Freddie Mac 2010 Annual Report Download - page 230

Subordinated Debt Interest and Principal Payments
In a September 23, 2008 statement concerning the conservatorship, the Director of FHFA stated that we would continue
to make interest and principal payments on our subordinated debt, even if we fail to maintain required capital levels. As a
result, the terms of any of our subordinated debt that provide for us to defer payments of interest under certain
circumstances, including our failure to maintain specified capital levels, are no longer applicable.
NOTE 10: FINANCIAL GUARANTEES
We securitize substantially all of the single-family mortgage loans we purchase and issue securities backed by such
mortgages, which we guarantee. Beginning January 1, 2010, we no longer recognize a financial guarantee for such trusts as
we recognize both the mortgage loans and the debt securities of these securitization trusts on our consolidated balance
sheets. See “NOTE 2: CHANGE IN ACCOUNTING PRINCIPLES” for further information about changes in accounting
affecting our securitized guarantees. Table 10.1 presents our maximum potential amount of future payments, our recognized
liability, and the maximum remaining term of our financial guarantees that are not consolidated on our balance sheets.
Table 10.1 — Financial Guarantees
Maximum
Exposure
(1)
Recognized
Liability
Maximum
Remaining
Term
Maximum
Exposure
(1)
Recognized
Liability
Maximum
Remaining
Term
December 31, 2010 December 31, 2009
(dollars in millions, terms in years)
Non-consolidated Freddie Mac securities . . . . . . . . .......... $25,279 $202 41 $1,854,813 $11,949 43
Other guarantee commitments . . ....................... 18,670 427 38 15,069 516 40
Derivative instruments . ............................. 37,578 301 35 30,362 76 33
Servicing-related premium guarantees .................... 172 — 5 193 — 5
(1) Maximum exposure represents the contractual amounts that could be lost under the non-consolidated guarantees if counterparties or borrowers defaulted,
without consideration of possible recoveries under credit enhancement arrangements, such as recourse provisions, third-party insurance contracts, or
from collateral held or pledged. The maximum exposure disclosed above is not representative of the actual loss we are likely to incur, based on our
historical loss experience and after consideration of proceeds from related collateral liquidation. In addition, the maximum exposure for our liquidity
guarantees is not mutually exclusive of our default guarantees on the same securities; therefore, these amounts are also included within the maximum
exposure of non-consolidated Freddie Mac securities and other guarantee commitments.
Non-consolidated Freddie Mac Securities
We issue three types of mortgage-related securities: (a) PCs; (b) REMICs and Other Structured Securities; and (c) Other
Guarantee Transactions. We guarantee the payment of principal and interest on these securities, which are backed by pools of
mortgage loans, irrespective of the cash flows received from the borrowers. Commencing January 1, 2010, only our
guarantees issued to non-consolidated securitization trusts are accounted for in accordance with the accounting standards for
guarantees (i.e., a guarantee asset and guarantee obligation are recognized).
At December 31, 2010 and 2009, there were $1.4 trillion and $1.7 trillion, respectively, of securities we issued in
resecuritization of our PCs and other previously issued REMICs and Other Structured Securities. The securities issued in
these resecuritizations consist of single-class and multiclass securities backed by PCs, REMICs, interest only strips, and
principal only strips and do not increase our credit-related exposure. As a result, no guarantee asset or guarantee obligation is
recognized for these transactions and they are excluded from the table above.
We recognize a guarantee asset, guarantee obligation and a reserve for guarantee losses, as necessary, for securities
issued by non-consolidated securitization trusts and other guarantee commitments for which we are exposed to incremental
credit risk. Our guarantee obligation represents the recognized liability, net of cumulative amortization, associated with our
guarantee of PCs and certain Other Guarantee Transactions issued to non-consolidated securitization trusts. In addition to our
guarantee obligation, we recognized a reserve for guarantee losses, which is included within other liabilities on our
consolidated balance sheets, which totaled $0.2 billion and $32.4 billion at December 31, 2010 and 2009, respectively. For
many of the loans underlying our non-consolidated guarantees, there are credit protections from third parties, including
subordination, covering a portion of our exposure. See “NOTE 5: MORTGAGE LOANS AND LOAN LOSS RESERVE” for
information about credit protections on loans we guarantee. See “NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING
PRINCIPLES” for further information about our accounting for financial guarantees.
During 2010 and 2009, we issued and guaranteed $375.9 billion and $467.0 billion, respectively, in UPB of Freddie
Mac mortgage-related securities backed by single-family mortgage loans (excluding those backed by HFA bonds). In
accordance with the changes in accounting standards for the consolidation of VIEs, we did not recognize a guarantee asset or
a guarantee obligation for these single-family securities. We also issued approximately $5.9 billion and $2.1 billion in UPB
of Other Structured Securities and Other Guarantee Transactions backed by multifamily mortgage loans during 2010 and
2009, respectively, for which a guarantee asset and guarantee obligation were recognized. As explained above, the vast
majority of our issued mortgage-related securities are no longer accounted for in accordance with the accounting standards
for guarantees (i.e., a guarantee asset and guarantee obligation are not recognized) as a result of the consolidation of certain
227 Freddie Mac