Freddie Mac 2004 Annual Report Download - page 163

Subsequent Measurement of Recognized GOs Ì With respect to the subsequent measurement of
recognized GOs for the year ended December 31, 2002, Freddie Mac accounts for recognized GOs at fair
value. All changes in fair value are reÖected in Freddie Mac's consolidated statements of income as a
component of Income on ""Guarantee obligation for Participation CertiÑcates.''
With respect to the subsequent measurement of recognized GOs for the years ended December 31, 2004
and 2003, Freddie Mac subsequently measures such liabilities using a systematic and rational method of
amortization. More speciÑcally, Freddie Mac amortizes recognized GOs into earnings in proportion to the rate
of unpaid principal balance decline of securitized mortgage loans. Periodic amortization of recognized GOs is
reÖected in earnings as a component of Income on ""Guarantee obligation for Participation CertiÑcates.''
Freddie Mac subsequently measures its contingent obligation to make guarantee payments pursuant to the
provisions of SFAS 5, which requires that credit losses be recognized in earnings when assessed as both
probable and estimable. See discussion below in ""Recently Adopted Accounting Standards and Accounting
Changes'' for further discussion concerning the change in methods used by Freddie Mac to subsequently
measure recognized GOs.
Guarantor Swap Transactions Executed Prior to January 1, 2003
Guarantor Swaps represent transactions in which third-party institutions transfer mortgage loans to
Freddie Mac in exchange for issued PCs that are backed by such mortgage loans. In return for providing its
guarantee on such issued PCs, and similar to PCs described above in ""Transfers of Financial Assets that
Qualify as Purchases or Sales,'' Freddie Mac earns a management and guarantee fee (""G-Fee'') that is paid
to Freddie Mac over the life of an issued PC. It is also common for Buy-Ups or Buy-Downs to be exchanged
between Freddie Mac and its counterparties upon the issuance of a PC. Buy-Ups represent upfront payments
that are made by Freddie Mac, which increase the G-Fee that Freddie Mac will receive over the life of the PC
in connection with its guarantee. Buy-Downs represent upfront payments that are made to Freddie Mac,
which decrease (i.e., partially prepay) the G-Fee that Freddie Mac will receive over the life of the PC in
connection with its guarantee. Moreover, Freddie Mac may receive upfront, cash-based payments as
additional compensation for its guarantee of mortgage loans with certain credit risk related characteristics
(""Credit Fees''). Finally, and as additional consideration received on such exchanges, Freddie Mac may
receive various types of seller-provided credit enhancements that correspond to securitized mortgage loans.
The accounting for the primary components of Guarantor Swaps executed prior to January 1, 2003 follows.
Accounting For Guarantee Fees, Buy-Up, Buy Down and Credit Fees Ì G-Fees (as adjusted for Buy-
Downs received) are recognized as Management and guarantee income on an accrual basis over the
corresponding guarantee period in accordance with the provisions of EITF Issue No. 85-20, ""Recognition of
Fees for Guaranteeing a Loan.''
Buy-Up amounts paid at PC issuance are recognized on the consolidated balance sheets as a GA if the
corresponding PCs are held by third parties and are accounted for like a debt security that is classiÑed as
trading under SFAS 115. If a Buy-Up was paid in connection with PCs that Freddie Mac holds, the Buy-Up is
recognized on the company's consolidated balance sheets as a component of Participation CertiÑcate
residuals, at fair value (""PC residuals''), which is discussed further below.
Buy-Down and Credit Fee amounts that were received at PC issuance prior to January 1, 2003 are
deferred on Freddie Mac's consolidated balance sheets as an adjustment of Other liabilities. These amounts
are amortized into Management and guarantee income pursuant to the requirements of SFAS No. 91,
""Accounting for Nonrefundable Fees and Costs Associated with Originating or Acquiring Loans and Initial
Direct Costs of Leases'' (""SFAS 91'').
If Freddie Mac were to purchase, and then subsequently sell for GAAP purposes, a PC that was issued
prior to January 1, 2003 as part of a Guarantor Swap (and for which a GA and GO were never previously
recognized), it would recognize, as a GA, the fair value of its contractual right to receive guarantee fees, and
would also recognize, as a GO, the fair value of its obligation to guarantee the payment of principal and
interest on such securities. Such assets and liabilities would be subsequently measured in a manner that is
consistent with principles described above in ""Transfers of Financial Assets that Qualify as Purchases or
Sales.''
Freddie Mac
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