Freddie Mac 2004 Annual Report Download - page 165

Credit enhancements that are separately recognized as Other assets are amortized into earnings as Non-
interest expense. Such assets are speciÑcally amortized over related contract terms at the greater of results
calculated by amortizing recognized credit enhancements (a) in proportion to the rate of unpaid principal
balance decline of covered mortgage loans or (b) on a straight-line basis over a credit enhancement's contract
term.
Accounting For Inception DiÅerences Between Consideration Received and Guarantee Obligations
Incurred Ì Because GAs, GOs and credit enhancement-related assets that are recognized at the inception of
an executed Guarantor Swap are valued independently of each other, net diÅerences between such recognized
assets and liabilities may exist at inception. Net positive diÅerences between such amounts are deferred on
Freddie Mac's consolidated balance sheet as a component of Guarantee obligation for Participation
CertiÑcates and are hereinafter referred to as ""Deferred Guarantee Income''. Net negative diÅerences
between GAs, GOs and credit enhancement-related assets that are recognized at the inception of executed
Ñnancial guarantees are expensed immediately to earnings as a component of Non-interest expense Ì Other
expenses.
Deferred Guarantee Income is amortized into earnings at a rate that is commensurate with the observed
decline in the unpaid principal balance of securitized mortgage loans. Periodic amortization of recognized
Deferred Guarantee Income is reÖected in earnings as a component of Income on ""Guarantee obligation for
Participation CertiÑcates.''
Accounting For Buy-Ups, Buy-Downs and Credit Fees Ì Cash payments that are made or received in
connection with Buy-Ups and Buy-Downs are recognized as adjustments of recognized Deferred Guarantee
Income. Likewise, Credit Fees that Freddie Mac received at inception are also recognized as adjustments of
recognized Deferred Guarantee Income.
MultiLender Swap-Based Issuances of PCs
Freddie Mac issues PCs through its MultiLender Program that are backed by mortgage loans delivered to
Freddie Mac by more than one third party. Freddie Mac may itself contribute mortgage loans to MultiLender
pools from which PCs are then issued and delivered to third parties (and to Freddie Mac, to the extent that
Freddie Mac contributed mortgage loans to a MultiLender pool). Freddie Mac accounts for its contributions
of mortgage loans to a MultiLender pool as partial sales of those assets, the sold portion of which is dependent
upon the contribution of collateral made by Freddie Mac relative to third parties. The portion of a
MultiLender Swap transaction that qualiÑes as a sale is accounted for in the same manner as transfers
described above that are accounted for as sales. The remaining portion of such PC issuances and transfers are
accounted for in a manner consistent with the accounting for PCs issued through the Guarantor Program (as
described above).
PC-for-Structured Security Swap Transactions
Freddie Mac issues and transfers Structured Securities to third parties in exchange for PCs and non-
Freddie Mac mortgage-related securities. Freddie Mac cannot freely pledge or exchange the securities that are
delivered to it by third parties in these exchanges. As a result, Freddie Mac does not view such exchanges as
triggering sale accounting recognition under SFAS 125/140. Additionally, Freddie Mac does not account for
such exchanges pursuant to the requirements of FIN 45 given that the guarantees on newly-issued Structured
Securities constitute guarantees of Freddie Mac's own performance associated with guarantees on PCs or
Structured Securities that underlie the newly-issued Structured Securities (guarantees of one's own perform-
ance are exempt from the requirements of FIN 45). As a result, Freddie Mac does not recognize any
incremental GAs or GOs on such transactions. Rather, Freddie Mac defers and amortizes into income on a
straight-line basis that portion of the transaction fee that Freddie Mac receives on such transactions that
relates to the estimated fair value of the company's future administrative responsibilities for issued Structured
Securities. In cases where Freddie Mac retains portions of the Structured Securities, a portion of this fee is
deferred under the requirements of SFAS 91. The balance of transaction fees received, which relates to
compensation earned in connection with structuring-related services rendered by Freddie Mac to third parties,
is recognized immediately in earnings as Non-interest income Ì Resecuritization fees.
Freddie Mac
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