Freddie Mac 2009 Annual Report Download - page 81

as amortization of pre-2003 deferred delivery and buy-down fees received by us which are recorded as deferred income as a
component of other liabilities. Beginning in 2003, delivery and buy-down fees are included within income on guarantee
obligation.
Table 13 — Management and Guarantee Income
Amount Rate Amount Rate Amount Rate
2009 2008 2007
Year Ended December 31,
(dollars in millions, rates in basis points)
Contractual management and guarantee fees
(1)
............................... $3,084 17.0 $3,124 17.5 $2,591 16.3
Amortization of deferred fees included in other liabilities . . . . . ................... (51) (0.3) 246 1.4 44 0.3
Total management and guarantee income . .................................. $3,033 16.7 $3,370 18.9 $2,635 16.6
Unamortized balance of deferred fees included in other liabilities, at period end . . ...... $ 238 $ 176 $ 410
(1) Consists of management and guarantee fees received related to our mortgage-related guarantees, including those issued prior to adoption of the
accounting standard for guarantees in January 2003, which did not require the establishment of a guarantee asset.
Management and guarantee income decreased in 2009 compared to 2008 primarily due to declines in the average rate of
contractual management and guarantee fees combined with the reversal of amortization of pre-2003 deferred fees.
Amortization of deferred fees declined in 2009 due to our expectations of increasing interest rates and slowing prepayments
in the future, which resulted in our recognizing a reversal of previously recognized amortization income. The average unpaid
principal balance of our issued PCs and Structured Securities was $1.81 trillion for 2009 compared to $1.78 trillion for 2008,
an increase of 2%. Although there were higher average balances of our issued guarantees during 2009, compared to 2008,
the effect of this increase was offset by declines in the average rate of contractual management and guarantee fees. Our
average management and guarantee fee rates declined in 2009, compared to 2008, since newly issued PCs in 2009 generally
had lower average contractual guarantee fee rates than the previously outstanding PCs that were liquidated. This rate decline
was primarily the result of the impact of market-adjusted pricing on new business purchases and higher credit quality in the
composition of mortgages within our new PC issuances during 2009 (for which we receive a lower fee). Market adjusted
pricing is a process in which we adjust our rates based on changes in spreads between the prices at which our PCs and
Fannie Mae’s mortgage-backed securities trade in the market.
We implemented delivery fee increases effective September 1, 2009 and October 1, 2009, for mortgages with certain
combinations of LTV ratios and other higher risk loan characteristics, subject to certain maximum limits. The Conservator’s
directive that we provide increased support to the mortgage market has also affected our guarantee pricing decisions by
limiting our ability to adjust our fees for current expectations of credit risk, and will likely continue to do so. We also
experienced competitive pressure on our contractual management and guarantee fee rates, which limited our ability to
increase our rates as customers renew their contracts. Under conservatorship, and given the current economic environment
and our public mission to provide increased support to the mortgage market, we currently seek to issue guarantees with fee
terms that are intended to cover our expected credit costs on new purchases and that cover a portion of our ongoing
administrative expenses. Specifically, our ability to increase our fees to offset higher than expected credit costs on guarantees
issued before 2009 is limited while we operate at the direction of our Conservator, and we currently expect that our fees will
not cover such credit costs.
Management and guarantee income increased in 2008 compared to 2007 primarily due to a 12% increase in the average
balance of our issued PCs and Structured Securities. In addition, the average contractual management and guarantee fee rate
for 2008 was higher than 2007 primarily due to an increase in the preference for buy-ups in these rates by our customers. To
a lesser extent, increased purchases of 30-year fixed-rate product during 2008, which has higher guarantee fee rates relative
to 15-year fixed-rate and certain other products, also contributed to the increase in guarantee fee rates.
Gains (Losses) on Guarantee Asset
Upon issuance of a financial guarantee, we record a guarantee asset on our consolidated balance sheets representing the
fair value of the management and guarantee fees (reflecting adjustments for buy-ups and buy-downs) we expect to receive
over the life of our PCs or Structured Securities. Subsequent changes in the fair value of the future cash flows of the
guarantee asset are reported in current period income as gains (losses) on guarantee asset.
Gains (losses) on guarantee asset reflects:
• reductions related to the management and guarantee fees received that are considered a return of our recorded
investment on the guarantee asset; and
• changes in the fair value of management and guarantee fees we expect to receive over the life of the financial
guarantee.
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