Freddie Mac 2006 Annual Report Download - page 60

In conjunction with the preparation of our consolidated fair value balance sheets, we use a number of Ñnancial models.
See ""RISK MANAGEMENT Ì Operational Risks'' and ""RISK MANAGEMENT Ì Interest-Rate Risk and Other
Market Risks'' for information concerning the risks associated with these models.
Table 29 Ì Summary Consolidated Fair Value Balance Sheets(1)
December 31,
2006 2005
Carrying Fair Carrying Fair
Amount(2) Value Amount(2) Value
(in billions)
Total assets ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $813.1 $811.3 $806.2 $805.2
Total liabilities and minority interests ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $784.8 $779.5 $779.0 $774.3
Net assets attributable to stockholders:
Preferred stockholders ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 6.1 5.8 4.6 4.1
Common stockholders ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 22.2 26.0 22.6 26.8
Total net assets ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 28.3 31.8 27.2 30.9
Total liabilities and net assets ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $813.1 $811.3 $806.2 $805.2
(1) The summary consolidated fair value balance sheets do not purport to present our net realizable, liquidation or market value as a whole. Furthermore,
amounts we ultimately realize from the disposition of assets or settlement of liabilities may vary signiÑcantly from the fair values presented.
(2) Carrying amounts equal the amounts reported on our GAAP consolidated balance sheets.
Key Components of Changes in Fair Value of Net Assets
Changes in the fair value of net assets from period to period result from returns (measured on a fair value basis) and
capital transactions and are primarily attributable to changes in a number of key components:
Core spread income
Core spread income on the Retained portfolio is a fair value estimate of the net current period accrual of income from
the spread between mortgage-related investments and debt, calculated on an option-adjusted basis. OAS is an estimate of
the yield spread between a given Ñnancial instrument and a benchmark (LIBOR, agency or Treasury) yield curve, after
consideration of potential variability in the instrument's cash Öows resulting from any options embedded in the instrument,
such as prepayment options.
Changes in mortgage-to-debt OAS
The fair value of our net assets can be signiÑcantly aÅected from period to period by changes in the net OAS between
the mortgage and agency debt sectors. The fair value impact of changes in OAS for a given period represents an estimate of
the net unrealized increase or decrease in fair value of net assets arising from net Öuctuations in OAS during that period.
We do not attempt to hedge or actively manage the basis risk represented by the impact of changes in mortgage-to-debt
OAS because we generally hold a substantial portion of our mortgage assets for the long term and we do not believe that
periodic increases or decreases in the fair value of net assets arising from Öuctuations in OAS will signiÑcantly aÅect the
long-term value of the Retained portfolio. Our estimate of the eÅect of changes in OAS excludes the impact of other
market risk factors we actively manage, or economically hedge, to keep interest-rate risk exposure within prescribed limits.
Asset-liability management return
Asset-liability management return represents the estimated net increase or decrease in the fair value of net assets
resulting from net exposures related to the market risks we actively manage. We do not hedge all of the interest-rate risk that
exists at the time a mortgage is purchased or that arises over its life. The market risks to which we are exposed as a result of
our Retained portfolio activities that we actively manage include duration and convexity risks, yield curve risk and volatility
risk. We seek to manage these risk exposures within prescribed limits as part of our overall portfolio management strategy.
Taking these risk positions and managing them within prudent limits is an integral part of our strategy to optimize the risk/
reward proÑle of our investment activity and produce fair value growth. We expect that the residual risk positions we take
and manage under our integrated risk management framework will produce fair value returns that contribute to meeting our
fair value growth objectives, although those positions may result in a net increase or decrease in fair value for a given period.
During 2006, our duration and convexity risk level as measured by our PMVS was below the risk limits set by management
and the board of directors. See ""RISK MANAGEMENT Ì Interest-Rate Risk and Other Market Risks'' for more
information.
Core guarantee fees, net
Core guarantee fees, net represents a fair value estimate of the annual income of the credit guarantee portfolio, based on
current portfolio characteristics and market conditions. This estimate considers both contractual guarantee fees collected
48 Freddie Mac