Freddie Mac 2005 Annual Report Download - page 125

No. 46(R),'' or FSP FIN 46(R)-6. FSP FIN 46(R)-6 addresses how a reporting enterprise should determine the
variability to be considered in applying FASB Interpretation No. 46 (revised December 2003) ""Consolidation of Variable
Interest Entities,'' or FIN 46(R). It requires the variability to be considered to be based on the design of the entity. This
statement is eÅective for us beginning July 1, 2006. We do not expect the adoption of FSP FIN 46(R)-6 to be material to
our Ñnancial condition or results of operations.
NOTE 2: TRANSFERS OF SECURITIZED INTERESTS IN MORTGAGE-RELATED ASSETS
Securitization Transactions Executed By Us
As discussed in ""NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES,'' we issue two types of
mortgage-related securities: PCs and Structured Securities.
Table 2.1 below presents the unpaid principal balances of issued PCs and Structured Securities as of December 31, 2005
and 2004.
Table 2.1 Ì Guaranteed PCs and Structured Securities Issued Based on Unpaid Principal Balances(1)(2)
December 31,
2005 2004
(in millions)
Guaranteed PCs and Structured Securities Issued:
Held by third parties ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 974,200 $ 852,270
Held in the Retained portfolio ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 361,324 356,698
Total Guaranteed PCs and Structured Securities issued(3)(4)ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $1,335,524 $1,208,968
(1) Excludes mortgage loans and mortgage-related securities traded, but not yet settled.
(2) Due to timing diÅerences in our receipt of principal and interest payments from mortgage servicers and subsequent pass-through of payments to PC
investors, the unpaid principal balances of the underlying mortgage loans do not equal the unpaid principal balances of issued PCs and Structured
Securities. See ""NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Ì Due to Participation CertiÑcate Investors'' for more
information.
(3) As further discussed in ""NOTE 4: FINANCIAL GUARANTEES,'' we guarantee certain mortgage-related securities issued by third parties.
(4) Guaranteed PCs and Structured Securities exclude $961,776 million and $723,429 million at December 31, 2005 and 2004, respectively, of Structured
Securities backed by resecuritized PCs and other previously issued Structured Securities. These excluded Structured Securities do not increase our
credit-related exposure and consist of single-class and multiclass Structured Securities backed by PCs, REMICs and principal-only strips. The
notional balance of interest-only strips of $132,883 million and $105,703 million at December 31, 2005 and 2004, respectively, is excluded because this
table is based on unpaid principal balances. Also excluded are modiÑable and combinable REMIC tranches and interest and principal classes where
the holder has the option to exchange the security tranches for other pre-deÑned security tranches. These tranches and classes collectively totaled
$1,495,501 million and $1,097,336 million at December 31, 2005 and 2004, respectively.
At December 31, 2005 and 2004, approximately 92 percent and 87 percent, respectively, of issued PCs and Structured
Securities (excluding securities we issued that are backed by Ginnie Mae CertiÑcates or non-agency mortgage-related
securities and other securities issued by third-parties that we guaranteed) had a corresponding Guarantee asset, Guarantee
obligation or PC residual recognized on our consolidated balance sheets. The percentage of these PCs and Structured
Securities that had a corresponding Guarantee asset, Guarantee obligation or PC residual due to the adoption of FIN 45
accounting on January 1, 2003 was 50 percent and 40 percent, at December 31, 2005 and 2004, respectively. At
December 31, 2005 and 2004, 93 percent and 89 percent, respectively, of PCs and Structured Securities held by third parties
had a related Guarantee asset and Guarantee obligation established.
Gains and Losses on Transfers of PCs and Structured Securities that are Accounted for as Sales
We recognized net pre-tax gains of approximately $364 million, $356 million and $711 million for the years ended
December 31, 2005, 2004 and 2003, respectively, on transfers of PCs and Structured Securities that were accounted for as
sales under SFAS 125/140.
In connection with the derivation of such gains (losses) upon sale prior to October 1, 2005, we had consistently applied
a methodology for determining the order in which to record extinguishments of unamortized deferred guarantee income,
buy-down fees and credit fees as adjustments to the carrying value of the repurchased securities. Beginning October 1, 2005,
we changed our method for determining gains (losses) upon the re-sale of PCs and Structured Securities related to
unamortized deferred guarantee income, buy-down fees and credit fees. Our methodology is now to apply a speciÑc
identiÑcation method of associating the extinguished deferred guarantee income, buy-down fees and credit fees to the
speciÑc portions of purchased PCs and Structured Securities and to relieve those carrying value adjustments through the
gains (losses) when the speciÑc portion of the PC or Structured Security is re-sold. This change in accounting principle was
facilitated by system changes that now allow us to apply and track the extinguished carrying value adjustments to the
speciÑc portions of the purchased PCs and Structured Securities.
109 Freddie Mac