Freddie Mac 2010 Annual Report Download - page 205

assets and liabilities of these trusts at their UPB, with accrued interest, allowance for credit losses, or other-than-temporary
impairments recognized as appropriate, using the practical expedient permitted upon adoption as we determined that
calculation of carrying values was not practical. Other newly consolidated assets and liabilities that either do not have a UPB
or are required to be carried at fair value were measured at fair value. After January 1, 2010, new consolidations of trust
assets and liabilities are recorded at either their: (a) carrying value if the underlying assets are contributed by us to the trust
and consolidated at the time of the transfer; or (b) fair value for the assets and liabilities that are consolidated under the
securitization trusts established for our guarantor swap program, rather than their UPB.
In addition to our PC trusts, we are involved with numerous other entities that meet the definition of a VIE, as
discussed below.
VIEs for which We are the Primary Beneficiary
PC Trusts
Our PC trusts issue pass-through securities that represent undivided beneficial interests in pools of mortgages held by
these trusts. For our fixed-rate PCs, we guarantee the timely payment of interest and principal. For our ARM PCs, we
guarantee the timely payment of the weighted average coupon interest rate for the underlying mortgage loans and the full
and final payment of principal; we do not guarantee the timely payment of principal on ARM PCs. In exchange for
providing this guarantee, we may receive a management and guarantee fee and up-front delivery fees. We issue most of our
PCs in transactions in which our customers exchange mortgage loans for PCs. We refer to these transactions as guarantor
swaps.
PCs are designed so that we bear the credit risk inherent in the loans underlying the PCs through our guarantee of
principal and interest payments on the PCs. The PC holders bear the interest rate or prepayment risk on the mortgage loans
and the risk that we will not perform on our obligation as guarantor. For purposes of our consolidation assessments, our
evaluation of power and economic exposure with regard to PC trusts focuses on credit risk because the credit performance of
the underlying mortgage loans was identified as the activity that most significantly impacts the economic performance of
these entities. We have the power to impact the activities related to this risk in our role as guarantor and master servicer.
Specifically, in our role as master servicer, we establish requirements for how mortgage loans are serviced and what
steps are to be taken to avoid credit losses (e.g., modification, foreclosure). Additionally, in our capacity as guarantor, we
have the ability to purchase defaulted mortgage loans out of the PC trust to help manage credit losses. See “NOTE 5:
MORTGAGE LOANS AND LOAN LOSS RESERVES” for further information regarding our purchase of mortgage loans
out of PC trusts. These powers allow us to direct the activities of the VIE (i.e., the PC trust) that most significantly impact
its economic performance. In addition, we determined that our guarantee to each PC trust to provide principal and interest
payments exposes us to losses that could potentially be significant to the PC trusts. Accordingly, we concluded that we are
the primary beneficiary of our single-family PC trusts.
At December 31, 2010, we were the primary beneficiary of, and therefore consolidated, PC trusts with assets totaling
$1.7 trillion, as measured using the UPB of PCs we issued. The assets of each PC trust can be used only to settle obligations
of that trust. In connection with our PC trusts, we have credit protection in the form of primary mortgage insurance, pool
insurance, recourse to lenders, and other forms of credit enhancement. We also have credit protection for certain of our PC
trusts that issue PCs backed by loans or certificates of federal agencies (such as FHA, VA, and USDA). See “NOTE 5:
MORTGAGE LOANS AND LOAN LOSS RESERVES — Credit Protection and Other Forms of Credit Enhancement” for
additional information regarding third-party credit enhancements related to our PC trusts.
Other Guarantee Transactions
Other Guarantee Transactions are mortgage-related securities that we issue to third parties in exchange for non-Freddie
Mac mortgage-related securities. See “NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES —
Securitization Activities through Issuances of Freddie Mac Mortgage-Related Securities” for information on the nature of
Other Guarantee Transactions. The degree to which our involvement with securitization trusts that issue Other Guarantee
Transactions provides us with power to direct the activities that most significantly impact the economic performance of these
VIEs (e.g., the ability to mitigate credit losses on the underlying assets of these entities) and exposure to benefits or losses
that could potentially be significant to the VIEs (e.g., the existence of third party credit enhancements) varies by transaction.
Our consolidation determination took into consideration the specific facts and circumstances of our involvement with each of
these entities, including our ability to direct or influence the performance of the underlying assets and our exposure to
potentially significant variability based upon the design of each entity and its governing contractual arrangements. As a
result, we have concluded that we are the primary beneficiary of certain Other Guarantee Transactions with underlying assets
totaling $15.8 billion at December 31, 2010. For those Other Guarantee Transactions that we do consolidate, the investors in
these securities have recourse only to the assets of those VIEs.
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