Freddie Mac 2009 Annual Report Download - page 186

OFF-BALANCE SHEET ARRANGEMENTS
We enter into certain business arrangements that are not recorded on our consolidated balance sheets or may be
recorded in amounts that differ from the full contract or notional amount of the transaction. Most of these arrangements
relate to our financial guarantee and securitization activity, or PCs and Structured Securities, for which we record guarantee
assets and obligations, but the related securitized assets are owned by third parties. These off-balance sheet arrangements
may expose us to potential losses in excess of the amounts recorded on our consolidated balance sheets.
PCs and Structured Securities
As discussed in “BUSINESS — Our Business and Statutory Mission — Our Business Segments — Single-Family
Guarantee Segment,” we guarantee the payment of principal and interest on PCs and Structured Securities we issue.
Mortgage-related assets that back PCs and Structured Securities held by third parties are not reflected as assets on our
consolidated balance sheets. See “NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES — Recently Issued
Accounting Standards, Not Yet Adopted Within These Consolidated Financial Statements” to our consolidated financial
statements for information on recently issued accounting standards, that will result in our recording most of these
securitizations on our consolidated balance sheets commencing in the first quarter of 2010. This will significantly reduce the
amount of our off-balance sheet arrangements.
In some cases, we share the risks of our credit guarantee activity with third parties through the use of primary mortgage
insurance, pool insurance and other credit enhancements. “NOTE 3: FINANCIAL GUARANTEES AND MORTGAGE
SECURITIZATIONS” to our consolidated financial statements provides information about our guarantees, including details
related to credit protections and maximum coverages that we obtain through credit enhancements. Also, see “RISK
MANAGEMENT — Credit Risks — Mortgage Credit Risk” for more information.
We also resecuritize our PCs and issue single- and multi-class Structured Securities and subsequently transfer such
Structured Securities to third parties in exchange for cash, PCs or other mortgage-related securities. We earn resecuritization
fees in connection with the creation of certain Structured Securities. We resecuritized a total of $382 billion, $507 billion
and $457 billion of Structured Securities during 2009, 2008 and 2007, respectively. The increase of our principal credit risk
exposure on Structured Securities relates only to that portion of resecuritized assets that consists of non-Freddie Mac
mortgage-related securities.
In addition, we enter into long-term standby commitments for mortgage assets held by third parties that require that we
purchase loans from lenders when the loans subject to these commitments meet certain delinquency criteria. We included
these transactions in the reported activity and balances of our PCs and Structured Securities. Long-term standby
commitments represented approximately 1%, 1% and 2% of the balance of our PCs and Structured Securities as of
December 31, 2009, 2008 and 2007, respectively.
Our maximum potential off-balance sheet exposure to credit losses relating to our PCs, Structured Securities and other
mortgage-related financial guarantees is primarily represented by the unpaid principal balance of the related loans and
securities held by third parties, which was $1,495 billion, $1,403 billion and $1,382 billion at December 31, 2009, 2008 and
2007, respectively. Based on our historical credit losses, which in 2009, 2008 and 2007 averaged approximately 40.8, 20.1
and 3.0 basis points, respectively, of the aggregate unpaid principal balance of our PCs and Structured Securities, we do not
believe that the maximum exposure is representative of our actual exposure on these guarantees. The maximum exposure
does not take into consideration the recovery we would receive through exercising our rights to the collateral backing the
underlying loans nor the available credit enhancements, which include recourse and primary insurance with third parties. In
addition, we provide for incurred losses each period on these guarantees within our provision for credit losses. The credit
losses we experienced from mortgages underlying our PCs and Structured Securities accelerated during 2009 due to
increased rates of delinquency and foreclosure transfers. See “RISK FACTORS — Competitive and Market Risks” for further
information. The accounting policies and fair value estimation methodologies we apply to our credit guarantee activities
significantly affect the volatility of our reported earnings. See “CONSOLIDATED RESULTS OF OPERATIONS — Non-
Interest Income (Loss)” for an analysis of the effects of our credit guarantee activities on our consolidated statements of
operations.
We established securitization trusts for the administration of cash remittances received on the underlying assets of our
PCs and Structured Securities. We receive trust management income, which represents the fees we earn as master servicer,
issuer, trustee and administrator for our PCs and Structured Securities. These fees, which are included in our non-interest
income, are derived from interest earned on principal and interest cash flows held in the trusts between the time funds are
remitted to the trusts by servicers and the date the funds are distributed to our PC and Structured Securities holders. The
trust management income is offset by interest expense we incur when a borrower prepays a mortgage, but the full amount of
interest for the month is due to the PC investor. We have off-balance sheet exposure to the trusts of the same maximum
amount that applies to our credit risk of our outstanding guarantees; however, we also have exposure to the trusts and
183 Freddie Mac