Freddie Mac 2014 Annual Report Download - page 168

163 Freddie Mac
obligations, or VRDOs, previously issued by HFAs. This support was provided through the issuance of guarantees,
which provide credit enhancement to the holders of such VRDOs and also create an obligation to provide funds to
purchase any VRDOs that are put by their holders and are not remarketed. Treasury provided a credit and liquidity
backstop on the TCLFP. These guarantees replaced existing liquidity facilities from other providers. The guarantees
were scheduled to expire on December 31, 2012. However, Treasury gave TCLFP participants the option to extend
their individual TCLFP facilities to December 31, 2015. Certain participants elected to extend their TCLFP facilities to
December 2015.
• NIBP — In December 2009, on a 50-50 pro rata basis, Freddie Mac and Fannie Mae agreed to issue in total $15.3
billion of partially guaranteed pass-through securities backed by new single-family and certain new multifamily
housing bonds issued by HFAs. Treasury purchased all of the pass-through securities issued by Freddie Mac and
Fannie Mae. This initiative provided financing for HFAs to issue new housing bonds.
Treasury will bear the initial losses of principal up to 35% of total principal for these two initiatives combined, and
thereafter Freddie Mac and Fannie Mae each will be responsible only for losses of principal on the securities that it issues to the
extent that such losses are in excess of 35% of all losses under both initiatives. Treasury will bear all losses of unpaid interest.
Under both initiatives, we and Fannie Mae were paid fees at the time bonds were securitized and are also paid ongoing fees for
as long as the bonds remain outstanding.
Related Parties as a Result of Conservatorship
As a result of our issuance to Treasury of the warrant to purchase shares of our common stock equal to 79.9% of the total
number of shares of our common stock outstanding, on a fully diluted basis, we are deemed a related party to the U.S.
government. Except for the transactions with Treasury discussed above in “Business Objectives,” “Government Support for our
Business” and “Housing Finance Agency Initiative” as well as in “NOTE 8: DEBT SECURITIES AND SUBORDINATED
BORROWINGS” and “NOTE 11: STOCKHOLDERS’ EQUITY,” no transactions outside of normal business activities have
occurred between us and the U.S. government (or any of its related parties) during the years ended December 31, 2014, 2013
and 2012. In addition, we are deemed related parties with Fannie Mae as both we and Fannie Mae have the same relationships
with FHFA and Treasury. All transactions between us and Fannie Mae have occurred in the normal course of business in
conservatorship. In October 2013, FHFA announced the formation of Common Securitization Solutions, LLCSM (CSS). CSS is
equally-owned by Freddie Mac and Fannie Mae. In connection with the formation of CSS, we entered into a limited liability
company agreement with Fannie Mae. For the year ended December 31, 2014, we contributed $43 million of capital to CSS. In
November 2014, we and Fannie Mae announced that a chief executive officer has been named for CSS. Additionally, we and
Fannie Mae each appointed two executives to the CSS Board of Managers and signed governance and operating agreements for
CSS.
NOTE 3: VARIABLE INTEREST ENTITIES
We have interests in various entities that are considered to be VIEs, including securitization trusts we use in our securities
issuance process. We are required to evaluate VIEs at inception and on an ongoing basis. When we determine that we are the
primary beneficiary of a VIE, we consolidate the assets and liabilities of the trust on our balance sheets. See “NOTE 1:
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES — Consolidation and Equity Method of Accounting” for more
information about VIEs.
VIEs for which We are the Primary Beneficiary
See “NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES — Securitization Activities through
Issuances of Freddie Mac Mortgage-Related Securities” for information on the nature of single-family PC trusts, REMICs and
Other Structured Securities, and Other Guarantee Transactions.
Single-family PC Trusts
Our single-family PC trusts issue pass-through securities that represent undivided beneficial interests in pools of
mortgages held by these trusts. 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 we
identified the credit performance of the underlying mortgage loans 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 mitigate credit losses (e.g., modification, foreclosure). Additionally, in our capacity as guarantor, we have the
ability to remove defaulted mortgage loans out of the PC trust to help mitigate credit losses. See “NOTE 5: IMPAIRED
LOANS” for further information regarding our removal 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 obligates us to absorb losses that could
Table of Contents