Freddie Mac 2006 Annual Report Download - page 59

Guarantee Obligation
See ""CONSOLIDATED RESULTS OF OPERATIONS Ì Non-Interest Income (Loss) Ì Income on Guarantee
Obligation'' for a description of the components of the Guarantee obligation. Table 28 summarizes the changes in the
Guarantee obligation balance.
Table 28 Ì Changes in Guarantee Obligation
December 31,
2006 2005
(in millions)
Beginning balance ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $5,541 $4,065
Transfer-out to the loan loss reserve(1) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (9) (10)
Additions, net of repurchases:
Fair value of performance and other related costs of newly-issued guarantees ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 1,719 1,629
Deferred guarantee income of newly-issued guarantees ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 733 777
Amortization income related to:
Performance and other related costs ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (584) (616)
Deferred guarantee incomeÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (283) (304)
Income on Guarantee obligation ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (867) (920)
Ending balance ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $7,117 $5,541
Components of the Guarantee obligation, at period end:
Unamortized balance of performance and other related costs ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $4,869 $3,743
Unamortized balance of deferred guarantee income ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 2,248 1,798
Ending Guarantee obligation ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $7,117 $5,541
(1) Represents portions of the Guarantee obligation recognized through Guarantor Swap transactions or upon the sale of PCs and Structured Securities
that correspond to incurred credit losses reclassiÑed to Reserve for guarantee losses on Participation CertiÑcates at initial recognition of a Guarantee
obligation.
The Guarantee obligation increased in 2006 due to business volume and a decline in the rate of amortization. Generally
increasing mortgage interest rates resulted in lower liquidation rates on outstanding PCs and Structured Securities.
Total Stockholders' Equity
The balance of Total stockholders' equity increased in 2006 primarily as a result of Net income, partially oÅset by
preferred and common stock dividends declared during 2006. During 2006, we repurchased $2.0 billion of outstanding shares
of common stock and issued $1.5 billion of non-cumulative, perpetual preferred stock in connection with a plan to replace
$2.0 billion of common stock with an equal amount of preferred stock. The repurchase of outstanding shares of common
stock and the issuance of non-cumulative, perpetual preferred stock during 2006 resulted in a net reduction of $0.5 billion to
the balance of Total stockholders' equity. During the Ñrst quarter of 2007, we issued $1.1 billion of non-cumulative,
perpetual preferred stock, including $500 million to complete the planned issuance described above and $600 million to
replace higher-cost preferred stock that we redeemed in 2007. See ""LIQUIDITY AND CAPITAL RESOURCES Ì
Capital Resources Ì Core Capital'' for additional information.
The balance of AOCI at December 31, 2006 was a net loss of approximately $7.9 billion, net of taxes, compared to a net
loss of $8.8 billion, net of taxes, at December 31, 2005. The reduction in the net loss in AOCI was primarily the result of the
amortization of deferred losses in Net interest income related to closed cash Öow hedge relationships, partially oÅset by an
increase in unrealized losses on available-for-sale securities primarily driven by the increase in interest rates during 2006.
CONSOLIDATED FAIR VALUE BALANCE SHEETS ANALYSIS
Our consolidated fair value balance sheets include the estimated fair values of Ñnancial instruments recorded on our
consolidated balance sheets prepared in accordance with GAAP, as well as oÅ-balance sheet Ñnancial instruments that
represent our assets or liabilities that are not recorded on our GAAP consolidated balance sheets. These oÅ-balance sheet
items predominantly consist of: (a) the unrecognized Guarantee asset and Guarantee obligation associated with our PCs
issued through our Guarantor Swap program prior to the implementation of FIN 45, (b) certain commitments to purchase
mortgage loans and (c) certain credit enhancements on manufactured housing asset-backed securities. The fair value
balance sheets also include certain assets and liabilities that are not Ñnancial instruments (such as property and equipment
and real estate owned, which are included in Other assets) at their carrying value in accordance with GAAP. During 2006
and 2005, our fair value results were impacted by several improvements in our approach for estimating the fair value of
certain Ñnancial instruments. See ""OFF-BALANCE SHEET ARRANGEMENTS'' and ""CRITICAL ACCOUNTING
POLICIES AND ESTIMATES'' as well as ""NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES''
and ""NOTE 16: FAIR VALUE DISCLOSURES'' to our consolidated Ñnancial statements for more information on fair
values.
47 Freddie Mac