Freddie Mac 2006 Annual Report Download - page 43

Enhancements to certain models used to estimate prepayment speeds on mortgage-related securities and our approach
for estimating uncollectible interest on single-family mortgages greater than 90 days delinquent resulted in a net decrease in
Retained portfolio interest income of $166 million (pre-tax) during the Ñrst quarter of 2005.
2005 versus 2004
Net interest income and net interest yield on a fully taxable-equivalent basis decreased in 2005 due to narrowing spreads
on Ñxed-rate assets as the yield curve Öattened and the composition of our Retained portfolio changed toward a greater
percentage of lower-yielding, variable-rate assets.
The decline in Net interest income for 2005 also reÖected higher interest expense on derivatives in qualifying hedge
accounting relationships. Net interest income associated with the accrual of periodic settlements related to our receive-Ñxed
swaps and foreign-currency swaps declined as the benchmark LIBOR interest rate increased. Net interest income was also
aÅected by our decision in 2004 to discontinue hedge accounting treatment for a signiÑcant amount of our pay-Ñxed swaps
and receive-Ñxed swaps, as discussed in ""NOTE 12: DERIVATIVES'' to our consolidated Ñnancial statements. The net
interest expense related to these swaps was no longer a component of Net interest income after hedge accounting was
discontinued, but was recognized as a component of Non-interest income (loss) in Derivative gains (losses).
Another factor in the decline in Net interest income for 2005 was our decision to cease the PC market-making and
support activities conducted through our Securities Sales and Trading Group, or SS&TG, business unit and our external
Money Manager program during the fourth quarter of 2004. By the end of 2004, we divested the trading portfolios related
to our SS&TG business unit and our external Money Manager program in the Investments portfolio. This divestiture
reduced the interest expense for funding the Investments portfolio as well as the hedging costs associated with it, which were
reÖected in Gains (losses) on investment activity. Our investments in mortgage-related securities held by our SS&TG
business unit and external Money Manager program were generally hedged by entering into forward sales of mortgage-
related securities. For 2004, the valuation diÅerence between the trading securities and the related forward sale
commitments resulted in a loss of $1,101 million in Gains (losses) on investment activity that was oÅset by Net interest
income on the held position.
Non-Interest Income (Loss)
Management and Guarantee Income
Table 10 provides summary information about Management and guarantee income. Management and guarantee income
consists of contractual amounts due to us related to our management and guarantee fee as well as amortization of certain
pre-2003 deferred fees, including credit and buy-down fees. Other guarantee-related revenue is deferred and recognized
over time as a component of Income on Guarantee obligation.
Table 10 Ì Management and Guarantee Income(1)
Year Ended December 31,
2006 2005 2004
Amount Rate Amount Rate Amount Rate
(dollars in millions, rate in basis points)
Contractual management and guarantee feesÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $1,613 15.4 $1,431 15.7 $1,303 16.5
Amortization of credit and buy-down fees included in Other liabilities(2) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 59 0.6 19 0.2 79 1.0
Total management and guarantee income ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $1,672 16.0 $1,450 15.9 $1,382 17.5
Unamortized balance of credit and buy-down fees included in Other liabilities, at
period endÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 136 $ 186 $ 323
(1) Excludes amounts related to PCs we held in our Retained portfolio, which are reported in Net interest income.
(2) A change in estimate resulted in a net pre-tax increase (decrease) in the Amortization of credit and buy down fees of $18 million and $(17) million for
2006 and 2005, respectively. See ""NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES'' to our consolidated Ñnancial
statements for further information.
Management and guarantee income increased in both 2006 and 2005, primarily reÖecting increases in the average
outstanding PC balances of 15 percent in each year. The average contractual management and guarantee fee rate decreased
in both years from the prior years, reÖecting lower guarantee fee rates on new business and the liquidation of existing
business with relatively higher guarantee fee rates. The continued decline in guarantee fee rates on new business is the result
of competitive pricing pressures. Management and guarantee income includes the amortization of pre-2003 deferred credit
fees and buy-down fees on our outstanding PCs. However, similar fees received after January 1, 2003 are primarily deferred
and recognized over time as a component of Income on Guarantee obligation.
Gains (Losses) on Guarantee Asset
Upon issuance of a guarantee of securitized assets, we may record a Guarantee asset on our consolidated balance sheets
representing the fair value of the guarantee fees we expect to receive over the life of the related PCs and Structured
31 Freddie Mac