Freddie Mac 2009 Annual Report Download - page 13

The compensation we receive in exchange for our guarantee activities consists primarily of a combination of
management and guarantee fees paid on a monthly basis as a percentage of the underlying unpaid principal balance of the
loans and initial upfront payments referred to as delivery fees. We recognize the fair value of the right to receive ongoing
management and guarantee fees as a guarantee asset at the inception of a guarantee. We subsequently account for the
guarantee asset like a debt security which performs similarly to an excess-servicing, interest-only mortgage security,
classified as trading, and reflect changes in the fair value of the guarantee asset in earnings. We recognize a guarantee
obligation at inception equal to the fair value of the compensation received. The guarantee obligation represents deferred
revenue that is amortized into earnings as we are relieved from risk under the guarantee. We may also make upfront
payments to buy-up the monthly management and guarantee fee rate, or receive upfront payments to buy-down the monthly
management and guarantee fee rate. These fees are paid in conjunction with the formation of a PC to provide for a uniform
PC coupon rate. For information on how we account for our securitization activities, including changes as a result of
amendments to the accounting standards for transfers of financial assets and consolidation of VIEs, see “NOTE 1:
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES” to our consolidated financial statements.
The guarantee we provide increases the marketability of our mortgage-related securities, providing additional liquidity to
the mortgage market. The types of mortgage-related securities we guarantee include the following:
• PCs we issue;
• single-class and multi-class Structured Securities (including Structured Transactions discussed below) we issue; and
• securities related to tax-exempt multifamily housing revenue bonds (see “Multifamily Segment”).
PCs
Our PCs are pass-through securities that represent undivided beneficial interests in trusts that own pools of mortgages
we have purchased. For our fixed-rate PCs, we guarantee the timely payment of interest and the timely payment of principal.
For our ARM PCs, we guarantee the timely payment of the weighted average coupon interest rate for the underlying
mortgage loans. We also guarantee the full and final payment of principal for ARM PCs; however, we do not guarantee the
timely payment of principal on ARM PCs. In exchange for providing this guarantee, we receive a management and guarantee
fee and up-front delivery fees. We issue most of our PCs in transactions in which our customers exchange mortgage loans for
PCs. We refer to these transactions as guarantor swaps. The following diagram illustrates a guarantor swap transaction:
Guarantor Swap
Mortgage Lender
Mortgage loans
PC
Freddie Mac
(administrator)
TRUST
Mortgage
loans PC
Freddie Mac
(guarantor)
Guarantee
Fee
Cash (Buy-ups)
Cash (Buy-downs, delivery fees)
10 Freddie Mac