Freddie Mac 2010 Annual Report Download - page 161

net assets, before capital transactions, is $3.5 billion related to our partial valuation allowance against our net deferred tax
assets recorded during 2009.
When the OAS on a given asset widens, the fair value of that asset will typically decline, all other market factors being
equal. However, we believe such OAS widening has the effect of increasing the likelihood that, in future periods, we will
recognize income at a higher spread on this existing asset. The reverse is true when the OAS on a given asset tightens —
current period fair values for that asset typically increase due to the tightening in OAS, while future income recognized on
the asset is more likely to be earned at a reduced spread. However, as market conditions change, our estimate of expected
fair value gains and losses from OAS may also change, and the actual core spread income recognized in future periods could
be significantly different from current estimates.
OFF-BALANCE SHEET ARRANGEMENTS
We enter into certain business arrangements that are not recorded on our consolidated balance sheets or may be
recorded in amounts that differ from the full contract or notional amount of the transaction. These off-balance sheet
arrangements may expose us to potential losses in excess of the amounts recorded on our consolidated balance sheets.
Arrangements Related to Guarantee and Securitization Activities
Most of our off-balance sheet arrangements relate to our business of guaranteeing mortgages and mortgage-related
securities, and related securitization activities. We guarantee the payment of principal and interest on Freddie Mac mortgage-
related securities we issue. As of December 31, 2010, our off-balance sheet arrangements primarily related to: (a) Freddie
Mac mortgage-related securities backed by multifamily loans; and (b) certain single-family Other Guarantee Transactions.
We also have off balance sheet arrangements related to other guarantee commitments, including long-term standby
commitments and liquidity guarantees.
Our maximum potential off-balance sheet exposure to credit losses relating to these securitization activities and other
guarantee commitments is primarily represented by the UPB of the loans and securities underlying the non-consolidated
trusts and guarantees to third parties, which was $43.9 billion, $1.5 trillion and $1.4 trillion at December 31, 2010, 2009 and
2008, respectively. Our off-balance sheet arrangements related to securitization activity have been significantly reduced due
to new accounting standards for transfers of financial assets and the consolidation of VIEs, which we adopted on January 1,
2010. See “NOTE 2: CHANGE IN ACCOUNTING PRINCIPLES” and “NOTE 10: FINANCIAL GUARANTEES” for more
information on our off-balance sheet securitization arrangements.
We provide long-term standby commitments to certain of our customers, which obligate us to purchase seriously
delinquent loans that are covered by those agreements. These other guarantee commitments totaled $5.5 billion, $5.1 billion,
and $10.6 billion of UPB at December 31, 2010, 2009, and 2008, respectively. We also had other guarantee commitments
outstanding with respect to multifamily housing revenue bonds of $9.7 billion, $9.2 billion, and $9.2 billion in UPB at
December 31, 2010, 2009, and 2008, respectively. In addition, as of December 31, 2010, 2009, and 2008, we issued other
guarantee commitments on HFA bonds under the TCLFP with UPB of $3.5 billion, $0.8 billion, and $0 billion respectively.
As part of the guarantee arrangements pertaining to certain multifamily housing revenue bonds and securities backed by
multifamily housing revenue bonds, we provided commitments to advance funds, commonly referred to as “liquidity
guarantees,” totaling $12.6 billion, $12.4 billion and $12.3 billion at December 31, 2010, 2009 and 2008, respectively. These
guarantees require us to advance funds to third parties that enable them to repurchase tendered bonds or securities that are
unable to be remarketed. Any repurchased securities are pledged to us to secure funding until the securities are remarketed.
We hold cash and cash equivalents in excess of these commitments to advance funds. At December 31, 2010, 2009, and
2008, there were no liquidity guarantee advances outstanding. Advances under our liquidity guarantees would typically
mature in 60 to 120 days. In addition, as part of the HFA initiative, we, together with Fannie Mae, provide liquidity
guarantees for certain variable-rate single-family and multifamily housing revenue bonds, under which Freddie Mac generally
is obligated to purchase 50% of any tendered bonds that cannot be remarketed within five business days.
Our exposure to losses on the transactions described above would be partially mitigated by the recovery we would
receive through exercising our rights to the collateral backing the underlying loans and the available credit enhancements,
which may include recourse and primary insurance with third parties. In addition, we provide for incurred losses each period
on these guarantees within our provision for credit losses.
Other Agreements
We own an interest in numerous entities that are considered to be VIEs for which we are not the primary beneficiary
and which we do not consolidate on our balance sheets in accordance with the accounting standards on the consolidation of
VIEs. These VIEs relate primarily to our investment activity in mortgage-related assets and non-mortgage assets, and include
LIHTC partnerships, certain Other Guarantee Transactions, and certain asset-backed investment trusts. Our consolidated
balance sheets reflect only our investment in the VIEs, rather than the full amount of the VIEs’ assets and liabilities. See
158 Freddie Mac