Freddie Mac 2004 Annual Report Download - page 72

value of these securities to remain more stable, (b) the carrying value of our mortgage-related interest-only
securities was reduced by impairments taken in prior years and (c) the balance subject to impairment
declined because we purchased fewer of these securities during 2004 compared to prior years. During the Ñrst
half of 2003, interest rates continued to decline from 2002 levels resulting in an increase in prepayments and,
in turn, a higher level of impairment losses than in the prior year. In 2003, interest rates decreased sharply
during the Ñrst and second quarters; as a result, the large majority of the 2003 mortgage-related interest-only
securities impairment losses were recognized in those quarters. As interest rates began to rise in the third and
fourth quarters of 2003, impairment losses recognized were greatly reduced. The large mortgage-related
interest-only security impairment losses during 2002 relate to the decline in interest rates.
Impairments recorded on non-interest-only securities totaled ($60) million, ($212) million and ($82)
million in 2004, 2003 and 2002, respectively, including impairments on manufactured housing securities
totaling ($44) million, ($208) million and ($67) million during the same periods as a result of the
comparatively low credit quality of these securities. See ""CONSOLIDATED BALANCE SHEETS
ANALYSIS Ì Cash and Investments'' for more information about our non-agency, mortgage-related
securities at December 31, 2004 and 2003. Also see ""NOTE 1: SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES'' to our consolidated Ñnancial statements.
Lower-of-Cost-or-Market Valuation Adjustments were ($2) million, ($179) million and $8 million in
2004, 2003 and 2002, respectively. We record mortgage loans classiÑed as held-for-sale at the lower-of-
amortized-cost or market valuation with changes in the valuation of our held-for-sale portfolio recorded to this
caption. Losses related to the lower of amortized cost or market value adjustments were insigniÑcant during
2004 and 2002. The sharp decline in mortgage interest rates in the second quarter of 2003 resulted in an
increase in mortgage loans purchased as the market experienced heavy reÑnancing activity. A sharp increase
in mortgage interest rates during the third quarter of 2003 reduced the value of our held-for-sale mortgage
loan portfolio, resulting in lower of amortized cost or market valuation adjustments that totaled ($178)
million.
Gains (Losses) on Debt Retirement
We record gains and losses on debt repurchases that are accounted for as extinguishments of debt based
on the diÅerence between the principal amount of the debt securities repurchased (adjusted for deferred
premiums, discounts, and hedging gains and losses) and current market prices, and the write-oÅ of related
deferred debt issuance costs.
We incurred pre-tax losses of ($327) million, ($1,775) million and ($674) million on the repurchase of
approximately $14.5 billion, $27.3 billion and $20.3 billion in principal amount of debt outstanding in 2004,
2003 and 2002, respectively. The most signiÑcant debt repurchases occurred in the second quarter of 2003,
resulting in pre-tax losses of ($1,266) million, when we repurchased an aggregate of $17.1 billion of U.S.
dollar and Euro-denominated debt securities, most of which followed the announcement of changes in our
senior management. We executed these particular repurchases to support the liquidity and price performance
of these securities. The gains (losses) on debt extinguishments include amounts previously deferred under
SFAS 133 hedge accounting related to the repurchased debt securities.
Resecuritization Fees
Resecuritization fees are revenues we earn primarily in connection with the issuance of Structured
Securities for which we make a REMIC election, where the underlying collateral is provided by third parties.
These fees are also generated in connection with the creation of interest-only and principal-only strips as well
as other Structured Securities.
Resecuritization fees totaled $159 million, $352 million and $276 million in 2004, 2003 and 2002,
respectively. A steep yield curve generally increases the value of structured cash Öows, which results in greater
value diÅerences between PCs and Structured Securities as well as a corresponding increase in the volume of
new Structured Securities being issued. As the yield curve Öattened during 2004 and investor demand for
Structured Securities decreased, we experienced a 28 percent decline in the volume of Structured Securitiza-
tion activities based on unpaid principal balances compared to 2003. In addition, we decreased our average
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