end of the 3 years, December 31, 2012. At the conclusion of the 3 year period, the remaining commitment will then be fixed and available to be drawn per the terms of the agreements (referred to hereafter as the “Adjusted Caps”).

Actual payments to the GSEs through September 30, 2010, totaled $148.2 billion, of which $52.6 billion and $95.6 billion were paid in fiscal years 2010 and 2009, respectively. Additionally, estimated liabilities of $359.9 billion and $91.9 billion have been recorded as of September 30, 2010, and 2009, respectively. The $359.9 billion liability as of September 30, 2010, represents the total estimated future payments for the life of the agreement under the Adjusted Caps using a “baseline” scenario, the lower end of an estimated range. The “baseline” scenario estimated the ultimate payments to be made to the GSEs under the SPSPAs totaled $508.1 billion. This amount consists of the $148.2 billion of payments made through September 30, 2010, and the $359.9 billion liability as of that date. An “extreme case” scenario estimate of $610 billion in ultimate payments is the upper end of the range, or $101.9 billion more than the “baseline” scenario. SFFAS No. 5 provides that when a probable contingent liability is a range of amounts and no amount within the range is a better estimate than any other amount, the estimated contingent liability should be based on the minimum value in the range.

OMB issued guidance to Treasury on October 7, 2009, allowing the use of fair value accounting for non-Federal securities beginning with reporting for fiscal year 2009. As a result, the GSE investments are reported at fair value at September 30, 2010, and 2009. Annual valuations are performed, as of September 30, of the preferred stock and warrants. In accordance with SFFAS No. 7, the annual valuation is classified as usual and recurring and thus recorded as an expense or revenue to the financial statements

Changing Regulatory Environment

On July 9, 2010, FHFA published, in the Federal Register, a proposed rule to clarify certain terms of conservatorship and receivership operations for the GSEs. The key issues addressed in the proposed rule are the status and priority of claims and the relationships among various classes of creditors and equity-holders under conservatorships or receiverships.

The GSE MBS purchase authority expired December 31, 2009. Additionally, on July 21, 2010, the President signed the Dodd-Frank Wall Street Reform and Consumer Protection Act, or the Dodd-Frank Act, into law. Dodd-Frank Act may result in the GSEs being subjected to new and additional regulatory oversight and standards, which would lead to increased restrictions on their day-to-day business and operations. Also, it contains a provision requiring the Secretary of the Treasury to conduct a study and develop recommendations regarding the options for ending the conservatorship. The Secretary’s report and recommendations are required to be submitted to Congress by January 31, 2011.

As of September 30, 2010, and September 30, 2009, GSE investments consisted of the following:

Investments in GSE as of September 30, 2010
(In billions of dollars)
Liquidation Preference Value At Beginning of Year
Current Year Increase in Liquidation Preference Value
Gross Investment as of 9/30/10
Cumulative Valuation Gain/(Loss)
9/30/10 Fair Value
Fannie Mae Senior Preferred Stock 45.8 40.1 85.9 (29.4) 56.5
Freddie Mac Senior Preferred Stock 51.5 12.4 63.9 (12.7) 51.2
Fannie Mae Warrants Common Stock 3.1 - 3.1 (2.1) 1.0
Freddie Mac Warrants Common Stock 2.3 - 2.3 (1.8) 0.5
  Total GSE
  Investment
102.7 52.5 155.2 (46.0) 109.2


Investments in GSE as of September 30, 2009
(In billions of dollars)
Liquidation Preference Value At Beginning of Year
Current Year Increase in Liquidation Preference Value
Gross Investment as of 9/30/09
Cumulative Valuation Gain/(Loss)
9/30/09 Fair Value
Fannie Mae Senior Preferred Stock 0.8 44.9 45.7 (20.6) 25.1
Freddie Mac Senior Preferred Stock 0.8 50.7 51.5 (23.2) 28.3
Fannie Mae Warrants Common Stock 3.1 - 3.1 3.6 6.7
Freddie Mac Warrants Common Stock 2.3 - 2.3 2.3 4.6
  Total GSE
  Investment
7.0 95.6 102.6 (37.9) 64.7

GSE Mortgage-Backed Securities Purchase Program

Under this program, Treasury, via asset managers, purchased GSE MBS in the open market. The asset managers were also authorized to enter into other trade/sell transactions such as pair-offs, turns, assignments, and dollar rolls. By purchasing these credit-guaranteed securities, the Treasury sought to broaden access to mortgage funding for current and prospective homeowners and to promote stability in the mortgage market. MBSs are accounted for under the Federal Credit Reform Act and are included in Note 4—Loans Receivable, Mortgage Backed Securities, and Loan Guarantee Liabilities, Net.

Temporary Guarantee Program for Money Market Funds

In September 2008, the Treasury Department established a Temporary Guarantee Program (Program) for Money Market Funds. Under this program, Treasury guaranteed to investors that they would receive the stable share price (SSP) for shares held in participating money market funds up to the number of shares held as of the close of business on September 19, 2008. To participate in the program, eligible money market funds had to submit an application and pay a premium of 1 basis point if the fund’s net asset value (NAV) is greater than or equal to 99.75 percent of the SSP, or 1.5 basis points of the SSP if the fund’s NAV is less than 99.75 percent of the SSP but greater than or equal to 99.50 percent of the SSP.

Under this program, any outlays would have been paid out initially from the ESF, and then from funds available under the EESA. Under Section 131 of the Act such outlays would be reimbursed from funds available under TARP.

The temporary guarantee program was extended and continued to provide coverage through September 19, 2009, to shareholders up to amounts that they held in participating money market funds as of the close of business on September 19, 2008. As of September 30, 2009, the program had expired and Treasury did not receive any claims for payment. As of September 30, 2009, Treasury had collected a total of approximately $1.2 billion in program participation payments that are recorded as earned revenue in the Statement of Net Cost. All participant payments are invested into Government securities.


Last Updated:  December 07, 2011