Freddie Mac 2009 Annual Report Download - page 221

recorded amounts associated with the guarantee transaction on the same basis as prior to the sale of the Freddie Mac PC or
Structured Security, because the sale does not result in the retention of any new assets or the assumption of any new
liabilities.
Due to PC Investors
Beginning December 2007 we introduced separate legal entities, or trusts, into our securities issuance process for the
purpose of managing the receipt and payments of cash flow of our PCs and Structured Securities. In connection with the
establishment of these trusts, we also established a separate custodial account in which cash remittances received on the
underlying assets of our PCs and Structured Securities are deposited. These cash remittances include both scheduled and
unscheduled principal and interest payments. The funds held in this account are segregated and are not commingled with our
general operating funds nor are they presented within our consolidated balance sheets. As securities administrator, we invest
the cash held in the custodial account, pending distribution to our PC and Structured Securities holders, in short-term
investments and are entitled to trust management fees on the trust’s assets which are recorded as other non-interest income.
The funds are maintained in this separate custodial account until they are due to the PC and Structured Securities holders on
their respective security payment dates.
Prior to December 2007, we managed the timing differences that exist for cash receipts from servicers on assets
underlying our PCs and Structured Securities and the subsequent pass-through of those payments on PCs owned by third-
party investors. In those cases, the PC balances were not reduced for payments of principal received from servicers in a
given month until the first day of the next month and we did not release the cash received (principal and interest) to the PC
investors until the fifteenth day of that next month. We generally invested the principal and interest amounts we received in
short-term investments from the time the cash was received until the time we paid the PC investors. In addition, for
unscheduled principal prepayments on loans underlying our PCs and Structured Securities, these timing differences resulted
in expenses, since the related PCs continued to bear interest due to the PC investor at the PC coupon rate from the date of
prepayment until the date the PC security balance is reduced, while no interest was received from the mortgage on that
prepayment amount during that period. The expense recognized upon prepayment was reported in interest expense — due to
Participation Certificate investors. We report coupon interest income amounts relating to our investment in PCs consistent
with the method used for PCs held by third-party investors.
Mortgage Loans
Upon loan acquisition, we classify the loan as either held for sale or held for investment. Mortgage loans that we have
the ability and intent to hold for the foreseeable future are classified as held for investment. Held-for-investment mortgage
loans are reported at their outstanding unpaid principal balances, net of deferred fees and cost basis adjustments (including
unamortized premiums and discounts). These deferred items are amortized into interest income over the estimated lives of
the mortgages using the effective interest method. We use actual prepayment experience and estimates of future prepayments
to determine the constant yield needed to apply the effective interest method. For purposes of estimating future prepayments,
the mortgages are aggregated by similar characteristics such as origination date, coupon and maturity. We recognize interest
on mortgage loans on an accrual basis, except when we believe the collection of principal or interest is not probable.
Mortgage loans not classified as held for investment are classified as held for sale. Held for sale mortgages are reported
at the lower of cost or fair value, with gains and losses reported in other gains (losses) on investments. Premiums and
discounts on loans classified as held for sale are not amortized during the period that such loans are classified as held for
sale. Beginning in the third quarter of 2008, we elected the fair value option for multifamily mortgage loans that were
purchased through our Capital Market Execution program to reflect our strategy in this program. Thus, these multifamily
mortgage loans are measured at fair value on a recurring basis. Gains or losses on these loans related to sales or changes in
fair value are reported in other gains (losses) on investments.
If we decide not to sell a mortgage loan classified as held for sale, and instead have the ability and intent to hold that
loan for the foreseeable future or until maturity or payoff, the mortgage loan is reclassified from held for sale to held for
investment on the date of change in our intent and ability. At the date of reclassification to held for investment, the mortgage
loan is recorded at the lower of cost or fair value. Any difference between the new carrying amount of the loan and its
outstanding principal balance at that time is treated as a premium or discount and amortized to income over the remaining
life of the loan using the effective interest method.
Allowance for Loan Losses and Reserve for Guarantee Losses
We maintain an allowance for loan losses on mortgage loans held-for-investment and a reserve for guarantee losses on
PCs, collectively referred to as our loan loss reserves, to provide for credit losses when it is probable that a loss has been
incurred. The held-for-investment loan portfolio is reported net of the allowance for loan losses on the consolidated balance
sheets. The reserve for guarantee losses is a liability account on our consolidated balance sheets. Increases in loan loss
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