Freddie Mac 2004 Annual Report Download - page 166

Purchases of PCs or Structured Securities for Which Recognized GAs and GOs Exist
The purchase of a PC or Structured Security prompts the extinguishment of a corresponding, recognized
GO. Likewise, and where applicable, the purchase of such securities also prompts the extinguishment of the
unamortized balance of Deferred Guarantee Income, Buy Downs and Credit Fees.
Freddie Mac records the de-recognition of an extinguished GO against earnings as a component of Gains
(losses) on investment activity. Correspondingly, recognized GAs are reduced by an amount equal to the-then
fair value of an extinguished GO, an adjustment of which is also reÖected in earnings as a component of Gains
(losses) on investment activity. All recognized GAs in this case are then reclassiÑed on Freddie Mac's
consolidated balance sheets as a component of ""Participation CertiÑcate residuals, at fair value'' (""PC
Residuals'').
The unamortized balance of Deferred Guarantee Income, Buy-Downs and Credit Fees received are
extinguished as a basis adjustment to the recognized value of purchased PCs. Like purchase discounts, such
basis adjustments are subsequently amortized into earnings as Interest income pursuant to the requirements of
SFAS 91 using the eÅective interest method.
PC Residuals
PC residuals relate to certain PCs or Structured Securities held by Freddie Mac and represent the fair
value of the expected future cash Öows associated with the guarantee contracts that are inherent within such
securities.
A PC residual is recognized by Freddie Mac in connection with PCs or Structured Securities held by
Freddie Mac that (a) were previously transferred to third parties as part of transactions that were accounted
for either as sales pursuant to the provisions of SFAS 125/140 sale or as guarantee transactions that are
subject to the provisions of FIN 45 (such that a GA and GO was previously-established for held PCs or
Structured Securities), (b) were formed from mortgage loans purchased through Freddie Mac's Cash
Window (""Cash Window Purchases'') and that were never transferred to third parties, (c) were purchased by
Freddie Mac from third parties in contemplation of the related issuance of such PCs through the Guarantor
Program or (d) relate to Buy-Ups paid in connection with purchased PCs that had not previously been
included as part of a transfer that was accounted for as a sale under SFAS 125/140 or as part of a guarantee
transaction that was subject to the provisions of FIN 45.
Like a recognized GA, a PC residual is accounted for like a debt security and is classiÑed as either
available-for-sale or trading under SFAS 115. PC residuals relating to PCs or Structured Securities that
previously went through either a SFAS 125/140 sale or were accounted for pursuant to FIN 45 are classiÑed
as trading under SFAS 115. PC residuals relating to PCs held in portfolio that were formed from Cash
Window Purchases and that were never transferred to third parties are generally classiÑed as available-for-sale
under SFAS 115. The same treatment applies to PC residuals that correspond to PCs purchased by Freddie
Mac from third parties in contemplation of their issuance through the Guarantor Program, except that any
portions of these PC residuals that relate to Buy-Ups paid by Freddie Mac are accounted for as trading
investments.
All changes in the fair value of PC residuals that are designated as trading are reÖected in earnings as a
component of Gains (losses) on investment activity. All changes in the fair value of PC residuals that are
accounted for as available-for-sale are reÖected as a component of Accumulated other comprehensive income
(loss), net of taxes (""AOCI''), a component of Stockholders' equity.
Recognized PC residuals consist of a variety of cash Öows that are primarily recorded through interest
income. See ""NOTE 2: TRANSFERS OF SECURITIZED INTERESTS IN MORTGAGE-RELATED
ASSETS'' for a discussion of the attribution of GA and PC Residual-related cash Öows.
Due to Participation CertiÑcate Investors
Timing diÅerences between Freddie Mac's receipt of scheduled and unscheduled principal and interest
payments from seller/servicers on mortgages underlying PCs and the subsequent pass through of those
payments on PCs owned by third-party investors results in the liability Due to Participation CertiÑcate
investors. In those cases, payments from seller/servicers are generally received in a given month, yet the PC
Freddie Mac
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