Freddie Mac 2004 Annual Report Download - page 62

""Table 21 Ì Quarterly and Full Year Gains (Losses) on Guarantee Asset for Participation CertiÑcates,
at Fair Value'' summarizes the 2004 and 2003 quarterly and full year gains and losses on the guarantee asset.
Table 21 Ì Quarterly and Full Year Gains (Losses) on Guarantee Asset for Participation CertiÑcates, at
Fair Value
Full Year
1Q 2004 2Q 2004 3Q 2004 4Q 2004 2004
(dollars in millions)
Return of investment in guarantee asset ÏÏÏÏÏÏÏÏÏÏÏÏÏ $ (199) $ (200) $ (207) $ (223) $ (829)
Changes in fair value of future cash Öows ÏÏÏÏÏÏÏÏÏÏÏÏ (444) 771 (639) 6 (306)
Gains (losses) on ""Guarantee asset for Participation
CertiÑcates at fair value'' ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ (643) $ 571 $ (846) $ (217) $(1,135)
Guarantee asset for Participation CertiÑcates, at fair
value, at period end ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $3,583 $4,724 $4,184 $4,516 $ 4,516
Full Year
1Q 2003 2Q 2003 3Q 2003 4Q 2003 2003
(dollars in millions)
Return of investment in guarantee assetÏÏÏÏÏÏÏÏÏÏÏÏÏ $ (153) $ (154) $ (160) $ (180) $ (647)
Changes in fair value of future cash Öows ÏÏÏÏÏÏÏÏÏÏÏ (415) (938) 418 121 (814)
Gains (losses) on ""Guarantee asset for Participation
CertiÑcates, at fair value'' ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ (568) $(1,092) $ 258 $ (59) $(1,461)
Guarantee asset for Participation CertiÑcates, at fair
value, at period endÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $2,424 $ 2,076 $3,030 $3,686 $ 3,686
For all periods presented, quarterly Öuctuations in gains (losses) on the guarantee asset were driven by
changes in interest rates that aÅected the expected lives of the mortgages underlying Outstanding PCs and
Structured Securities, our expectations of prepayments and corresponding discount rates and the return of
investment.
We experienced declines in the fair value of our guarantee asset during the Ñrst and third quarters of 2004
because the decline in 30-year mortgage interest rates increased our expectation of prepayments and reduced
the value of our guarantee asset. Conversely, increases in 30-year mortgage interest rates during the second
quarter of 2004 slowed the pace of expected prepayments and increased the fair value of the guarantee asset.
Interest rates for 30-year mortgages were relatively Öat during the fourth quarter of 2004. In the fourth
quarter, the fair value of our guarantee asset declined as we collected Management and guarantee income
related to our guarantee asset, as described above.
Through the Ñrst two quarters of 2003, our average single-family portfolio mortgage coupon rate was
signiÑcantly higher than prevailing 30-year mortgage rates, which increased our expectation of prepayments
and reduced the fair value of our guarantee asset. In the third quarter of 2003, mortgage interest rates
increased, which slowed the pace of liquidations and increased the fair value of the guarantee asset. The fourth
quarter of 2003 was primarily driven by the return of investment, as described above. Rates on 30-year
mortgages dropped slightly during the fourth quarter of 2003, which also contributed to the decline in the fair
value of the guarantee asset.
Income on Guarantee Obligation
With the adoption of FIN 45 on January 1, 2003, we changed the way we account for Income on
""Guarantee obligation for Participation CertiÑcates.'' Beginning in 2003, we began recording guarantee
obligations for PCs issued through our Guarantor Program and for certain Structured Securities that we issue
to third parties in exchange for non-agency mortgage-backed securities, as well as for that portion of PCs
issued through MultiLender Program transactions that are not accounted for as sales under SFAS 125/140.
Previously, we recorded a guarantee obligation only upon the transfer of PCs or Structured Securities that
qualiÑed for sale accounting pursuant to SFAS 125/140. (We continue to record guarantee obligations for
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