Freddie Mac 2009 Annual Report Download - page 241

Derivative Instruments
Derivative instruments primarily include written options, written swaptions, interest-rate swap guarantees and guarantees
of stated final maturity Structured Securities. Derivative instruments also include short-term default and other guarantee
commitments that we account for as derivatives.
We guarantee the performance of interest-rate swap contracts in certain circumstances. As part of a resecuritization
transaction, we may transfer certain swaps and related assets to a third party and guarantee that interest income generated
from the assets will be sufficient to cover the required payments under the interest-rate swap contracts. In some cases, we
guarantee that a borrower will perform under an interest-rate swap contract linked to a customer’s adjustable-rate mortgage.
In connection with certain resecuritization transactions, we may also guarantee that the sponsor of certain securitized
multifamily housing revenue bonds will perform under the interest-rate swap contract linked to the variable-rate certificates
we issued, which are backed by the bonds.
In addition, we issued credit derivatives that guarantee the payments on (a) multifamily mortgage loans that are
originated and held by state and municipal housing finance agencies to support tax-exempt multifamily housing revenue
bonds; (b) pass-through certificates which are backed by tax-exempt multifamily housing revenue bonds and related taxable
bonds and/or loans; and (c) the reimbursement of certain losses incurred by third party providers of letters of credit secured
by multifamily housing revenue bonds.
We have issued Structured Securities with stated final maturities that are shorter than the stated maturity of the
underlying mortgage loans. If the underlying mortgage loans to these securities have not been purchased by a third party or
fully matured as of the stated final maturity date of such securities, we may sponsor an auction of the underlying assets. To
the extent that purchase or auction proceeds are insufficient to cover unpaid principal amounts due to investors in such
Structured Securities, we are obligated to fund such principal. Our maximum exposure on these guarantees represents the
outstanding unpaid principal balance of the underlying mortgage loans.
Servicing-Related Premium Guarantees
We provided guarantees to reimburse servicers for premiums paid to acquire servicing in situations where the original
seller is unable to perform under its separate servicing agreement. The liability associated with these agreements was not
material at December 31, 2009 and 2008.
Credit Protection or Credit Enhancement
In connection with our PCs, Structured Securities and other mortgage-related guarantees, we have credit protection in
the form of primary mortgage insurance, pool insurance, recourse to lenders indemnification agreements with seller/servicers
and other forms of credit enhancements. The total maximum amount of coverage from these credit protection and recourse
agreements associated with single-family mortgage loans, excluding Structured Transactions, was $68.1 billion and
$74.7 billion at December 31, 2009 and 2008, respectively, and this credit protection covers $307.8 billion and
$342.7 billion, respectively, in unpaid principal balances. At December 31, 2009 and 2008, we recorded $597 million and
$764 million, respectively, within other assets on our consolidated balance sheets related to these credit enhancements on
securitized mortgages.
Table 3.2 presents the maximum amounts of potential loss recovery by type of credit protection.
Table 3.2 — Credit Protection or Credit Enhancement
(1)
December 31, 2009 December 31, 2008
Maximum Coverage at
(in millions)
PCs and Structured Securities:
Single-family:
Primary mortgage insurance ................................................... $55,205 $59,388
Lender recourse and indemnifications . . . ......................................... 9,014 11,047
Pool insurance ............................................................ 3,431 3,768
HFA indemnification
(2)
...................................................... 1,370 —
Other credit enhancements .................................................... 476 475
Multifamily:
Credit enhancements . . . ..................................................... 2,844 3,261
HFA indemnification
(2)
...................................................... 142 —
(1) Exclude credit enhancements related to resecuritization transactions that are backed by loans or certificates issued by Federal agencies as wellas
Structured Transactions, which had unpaid principal balances that totaled $26.5 billion and $24.4 billion at December 31, 2009 and 2008, respectively.
(2) The amount of potential reimbursement of losses on securities we have guaranteed that are backed by state and local HFA bonds, under which Treasury
bears initial losses on these securities up to 35% of those issued under the HFA initiative on a combined basis. Treasury will also bear losses of unpaid
interest.
We have credit protection for certain of our resecuritization transactions that are backed by loans or certificates of
federal agencies (such as the FHA, VA, Ginnie Mae and USDA), which totaled $3.9 billion and $4.4 billion in unpaid
238 Freddie Mac