Freddie Mac 2004 Annual Report Download - page 159

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Freddie Mac (the ""company'') is a stockholder-owned, government-sponsored enterprise (""GSE'')
established by Congress in 1970 to provide a continuous Öow of funds for residential mortgages. Freddie Mac's
obligations are the company's alone and not insured or guaranteed by the United States of America (""U.S.'')
or any other agency or instrumentality of the U.S.
Freddie Mac plays a fundamental role in the American housing Ñnance system, linking the domestic
mortgage market and the global capital markets. Freddie Mac's participation in the secondary mortgage
market includes providing its credit guarantee for residential mortgages originated by mortgage lenders and
investing in mortgage loans and mortgage-related securities held in Freddie Mac's Retained portfolio.
Through its credit guarantee activities, Freddie Mac securitizes mortgage loans by issuing Mortgage
Participation CertiÑcates (""PCs'') to third-party investors. Freddie Mac also resecuritizes mortgage-related
securities that are issued by Freddie Mac or the Government National Mortgage Association (""Ginnie
Mae''), as well as non-agency entities. Securities issued through Freddie Mac's resecuritization activities are
referred to as Structured Securities. Freddie Mac also guarantees multifamily mortgage loans that support
housing revenue bonds issued by third parties and it guarantees other mortgage loans held by third parties,
which are included in the deÑnition of PCs and Structured Securities. In each case, under U.S. generally
accepted accounting principles (""GAAP''), securitized mortgage-related assets that back PCs and Structured
Securities that are held by third parties are not reÖected as assets of Freddie Mac. However, Freddie Mac does
retain an obligation to guarantee the payment of principal and interest on issued PCs and Structured
Securities, which usually results in the recognition of a guarantee asset and guarantee obligation on the
company's consolidated balance sheets.
Freddie Mac's Ñnancial reporting and accounting policies conform to GAAP. Certain amounts in prior
periods have been reclassiÑed to conform with the current presentation.
Estimates
The preparation of Ñnancial statements in conformity with GAAP requires management to make
estimates and assumptions that aÅect (a) the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the Ñnancial statements and (b) the reported amounts of
revenues and expenses during the reporting period. Actual results could diÅer from those estimates. The use of
certain estimates in preparation of the Ñnancial statements is described below.
A signiÑcant estimate that is prevalent in the company's Ñnancial statements is the estimation of fair
value for Ñnancial instruments, including derivative instruments, required to be recorded at fair value under
GAAP. The measurement of fair value is fundamental to the presentation of Freddie Mac's Ñnancial condition
and results of operations and, in many instances, requires management to make complex judgments. In
general, Freddie Mac records Ñnancial instruments at an estimate of the amount at which the instrument
could be exchanged in a current transaction between willing parties, other than in a forced or liquidation sale.
Fair value is generally based on (i) quoted prices, (ii) market parameters obtained from third-party dealers,
pricing services or based on direct market observations in active markets or (iii) derived from such prices or
parameters, where available. If quoted prices or market parameters are not available, fair value is based on
internal valuation models using market data inputs or internally developed assumptions, where appropriate.
The use of diÅerent pricing models and assumptions could produce materially diÅerent estimates of fair value.
See ""NOTE 16: FAIR VALUE DISCLOSURES'' for further discussion of fair value estimates.
Freddie Mac also makes other signiÑcant estimates and judgments in:
‚ determining the expected future cash Öows (including the timing and amounts of prepayments) of
mortgage-related assets in the Retained portfolio;
‚ assessing when securities are other-than-temporarily impaired;
‚ assessing the reserves for credit losses on mortgage loans and guarantee losses on PCs;
‚ assessing Freddie Mac's legal and tax contingencies;
Freddie Mac
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