Freddie Mac 2005 Annual Report Download - page 117

the available-for-sale classiÑcation from the trading classiÑcation related to resecuritization transactions during 2005, 2004
and 2003, respectively.
Transfers of PCs and Structured Securities that Qualify as Sales
Upon completion of a transfer of a Ñnancial asset that qualiÑes as a sale under SFAS No. 140, ""Accounting for
Transfers and Servicing of Financial Assets and Extinguishments of Liabilities'' (""SFAS 140''), we de-recognize all assets
sold and recognize all assets obtained and liabilities incurred. In this regard, we recognize the fair value of our obligation to
guarantee the payment of principal and interest of PCs and Structured Securities transferred in sale transactions. The
portion of such obligation that relates to our non-contingent obligation to stand ready to perform under our guarantee is
recognized as a Guarantee obligation, while the portion of the obligation that relates to estimated incurred losses on
securitized assets is recognized for consolidated balance sheet purposes as Reserve for guarantee losses on Participation
CertiÑcates. The resulting gain (loss) on sale of transferred PCs and Structured Securities is reÖected in our consolidated
statements of income as a component of Gains (losses) on investment activity.
In recording a sales transaction, we also continue to carry on our consolidated balance sheets any retained interests in
securitized Ñnancial assets. Such retained interests include our right to receive management and guarantee fees on PCs or
Structured Securities, which is classiÑed on our consolidated balance sheets as a Guarantee asset. The carrying amount of
all such retained interests is determined by allocating the previous carrying amount of the transferred assets between assets
sold and the retained interests based upon their relative fair values at the date of transfer. Other retained interests include
PCs or Structured Securities that are not transferred to third parties upon the completion of a securitization or
resecuritization transaction.
Swap-Based Issuances of PCs and Structured Securities
In addition to issuing PCs and Structured Securities through cash-based sales transactions, we issue such securities
through various swap-based exchanges. In the case of PC-based swaps, we issue such securities to third parties through
Guarantor and MultiLender Swap transactions. Guarantor Swaps represent transactions in which Ñnancial institutions
transfer mortgage loans to us in exchange for PCs we issue that are backed by such mortgage loans. MultiLender Swaps are
similar to Guarantor Swaps, except that formed pools include loans that are contributed by more than one other party or by
us. In Guarantor and MultiLender Swaps, as in sales transactions, in return for providing our guarantee, we earn a
guarantee fee that is paid to us over the life of an issued PC. It is also common for buy-up or buy-down payments to be
exchanged between our counterparties and us upon the issuance of a PC. Buy-Ups are upfront payments made by us that
increase the guarantee fee we will receive over the life of the PC. Buy-Downs are upfront payments that are made to us that
decrease (i.e., partially prepay) the guarantee fee we will receive over the life of the PC. We also may receive upfront,
cash-based payments as additional compensation for our guarantee of mortgage loans, referred to as Credit Fees, and as
additional consideration received on such exchanges, we may receive various types of seller-provided credit enhancements
related to the underlying mortgage loans. We also issue and transfer Structured Securities to third parties in exchange for
PCs and non-Freddie Mac mortgage-related securities.
We recognize the fair value of our contractual right to receive guarantee fees as a Guarantee asset at the inception of an
executed guarantee. Additionally, we recognize a Guarantee obligation at the greater of (a) fair value or (b) the contingent
liability amount required by SFAS No. 5, ""Accounting For Contingencies,'' or SFAS 5, to be recognized at inception of an
executed guarantee. Similar to transfers of PCs and Structured Securities that qualify as sales, that portion of our estimated
guarantee liability that relates to our non-contingent obligation to stand ready to perform under a PC guarantee is
recognized as Guarantee obligation, while that portion of such estimated guarantee liability that relates to our contingent
obligation to make payments under our guarantee is recognized for consolidated balance sheet purposes as Reserve for
guarantee losses on Participation CertiÑcates. Further, credit enhancements received in connection with Guarantor Swaps
and other similar exchange transactions of PCs are measured at fair value and recognized as follows: (a) pool insurance is
recognized as an Other asset; (b) recourse and/or indemniÑcations that are provided by counterparties to Guarantor Swap
transactions are recognized as Other assets; and (c) primary mortgage insurance is recognized at inception as a component
of the recognized Guarantee obligation.
Because Guarantee asset, Guarantee obligation and credit enhancement-related assets that are recognized at the
inception of an executed Guarantor Swap are valued independently of each other, net diÅerences between such recognized
assets and liabilities may exist at inception. Net positive diÅerences between such amounts are deferred on our consolidated
balance sheet as a component of Guarantee obligation and are hereinafter referred to as ""Deferred Guarantee Income''.
Net negative diÅerences between Guarantee asset, Guarantee obligation and credit enhancement-related assets that are
recognized at the inception of executed Ñnancial guarantees are expensed immediately to earnings as a component of Non-
interest expense Ì Other expenses. Additionally, cash payments that are made or received in connection with Buy-Ups
101 Freddie Mac