Freddie Mac 2010 Annual Report Download - page 185

deemed to be substantially the same as the underlying PCs. As a result, when we purchase single-class REMICs and Other
Structured Securities, we extinguish a pro rata portion of the outstanding debt securities of the related PC trust on our
consolidated balance sheets.
When we sell single-class REMICs and Other Structured Securities, we recognize a liability to the third-party beneficial
interest holders of the related consolidated PC trust as debt securities of consolidated trusts held by third parties. That is, our
sale of single-class REMICs and Other Structured Securities, is accounted for as the issuance of debt, not as the sale of
investment securities.
Multiclass REMICs and Other Structured Securities
In multiclass REMICs and Other Structured Securities, the collateral includes PCs and REMICs and Other Structured
Securities. Generally, PCs serve as the primary type of collateral for these resecuritizations. We do not consolidate these
resecuritization trusts as we are not deemed to be the primary beneficiary of such trusts. In our multiclass REMICs and
Other Structured Securities, the cash flows of the underlying PCs are divided (e.g., stripped and/or time tranched). Due
primarily to this division of cash flows, these securities are not deemed to be substantially the same as the underlying PCs.
As a result, when we purchase multiclass REMICs and Other Structured Securities, we record these securities as investments
in debt securities rather than as the extinguishment of debt since we are investing in the debt securities of a non-consolidated
entity. See “Investments in Securities” for further information regarding our accounting for investments in multiclass
REMICs and Other Structured Securities. The purchase of these securities is generally funded through the issuance of
unsecured debt to third parties.
We recognize, as assets, both the investment in the multiclass REMICs and Other Structured Securities and the
mortgage loans backing the PCs held by the trusts which underlie multiclass REMICs and Other Structured Securities.
Additionally, we recognize, as liabilities, the unsecured debt issued to third parties to fund the purchase of the multiclass
REMICs and Other Structured Securities as well as the debt issued to third parties of the PC trusts we consolidate which
underlie multiclass REMICs and Other Structured Securities. This results in recognition of interest income from both assets
and interest expense from both liabilities.
When we sell multiclass REMICs and Other Structured Securities, we account for the transfer in accordance with the
accounting standards for transfers of financial assets. To the extent the transfer of multiclass REMICs and Other Structured
Securities qualifies as a sale, we de-recognize all assets sold and recognize all assets obtained and liabilities incurred. Any
gain (loss) on the sale of multiclass REMICs and Other Structured Securities is reflected in our consolidated statements of
operations as a component of other gains (losses) on investment securities. To the extent the transfer of multiclass REMICs
and Other Structured Securities does not qualify as a sale, we account for the transfer as a financing transaction and
recognize a liability for the proceeds received from third parties in the transfer.
Cash and Cash Equivalents
Highly liquid investment securities that have an original maturity of three months or less are accounted for as cash
equivalents. In addition, cash collateral that we have the right to use for general corporate purposes and that we obtain from
counterparties to derivative contracts is recorded as cash and cash equivalents. The vast majority of our cash and cash
equivalents balance is interest-bearing in nature.
Restricted Cash and Cash Equivalents
Cash collateral accepted from counterparties that we do not have the right to use for general corporate purposes is
recorded as restricted cash in our consolidated balance sheets. Restricted cash includes cash remittances received on the
underlying assets of our consolidated trusts, which are deposited into a separate custodial account. These cash remittances
include both scheduled and unscheduled principal and interest payments. These funds are segregated and are not commingled
with our general operating funds. As securities administrator, we invest the cash held in the custodial account, pending
distribution to our PC and REMICs and Other Structured Securities holders, in short-term investments and are entitled to the
interest income earned on these short-term investments, which is recorded as interest income, other on our consolidated
statements of operations. The funds are maintained in this separate custodial account until they are remitted to the PC and
REMICs and Other Structured Securities holders on their respective security payment dates.
Mortgage Loans
Upon acquisition, we classify a loan as either held-for-sale or held-for-investment. Mortgage loans that we have the
ability and intent to hold for the foreseeable future are classified as held-for-investment. Historically, we classified mortgage
loans that we purchased to use as collateral for future PC and other mortgage-related security issuances as held-for-sale
because we intended to securitize the loans in transactions that qualified for derecognition from our consolidated financial
statements and did not have the intent to hold these loans for the foreseeable future. Effective January 1, 2010 we were
required to consolidate our single-family PC trusts and certain Other Guarantee Transactions, and, therefore, recognized the
182 Freddie Mac