Freddie Mac 2010 Annual Report Download - page 234

Table 11.4 — Details of Cash Flows
2009 2008
For the Year Ended
December 31,
(in millions)
Cash flows from:
Proceeds from transfers of Freddie Mac securities that were accounted for as sales
(1)
.......................... $118,445 $ 36,885
Cash flows received on the guarantee asset
(2)
..................................................... 2,922 2,871
Principal and interest from retained securitization interests
(3)
.......................................... 21,377 20,411
Purchases of delinquent or foreclosed loans and required purchase of balloon mortgages
(4)
...................... (26,346) (13,539)
(1) On our consolidated statements of cash flows, this amount is included in investing activities as part of proceeds from sales of trading and available-for-
sale securities.
(2) Represents cash received from securities receiving sales treatment and related to management and guarantee fees, which reduce the guarantee asset. On
our consolidated statements of cash flows, the change in guarantee asset and the corresponding management and guarantee fee income are reflected as
operating activities.
(3) On our consolidated statements of cash flows, the cash flows from interest are included in net income (loss) and the principal repayments are included
in investing activities as part of proceeds from maturities of available-for-sale securities.
(4) On our consolidated statements of cash flows, this amount is included in investing activities as part of purchases of held-for-investment mortgages.
Includes our acquisitions of REO in cases where a foreclosure sale occurred while a loan was owned by the securitization trust.
In addition to the cash flow shown above, we are obligated under our guarantee to make up any shortfalls in principal
and interest to the holders of our securities, including those shortfalls arising from losses incurred in our role as trustee for
the master trust, which administers cash remittances from mortgages and makes payments to the security holders. See
“NOTE 10: FINANCIAL GUARANTEES” for further information on these cash flows.
Gains and Losses on Transfers of PCs and REMICs and Other Structured Securities that are Accounted for as Sales
The gain or loss on a securitization that qualifies as a sale is determined, in part, based on the carrying amounts of the
financial assets sold. The carrying amounts of the assets sold are allocated between those sold to third parties and those held
as retained interests based on their relative fair value at the date of sale. We recognized net pre-tax gains (losses) on transfers
of mortgage loans, PCs and REMICs and Other Structured Securities that were accounted for as sales of approximately
$1.5 billion and $151 million for the years ended December 31, 2009 and 2008, respectively. These transactions were not
significant in 2010 due to the changes in the accounting standards for consolidation of PC trusts and certain Other Guarantee
Transactions that became effective January 1, 2010.
NOTE 12: DERIVATIVES
Use of Derivatives
We use derivatives primarily to:
• hedge forecasted issuances of debt;
• synthetically create callable and non-callable funding;
• regularly adjust or rebalance our funding mix in order to more closely match changes in the interest-rate
characteristics of our mortgage assets; and
• hedge foreign-currency exposure.
Hedge Forecasted Debt Issuances
We typically commit to purchase mortgage investments on an opportunistic basis for a future settlement, typically
ranging from two weeks to three months after the date of the commitment. To facilitate larger and more predictable debt
issuances that contribute to lower funding costs, we use interest-rate derivatives to economically hedge the interest-rate risk
exposure from the time we commit to purchase a mortgage to the time the related debt is issued.
Create Synthetic Funding
We also use derivatives to synthetically create the substantive economic equivalent of various debt funding structures.
For example, the combination of a series of short-term debt issuances over a defined period and a pay-fixed interest rate
swap with the same maturity as the last debt issuance is the substantive economic equivalent of a long-term fixed-rate debt
instrument of comparable maturity. Similarly, the combination of non-callable debt and a call swaption, or option to enter
into a receive-fixed interest rate swap, with the same maturity as the non-callable debt, is the substantive economic
equivalent of callable debt. These derivatives strategies increase our funding flexibility and allow us to better match asset and
liability cash flows, often reducing overall funding costs.
Adjust Funding Mix
We generally use interest-rate swaps to mitigate contractual funding mismatches between our assets and liabilities. We
also use swaptions and other option-based derivatives to adjust the contractual terms of our debt funding in response to
changes in the expected lives of our investments in mortgage-related assets. As market conditions dictate, we take
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