Freddie Mac 2009 Annual Report Download - page 243

normal course of business. It is difficult to estimate our maximum exposure under these indemnification arrangements
because in many cases there are no stated or notional amounts included in the indemnification clauses. Such indemnification
provisions pertain to matters such as hold harmless clauses, adverse changes in tax laws, breaches of confidentiality,
misconduct and potential claims from third parties related to items such as actual or alleged infringement of intellectual
property. At December 31, 2009, our assessment is that the risk of any material loss from such a claim for indemnification is
remote and there are no probable and estimable losses associated with these contracts. We have not recorded any liabilities
related to these indemnifications on our consolidated balance sheets at December 31, 2009 and 2008.
NOTE 4: RETAINED INTERESTS IN MORTGAGE-RELATED SECURITIZATIONS
In connection with certain transfers of financial assets that qualify as sales, we may retain certain newly-issued PCs and
Structured Securities not transferred to third parties upon the completion of a securitization transaction. These securities may
be backed by mortgage loans purchased from our customers, PCs and Structured Securities, or previously resecuritized
securities. These Freddie Mac PCs and Structured Securities are included in investments in securities on our consolidated
balance sheets.
Our exposure to credit losses on the loans underlying our retained securitization interests and our guarantee asset is
recorded within our reserve for guarantee losses on PCs and as a component of our guarantee obligation, respectively. For
additional information regarding our delinquencies and credit losses, see “NOTE 7: MORTGAGE LOANS AND LOAN
LOSS RESERVES.” Table 4.1 below presents the carrying values of our retained interests in securitization transactions as of
December 31, 2009 and 2008.
Table 4.1 — Carrying Value of Retained Interests
2009 2008
December 31,
(in millions)
Retained Interests, mortgage-related securities. . .................................................... $91,537 $98,307
Retained Interests, guarantee asset.............................................................. $10,444 $ 4,847
Retained Interests, Mortgage-Related Securities
We estimate the fair value of retained interests in mortgage-related securities based on independent price quotes
obtained from third-party pricing services or dealer provided prices. The hypothetical sensitivity of the carrying value of
retained securitization interests is based on internal models adjusted where necessary to align with fair values.
Retained Interests, Guarantee Asset
Our approach for estimating the fair value of the guarantee asset at December 31, 2009 used third-party market data as
practicable. For approximately 80% of the fair value of the guarantee asset, which relates to fixed-rate loan products that
reflect current market rates, the valuation approach involved obtaining dealer quotes on proxy securities with collateral
similar to aggregated characteristics of our portfolio. This effectively equates the guarantee asset with current, or “spot,”
market values for excess servicing interest-only securities. We consider these securities to be comparable to the guarantee
asset in that they represent interest-only cash flows and do not have matching principal-only securities. The remaining 20%
of the fair value of the guarantee asset related to underlying loan products for which comparable market prices were not
readily available. These amounts relate specifically to ARM products, highly seasoned loans or fixed-rate loans with coupons
that are not consistent with current market rates. This portion of the guarantee asset was valued using an expected cash flow
approach, including only those cash flows expected to result from our contractual right to receive management and guarantee
fees, with market input assumptions extracted from the dealer quotes provided on the more liquid products, reduced by an
estimated liquidity discount.
The fair values at the time of securitization and subsequent fair value measurements at the end of a period were
primarily estimated using third-party information. Consequently, we derived the assumptions presented in Table 4.2 by
determining those implied by our valuation estimates, with the IRRs adjusted where necessary to align our internal models
with estimated fair values determined using third-party information. However, prepayment rates are presented based on our
internal models and have not been similarly adjusted. For the portion of our guarantee asset that is valued by obtaining
dealer quotes on proxy securities, we derive the assumptions from the prices we are provided. Table 4.2 contains estimates
of the key assumptions used to derive the fair value measurement that relates solely to our guarantee asset on financial
guarantees of single-family loans. These represent the average assumptions used both at the end of the period as well as the
valuation assumptions at guarantee issuance during the year presented on a combined basis.
240 Freddie Mac