Freddie Mac 2009 Annual Report Download - page 239

NOTE 3: FINANCIAL GUARANTEES AND MORTGAGE SECURITIZATIONS
Financial Guarantees
As discussed in “NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES,” we securitize substantially all
the single-family mortgage loans we have purchased and issue securities which we guarantee. We enter into other financial
agreements, including credit enhancements on mortgage-related assets and derivative transactions, which also give rise to
financial guarantees. Table 3.1 below presents our maximum potential amount of future payments, our recognized liability
and the maximum remaining term of these guarantees.
Table 3.1 — Financial Guarantees
Maximum
Exposure
(1)
Recognized
Liability
Maximum
Remaining
Term
Maximum
Exposure
(1)
Recognized
Liability
Maximum
Remaining
Term
December 31, 2009 December 31, 2008
(dollars in millions, terms in years)
Guaranteed PCs and Structured Securities . . . ............. $1,854,813 $11,949 43 $1,807,553 $11,480 44
Other mortgage-related guarantees . . . . ................. 15,069 516 40 19,685 618 39
Derivative instruments . . . .......................... 30,362 76 33 39,488 111 34
Servicing-related premium guarantees . . ................. 193 — 5 63 — 5
(1) Maximum exposure represents the contractual amounts that could be lost under the guarantees if counterparties or borrowers defaulted, without
consideration of possible recoveries under credit enhancement arrangements, such as recourse provisions, third-party insurance contracts or from
collateral held or pledged. The maximum exposure disclosed above is not representative of the actual loss we are likely to incur, based on our historical
loss experience and after consideration of proceeds from related collateral liquidation or available credit enhancements. In addition, the maximum
exposure for our liquidity guarantees is not mutually exclusive of our default guarantees on the same securities; therefore, the amounts are also included
within the maximum exposure of guaranteed PCs and Structured Securities.
Guaranteed PCs and Structured Securities
We issue two types of mortgage-related securities: PCs and Structured Securities and we refer to certain Structured
Securities as Structured Transactions. See “NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES” for a
discussion of our Structured Transactions. We guarantee the payment of principal and interest on issued PCs and Structured
Securities that are backed by pools of mortgage loans. For our fixed-rate PCs, we guarantee the timely payment of interest at
the applicable PC coupon rate and scheduled principal payments for the underlying mortgages. For our ARM PCs, we
guarantee the timely payment of the weighted average coupon interest rate and the full and final payment of principal for the
underlying mortgages. We do not guarantee the timely payment of principal for ARM PCs. To the extent the interest rate is
modified and reduced for a loan underlying a fixed-rate PC, we pay the shortfall between the original contractual interest
rate and the modified interest rate. To the extent the interest rate is modified and reduced for a loan underlying an ARM PC,
we only guarantee the timely payment of the modified interest rate and we are not responsible for any shortfalls between the
original contractual interest rate and the modified interest rate. When our Structured Securities consist of re-securitizations of
PCs, our guarantee and the impacts of modifications to the interest rate of the underlying loans operate in the same manner
as PCs. We establish trusts for all of our issued PCs pursuant to our master trust agreement and we serve a role to the trust
as administrator, trustee, guarantor, and master servicer of the underlying loans. We do not perform the servicing directly on
the loans within PCs; however, we assist our seller/servicers in their loss mitigation activities on loans within PCs that
become delinquent, or past due. During 2009 and 2008, we executed foreclosure alternatives on approximately 143,000 and
88,000 single-family mortgage loans, respectively, including those loans held by us on our consolidated balance sheets.
Foreclosure alternatives include modifications with and without concessions to the borrower, forbearance agreements, pre-
foreclosure sales and repayment plans. Our practice is to purchase these loans from the trusts when foreclosure sales occur,
they are modified, or in certain other circumstances. See “NOTE 8: REAL ESTATE OWNED” for more information on
properties acquired under our financial guarantees. See “NOTE 7: MORTGAGE LOANS AND LOAN LOSS RESERVES”
and “NOTE 19: CONCENTRATION OF CREDIT AND OTHER RISKS” for credit performance information on loans we
own or have securitized, information on our purchases of loans under our financial guarantees and other risks associated with
our securitization activities.
During 2009 and 2008 we issued $471.7 billion and $352.8 billion of our PCs and Structured Securities backed by
single-family mortgage loans and the vast majority of these were in guarantor swap securitizations where our primary
involvement is to guarantee the payment of principal and interest, so these transactions are accounted for in accordance with
the accounting standards for guarantees at time of issuance. We also issued approximately $2.5 billion and $0.7 billion of
PCs and Structured Securities backed by multifamily mortgage loans during 2009 and 2008, respectively. At December 31,
2009 and 2008, we had $1,854.8 billion and $1,807.6 billion of issued and outstanding PCs and Structured Securities,
respectively, of which $374.6 billion and $424.5 billion, respectively, were held as investments in mortgage-related securities
on our consolidated balance sheets. In 2009, we entered into an agreement with Treasury, FHFA and Fannie Mae, which sets
forth the terms under which Treasury and, as directed by FHFA, we and Fannie Mae, would provide guarantees on securities
236 Freddie Mac