Freddie Mac 2004 Annual Report Download - page 185

NOTE 3: VARIABLE INTEREST ENTITIES
The company is a party to numerous entities that are considered to be variable interest entities (""VIEs'')
under FIN 46-R. These VIEs include low-income housing tax credit partnerships, West*Mac, certain asset-
backed investment trusts, certain Structured Securities transactions and a mortgage reinsurance company. In
addition, Freddie Mac buys the highly-rated senior securities in certain mortgage securitization trusts that are
VIEs. Highly-rated senior securities issued by these securitization trusts are not designed to absorb a
signiÑcant portion of the variability created by the assets/collateral in the trusts. Freddie Mac's investments in
these securities do not represent a signiÑcant variable interest in the securitization trusts. Further, Freddie
Mac invests in securitization entities that are qualifying special purpose entities (""QSPEs'') as described in
SFAS 125/140. Interests in these QSPEs are exempt from FIN 46-R because of the company's inability to
unilaterally liquidate or change the QSPE. See ""NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNT-
ING POLICIES'' for further information regarding FIN 46-R.
Low-Income Housing Tax Credit Partnerships
Freddie Mac invests as a limited partner in low-income housing tax credit partnerships formed for the
purpose of providing funding for aÅordable multifamily rental properties. These low-income housing tax credit
partnerships invest directly in limited partnerships that develop or rehabilitate multifamily rental properties.
Completed properties are rented to qualiÑed low-income tenants, allowing the properties to be eligible for
federal tax credits. A general partner operates the partnership, identifying investments and obtaining debt
Ñnancing as needed to Ñnance partnership activities. Although these partnerships generate operating losses,
Freddie Mac realizes a return on its investment through reductions in income tax expense that result from tax
credits and the deductibility of the operating losses. The partnership agreements are typically structured to
meet a required 15-year period of occupancy by qualiÑed low-income tenants. These investments were made
between 1989 and 2004. At December 31, 2004, Freddie Mac did not guarantee any obligations of these
partnerships and Freddie Mac's exposure is limited to the amount of its investments.
West*Mac
Freddie Mac is one of two general partners in West*Mac, which was formed in 1986. The purpose of
West*Mac is to acquire, develop and manage certain real property located in McLean, Virginia. This real
property is Freddie Mac's corporate headquarters.
Asset-Backed Investment Trusts
Freddie Mac invests in a variety of non-mortgage-related, asset-backed investment trusts. These
investments represent interests in trusts consisting of a pool of receivables or other Ñnancial assets, typically
credit card receivables, auto loans or student loans. The trusts act as vehicles to allow originators to securitize
assets. The originators of the Ñnancial assets or the underwriters of the deal create the trusts and typically own
the residual interest in the trust assets.
Securities are structured from the underlying pool of assets to provide for varying degrees of risk. Primary
risks include potential loss from the credit risk and interest rate risk of the underlying pool. Freddie Mac
invests in these securities to manage its cash Öows, create a diverse source of liquidity and achieve proÑtable
investment returns. These investments were made between 2000 and 2004.
Structured Securities Ì T-Series Transactions
In T-Series transactions (or alternative collateral deals), a seller or sellers of mortgage loans transfers
mortgage loans to a trust speciÑcally for the purpose of issuing securities collateralized by the mortgage loans.
These T-Series transactions issue various senior and subordinated interests. Freddie Mac guarantees and
purchases certain of the senior interests. Simultaneous with this guarantee and purchase, Freddie Mac issues
and guarantees Structured Securities. These Structured Securities represent an interest in the senior interests
of the T-series transactions. The subordinated interests are generally either held by the seller or other party or
sold in the capital markets.
Freddie Mac
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