Freddie Mac 2004 Annual Report Download - page 61

guarantee asset. As depicted in ""Table 20 Ì Attribution of Gains (Losses) on Guarantee Asset for
Participation CertiÑcates, at Fair Value,'' cash Öows received on the guarantee asset are allocated between
interest income (imputed income on the asset based on the discount rate used in the calculation of the fair
value of the guarantee asset) and return of investment (the portion of actual cash Öows that represents a
reduction of the guarantee asset receivable). The realization of cash Öows results in a corresponding reduction
in the valuation of the guarantee asset.
The change in the fair value of future expected cash Öows is the second component of the change in the
guarantee asset value. The value of expected cash Öows is driven by changes in the expected interest rates and
related discount rates that aÅect the estimated life of the mortgages underlying the Outstanding PCs and
Structured Securities and other economic factors that inÖuence the amount and timing of the future cash
Öows. Changes in the estimated lives of the underlying mortgages aÅect the value of the guarantee asset
because our right to receive guarantee fees ceases when borrowers prepay the underlying mortgages.
The portion of the gains and losses on the guarantee asset attributable to these two factors is shown in
""Table 20 Ì Attribution of Gains (Losses) on Guarantee Asset for Participation CertiÑcates, at Fair Value,''
below. See ""Table 36 Ì Changes in Guarantee Asset for Participation CertiÑcates, at Fair Value'' in
""CONSOLIDATED BALANCE SHEETS ANALYSIS Ì Guarantee Asset for Participation CertiÑcates''
for additional information about the guarantee asset.
Table 20 Ì Attribution of Gains (Losses) on Guarantee Asset for Participation CertiÑcates, at Fair Value
Year Ended December 31,
2004 2003 2002
(dollars in millions)
Total cash Öows received(1) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $(1,086) $ (891) $ (820)
Portion of cash Öows received related to imputed interest ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 257 244 259
Return of investment in guarantee asset ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (829) (647) (561)
Change in fair value of future cash ÖowsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (306) (814) (1,615)
Gains (losses) on ""Guarantee asset for Participation CertiÑcates, at fair
value'' ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $(1,135) $(1,461) $(2,176)
(1) Represents guarantee fees received on Outstanding PCs and Structured Securities issued under FAS 140 or FIN 45 for which there
is a guarantee asset established.
Losses on the guarantee asset decreased $326 million, or 22 percent, to ($1,135) million in 2004
compared to ($1,461) million in 2003 and decreased $715 million, or 33 percent, to ($1,461) million in 2003
compared to ($2,176) million in 2002. The decreased losses were primarily due to a smaller overall decline in
mortgage interest rates in 2004 compared to 2003, which tends to aÅect actual and expected prepayments.
This prepayment experience aÅects our estimation of future guarantee fee cash Öows and consequently, the
fair value of the guarantee asset. Return of investment for each year was consistent with the growth of the
outstanding PCs and Structured Securities, as shown in ""Table 8 Ì Freddie Mac's Total Mortgage Portfolio
Based on Unpaid Principal Balances'' in ""OUR RETAINED AND TOTAL MORTGAGE
PORTFOLIOS.''
Freddie Mac
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