Freddie Mac 2006 Annual Report Download - page 44

Securities. Subsequent changes in the fair value of the Guarantee asset are reported in current period income as Gains
(losses) on Guarantee asset.
The change in fair value of the Guarantee asset reÖects:
‚ reductions related to the contractual guarantee fees due that are considered a return of our recorded investment in the
Guarantee asset; and
‚ changes in the fair value of expected future guarantee fees we expect to receive over the life of the related PC or
Structured Security.
As shown on ""Table 11 Ì Attribution of Change Ì Gains (Losses) on Guarantee Asset,'' contractual guarantee fees
due represent Management and guarantee income realized in the current period related to PCs and Structured Securities
held by third parties with an established Guarantee asset. A portion of contractual guarantee fees due is attributed to
imputed interest income on the Guarantee asset.
The fair value of expected future cash Öows is driven by changes in the expected interest and related discount rates that
aÅect the estimated life of the mortgages underlying the outstanding PCs and Structured Securities and other economic
factors that inÖuence the amount and timing of the future cash Öows. Our valuation methodology for the Guarantee asset,
Ñrst implemented for 2005, uses market-based information to determine the fair value of future cash Öows associated with
the Guarantee asset. Changes in the fair value of the Guarantee asset, which are recorded in current period earnings through
Gains (losses) on Guarantee asset, reÖect the volatility associated with the market-based inputs used in our valuation.
Changes in the estimated lives of the underlying mortgages also aÅect the fair value of the Guarantee asset. See
""CONSOLIDATED BALANCE SHEETS ANALYSIS Ì Table 25 Ì Changes in Guarantee Asset'' for additional
information about the Guarantee asset.
Table 11 Ì Attribution of Change Ì Gains (Losses) on Guarantee Asset
Year Ended December 31,
2006 2005 2004
(in millions)
Contractual guarantee fees dueÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $(1,475) $(1,270) $(1,086)
Portion of contractual guarantee fees due related to imputed interest income ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 466 371 257
Return of investment on Guarantee asset ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (1,009) (899) (829)
Change in fair value of future cash Öows ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 169 (138) (306)
Change in estimate(1) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 40 (27) Ì
Gains (losses) on Guarantee asset ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ (800) $(1,064) $(1,135)
(1) Represents a change in estimate resulting from enhancing our approach for determining the fair value of the Guarantee asset. See ""NOTE 1:
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES'' to our consolidated Ñnancial statements for further information.
The reduction in our Guarantee asset attributable to the Return of investment on Guarantee asset increased during
2006, 2005 and 2004. The Return of investment on Guarantee asset increased as the outstanding PCs and Structured
Securities have grown each year.
Losses on the Guarantee asset decreased in 2006 as compared with 2005, due to increases in the fair value of the
Guarantee asset consistent with the increase in mortgage interest rates during the year, which generally extends the life of
the Guarantee asset. Losses on the Guarantee asset decreased in 2005 as compared with 2004, reÖecting the increase in
mortgage interest rates during the year oÅset by the eÅect of the change in our valuation method.
Income on Guarantee Obligation
Upon issuance of a guarantee of securitized assets, we record a Guarantee obligation on our consolidated balance sheets
representing the fair value of our obligation to perform under the terms of the guarantee. The Guarantee obligation consists
of the following:
‚ performance and other related costs, which consist of: estimated default costs, including the unrecoverable principal
and interest that will be incurred over the expected life of the underlying mortgages; estimated foreclosure-related
costs; and estimated administrative and other costs related to our guarantee; and
‚ deferred guarantee income on newly-issued Guarantor Swap transactions, which represents the excess of compensa-
tion received on issued guarantees and the fair value of the related Guarantee asset, as compared to the fair value of
the corresponding Guarantee obligation. Compensation received includes cash, credit and buy-down fees received at
the time of securitization. Credit fees vary with the relative credit quality of the underlying mortgages and buydown
fees vary based on customer compensation payment preferences.
The Guarantee obligation is amortized into income in relation to the decline in the unpaid principal balance on the
mortgage loans underlying the PCs and Structured Securities.
32 Freddie Mac