Freddie Mac 2005 Annual Report Download - page 38

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Looking beyond 2005, our long-term expectation is to generate returns, before capital transactions, on the average fair
value of net assets attributable to common stockholders, in the low- to mid-teens, although period-to-period returns may
Öuctuate substantially due to market conditions. Our expectations are based upon assumptions regarding rates of growth in
our business, spreads we expect to earn on our business, and required capital levels, among other factors. We have assumed
no adverse impacts from legislative or regulatory actions. Our actual results may diÅer materially from our expectations for
a number of reasons, including those discussed in ""RISK FACTORS'' and ""FORWARD-LOOKING STATEMENTS.''
The primary drivers of our fair value results during 2005 were core spread income from the Retained portfolio (deÑned
as the net revenue resulting from the option-adjusted spread, or OAS, between mortgage-related investments and debt) and
fee-based income (including guarantee fees and credit fees related to our guaranteed mortgage-related securities),
substantially oÅset by a decrease from wider net mortgage-to-debt OAS, which we estimate reduced fair value by
approximately $1.3 billion (after-tax). We believe disclosing the estimated impact of changes in OAS on the fair value of net
assets is helpful to understanding our current-period fair value results in the context of our long-term fair value return
expectations. Our estimate of the impact of changes in OAS is discussed further in ""CONSOLIDATED FAIR VALUE
BALANCE SHEETS ANALYSIS Ì Discussion of Fair Value Results.''
Our fair value results also were aÅected by the net eÅect of changes in our approach for estimating the fair values of
certain Ñnancial instruments implemented as of the Ñrst quarter 2005, which we estimate reduced fair value by
approximately $0.5 billion (after-tax). This reduction includes the net eÅect of changes we made to our fair value estimates
for our guarantee-related assets and liabilities, where we implemented an approach that uses more market data for
determining these fair values. We estimate that our improved approach for valuing guarantee-related assets and liabilities
reduced fair value in the Ñrst quarter of 2005 by approximately $0.8 billion (after-tax). Our approach for estimating fair
values and the recent improvements are discussed in more detail in ""NOTE 2: TRANSFERS OF SECURITIZED
INTERESTS IN MORTGAGE-RELATED ASSETS'' to our consolidated Ñnancial statements. During 2005, we also
improved our approach for estimating the fair values of multifamily whole loans and the minority interests in consolidated
real estate investment trusts, or REITs, as well as other securities by increasing the amount of market data used in the
valuation process.
In addition, our fair value results were aÅected by the agreement to settle the securities class action and shareholder
derivative litigation, the eÅect of which reduced fair value by approximately $0.2 billion (after-tax), and the eÅect of
charges related to Hurricane Katrina, which reduced fair value by approximately $0.2 billion (after-tax).
22 Freddie Mac