Freddie Mac 2005 Annual Report Download - page 128

Valuation of Other Retained Interests
Other retained interests include securities that were issued by us as part of a resecuritization transaction for which sale
accounting was applied. The majority of these securities is classiÑed as available-for-sale. The fair value of Other retained
interests is generally based on independent price quotations obtained from third-party pricing services or dealer marks.
In order to report the hypothetical sensitivity of the carrying value of Other retained interests, we used internal models
calibrated to the fair values. The sensitivity analysis in Table 2.4 illustrates hypothetical adverse changes in the fair value of
Other retained interests for changes in key assumptions based on these models.
Table 2.4 Ì Sensitivity Analysis of Other Retained Interests
December 31, 2005
(dollars in millions)
Fair valueÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $124,939
Weighted average IRR assumptions: ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 5.4%
Impact on fair value of 100 bps upward change ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ (4,470)
Impact on fair value of 200 bps upward change ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ (8,656)
Weighted average prepayment rate assumptions: ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 11.3%
Impact on fair value of 10% upward change ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ (85)
Impact on fair value of 20% upward change ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ (164)
Cash Flows on Transfers of Securitized Interests and Corresponding Retained Interests
Table 2.5 below summarizes cash Öows on retained interests.
Table 2.5 Ì Details of Cash Flows
Year Ended December 31,
2005 2004 2003
(in millions)
Cash Öows from:
Transfers of Freddie Mac securities that were accounted for as sales ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $86,326 $152,662 $347,874
Cash Öows received on the Guarantee asset(1) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 1,270 $ 1,086 $ 891
Other Retained Interests principal and interest(2)ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $25,611 $ 28,439 $ 35,975
Purchases of delinquent or foreclosed loans(3)ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $(4,373) $ (4,931) $ (5,822)
(1) Represents contractual guarantee-related cash Öows received by us in connection with the recognized Guarantee asset.
(2) Excludes cash Öows related to retained interests held in the portfolio of our Securities Sales and Trading Group, or SS&TG, business unit which ceased
operations in the fourth quarter of 2004. Such cash Öows were not material.
(3) Represents delinquent mortgage loans purchased out of securitized pools that back issued PCs or Structured Securities.
NOTE 3: VARIABLE INTEREST ENTITIES
We are a party to numerous entities that are considered to be variable interest entities, or VIEs. These VIEs include
low-income housing tax credit partnerships, certain Structured Securities transactions and a mortgage reinsurance company.
In addition, we buy the highly-rated senior securities in certain mortgage securitization trusts that are VIEs. Highly-rated
senior securities issued by these securitization trusts are not designed to absorb a signiÑcant portion of the variability created
by the assets/collateral in the trusts. Our investments in these securities do not represent a signiÑcant variable interest in the
securitization trusts. Further, we invest in securitization entities that are qualifying special purpose entities which are not
subject to consolidation because of our inability to unilaterally liquidate or change the qualifying special purpose entity. See
""NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Ì Consolidation and Equity Method of
Accounting'' for further information regarding the consolidation practices of our VIEs.
Low-Income Housing Tax Credit Partnerships
We invest as a limited partner in low-income housing tax credit partnerships formed for the purpose of providing
funding for aÅordable multifamily rental properties. These low-income housing tax credit partnerships invest directly in
limited partnerships that develop or rehabilitate multifamily rental properties. Completed properties are rented to qualiÑed
low-income tenants, allowing the properties to be eligible for federal tax credits. A general partner operates the partnership,
identifying investments and obtaining debt Ñnancing as needed to Ñnance partnership activities. Although these
partnerships generate operating losses, we realize a return on our investment through reductions in income tax expense that
result from tax credits and the deductibility of the operating losses. The partnership agreements are typically structured to
meet a required 15-year period of occupancy by qualiÑed low-income tenants. These investments were made between 1989
and 2005. At December 31, 2005 and 2004, we did not guarantee any obligations of these partnerships and our exposure was
limited to the amount of our investments. At December 31, 2005 and 2004, we were the primary beneÑciary of investments
in six and Ñve low-income housing tax credit partnerships, respectively, and we consolidated these investments. The
investors in the obligations of the consolidated low-income housing tax credit partnerships have recourse only to the assets of
those VIEs and do not have recourse to us.
112 Freddie Mac