Freddie Mac 2004 Annual Report Download - page 104

OFF-BALANCE SHEET ARRANGEMENTS
OÅ-Balance Sheet Transactions
In the ordinary course of business, we fulÑll our statutory purposes by engaging in various transactions.
These transactions enable us to:
‚ maintain the lowest possible cost of Ñnancing for our mortgage investments;
‚ bring eÇciency to the mortgage market;
‚ manage interest-rate risk, credit risk and other business and market risks; and
‚ enhance our liquidity and capital resources.
Financial instruments created through these transactions may or may not be recorded on our consolidated
balance sheets at their fair value or on a cost basis. A transaction's contractual or notional amount usually does
not equal the related fair value or carrying amount. See ""CRITICAL ACCOUNTING POLICIES AND
ESTIMATES Ì Issuances and Transfers of PCs and Structured Securities'' for more discussion on oÅ-
balance sheet arrangements.
Guaranty of PCs and Structured Securities
As discussed in ""BUSINESS Ì Credit Guarantee Activities,'' we participate in the secondary mortgage
market by issuing PCs and Structured Securities to third party investors. PCs represent undivided interests in
pools of mortgage loans that are backed by either single-family or multifamily mortgage loans. Structured
Securities represent undivided interests in PCs or other mortgage-related securities issued by either Ginnie
Mae or non-agency issuers. In each case, we guarantee the payment of principal and interest on issued PCs or
Structured Securities. In these transactions, mortgage-related assets that back PCs and Structured Securities
held by third parties are not reÖected as our assets under GAAP, unless we retained an interest in PCs that
back Structured Securities that were issued as part of a sale transaction.
We assume the mortgage credit risk on the mortgages underlying PCs and Structured Securities by
guaranteeing the payment of principal and interest to holders of these securities. We manage this risk
carefully, sharing the risk in some cases with third parties through the use of primary loan-level mortgage
insurance, pool insurance and other credit enhancements. ""NOTE 4: FINANCIAL GUARANTEES'' to the
consolidated Ñnancial statements provides details related to credit protections and maximum coverages that
we obtain through credit enhancements in our credit guarantee activities. Also, see ""RISK MANAGE-
MENT Ì Credit Risks'' for more information.
Our PCs and Structured Securities are an integral part of our mortgage purchase program and any
decline in the price performance of or demand for our PCs could have a material adverse eÅect on the
proÑtability of our new credit guarantee business.
Most of our credit guarantee activity occurs through the Guarantor Program in the form of mortgage
swap transactions. In a mortgage swap transaction, a mortgage lender delivers mortgages to us in exchange for
PCs that represent undivided interests in those same mortgages. We receive various forms of consideration in
exchange for providing our guarantee on issued PCs, including (i) the contractual right to receive a
management and guarantee fee, (ii) delivery or credit fees for higher-risk mortgages and (iii) other forms of
credit enhancements received from counterparties or mortgage loan insurers.
Most of the remaining credit guarantee activity occurs through our Cash Window or our MultiLender
Program. Single-family mortgage loans we purchase for cash through the Cash Window are typically either
retained by us in our Retained portfolio or pooled together with other single-family mortgage loans we
purchase in connection with PC swap-based transactions in our MultiLender Program executed with various
lenders. We may issue such PCs to these lenders in exchange for the mortgage loans we purchase from them
or, to the extent these loans are pooled with loans purchased for cash, we may sell them to third parties for
cash consideration through an auction.
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