Freddie Mac 2009 Annual Report Download - page 220

Structured Securities
We issue single-class Structured Securities and multi-class Structured Securities. We create Structured Securities
primarily by using PCs or previously issued Structured Securities as collateral. Similar to our PCs, we guarantee the payment
of principal and interest to the holders of the tranches of our Structured Securities. For Structured Securities that we issue to
third parties in exchange for PCs, we receive a transaction fee (measured at the amount received), but we generally do not
recognize any incremental guarantee asset or guarantee obligation because the underlying collateral is a guaranteed PC;
therefore, there is no incremental guarantee asset or obligation to record. Rather, we defer and amortize into earnings as
other non-interest income on a straight-line basis that portion of the transaction fee that we receive equal to the estimated
fair value of our future administrative responsibilities for issued Structured Securities. These responsibilities include ongoing
trustee services, administration of pass-through amounts, paying agent services, tax reporting and other required services. We
estimate the fair value of these future responsibilities based on quotes from third-party vendors who perform each type of
service and, where quotes are not available, based on our estimates of what those vendors would charge.
The remaining portion of the transaction fee relates to compensation earned in connection with structuring-related
services we rendered to third parties and is allocated to the Structured Securities we retain, if any, and the Structured
Securities acquired by third parties, based on the relative fair value of the Structured Securities. The fee allocated to any
Structured Securities we retain is deferred as a carrying value adjustment of retained Structured Securities and is amortized
using the effective interest method over the estimated lives of the Structured Securities. The fee allocated to the Structured
Securities acquired by third parties is recognized immediately in earnings as other non-interest income.
Structured Transactions
Structured Securities that we issue to third parties in exchange for non-Freddie Mac mortgage-related securities are
referred to as Structured Transactions. We recognize a guarantee asset, to the extent a management and guarantee fee is
charged, and we recognize our guarantee obligation at fair value. We do not receive transaction fees for these transactions.
Structured Transactions can generally be segregated into two different types. In one type, we purchase single-class pass-
through securities, place them in a securitization trust, guarantee the principal and interest, and issue the Structured
Transaction. For other Structured Transactions, we purchase only the senior tranches from a non-Freddie Mac senior-
subordinated securitization, place these senior tranches into a securitization trust, provide a guarantee of the principal and
interest of the senior tranches, and issue the Structured Transaction.
Cash-Based Sales Transactions
Sometimes we issue PCs and Structured Securities through cash-based sales transactions. Cash-based sales involve the
transfer of loans or PCs that we hold into PCs or Structured Securities. Upon completion of a transfer of loans or PCs that
qualifies as a sale in accordance with the accounting standards for transfer and servicing of financial assets, we derecognize
all assets sold and recognize all assets obtained and liabilities incurred.
We continue to carry on our consolidated balance sheets any retained interests in securitized financial assets. Such
retained interests may include our right to receive management and guarantee fees on PCs or Structured Transactions, which
is classified on our consolidated balance sheets as a guarantee asset. The carrying amount of all such retained interests is
determined by allocating the previous carrying amount of the transferred assets between assets sold and the retained interests
based upon their relative fair values at the date of transfer. Other retained interests include PCs or Structured Securities that
are not transferred to third parties upon the completion of a securitization or resecuritization transaction.
Upon sale of a PC, we recognize a guarantee obligation representing our non-contingent obligation to stand ready to
perform under the terms of our guarantee. The resulting gain (loss) on sale of transferred PCs and Structured Securities is
reflected in our consolidated statements of operations as a component of gains (losses) on investment activity.
Freddie Mac PCs and Structured Securities included in Mortgage-Related Securities
When we own Freddie Mac PCs or Structured Securities, we do not derecognize any components of the guarantee asset,
guarantee obligation, reserve for guarantee losses, or any other outstanding recorded amounts associated with the guarantee
transaction because our contractual guarantee obligation to the unconsolidated securitization trust remains in force until the
trust is liquidated, unless the trust is consolidated. We continue to account for the guarantee asset, guarantee obligation, and
reserve for guarantee losses in the same manner as described above, and investments in Freddie Mac PCs and Structured
Securities, as described in greater detail below. Whether we own the security or not, our guarantee obligation and related
credit exposure does not change. Our valuation of these securities is consistent with the legal structure of the guarantee
transaction, which includes our guarantee to the securitization trust. As such, the fair value of Freddie Mac PCs and
Structured Securities held by us includes the implicit value of the guarantee. See “NOTE 18: FAIR VALUE
DISCLOSURES,” for disclosure of the fair values of our mortgage-related securities, guarantee asset, and guarantee
obligation. Upon subsequent sale of a Freddie Mac PC or Structured Security, we continue to account for any outstanding
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