Freddie Mac 2004 Annual Report Download - page 187

NOTE 4: FINANCIAL GUARANTEES
Freddie Mac executes a variety of Ñnancial guarantees. Each of the principal types of such guarantees,
including relevant qualitative and quantitative information associated with such items, is further discussed
below.
Principal and Interest Guarantees of PCs and Structured Securities
As is further discussed in ""NOTE 2: TRANSFERS OF SECURITIZED INTERESTS IN MORT-
GAGE-RELATED ASSETS,'' Freddie Mac issues two types of mortgage-related securities: PCs and
Structured Securities. PCs represent undivided interests in pools of mortgage loans that are secured by either
single-family or multifamily mortgage loans. Similarly, Structured Securities represent undivided interests in
PCs or other mortgage-related securities that are issued by either Ginnie Mae or non-agency issuers. Freddie
Mac guarantees the payment of principal and interest on all issued PCs and Structured Securities. Freddie
Mac's guarantees related to Structured Securities include its guarantees on PCs or any non-Freddie Mac
mortgage-related securities that underlie these Structured Securities.
Depending upon the manner by which Freddie Mac transferred PCs or Structured Securities to third
parties in 2004 and 2003, all such transfers, which totaled $365,108 million and $713,787 million, respectively,
were accounted for pursuant to the requirements of FIN 45 and SFAS 125/140. Upon completion of the
transfer of PCs or Structured Securities to third parties, Freddie Mac recognizes the fair value of its obligation
to make guarantee payments. The methods by which Freddie Mac accounts for its guarantees of PCs and
Structured Securities are further discussed in ""NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNT-
ING POLICIES.''
The maximum potential amount of future principal payments Freddie Mac could be required to make in
connection with the unpaid principal balance of all PCs and Structured Securities held by third parties totaled
$852 billion and $752 billion at December 31, 2004 and 2003, respectively. Included in these amounts are
$5.4 billion and $5.0 billion at December 31, 2004 and 2003, respectively, that pertain to guarantees related to
multifamily housing revenue bonds that come in three principal forms. First, Freddie Mac provides a
guarantee of the payment of principal and interest on tax-exempt multifamily housing revenue bonds that
support pass-through certiÑcates issued by third parties. These housing revenue bonds are collateralized by
mortgage loans on low- and moderate-income multifamily housing projects. Second, Freddie Mac issues pass-
through certiÑcates which are backed by tax-exempt multifamily housing revenue bonds and related taxable
bonds and/or loans. Freddie Mac guarantees all scheduled principal on the bonds or loans, and guarantees
interest on the certiÑcates. And third, Freddie Mac guarantees the payment of principal and interest related to
low- and moderate-income multifamily mortgage loans that are originated and held by state and municipal
agencies to support tax-exempt multifamily housing revenue bonds. Additionally, Freddie Mac provided credit
guarantees of $1.8 billion and $2.3 billion at December 31, 2004 and 2003, respectively, of single-family
mortgage loans held by third parties.
As part of these guarantee arrangements, Freddie Mac also provides a commitment to advance funds,
commonly referred to as ""liquidity guarantees,'' totaling $5.0 billion and $4.5 billion, at December 31, 2004
and 2003, respectively, to enable the repurchase by others of tendered tax-exempt pass-through certiÑcates
and housing revenue bonds that are unable to be remarketed. Any repurchased securities would be pledged to
Freddie Mac as collateral for such funding until such time as the securities could be remarketed. There have
been no payments made to date by Freddie Mac under this type of loan commitment.
Generally, the contractual terms of Freddie Mac's guarantees on PCs and Structured Securities are 15 to
30 years. However, the actual term of each guarantee may be signiÑcantly less than the contractual terms due
to the prepayment characteristics of the mortgage-related assets that back PCs and Structured Securities.
Maximum potential interest payments Freddie Mac could be required to make associated with these
guarantees are not expected to signiÑcantly exceed 120 days of interest at the certiÑcate rate, given that
Freddie Mac generally begins a process to purchase the defaulted mortgages when they have been delinquent
for 120 consecutive days.
In connection with PCs or Structured Securities backed by single-family mortgage loans, Freddie Mac
had maximum coverage totaling $27.2 billion and $27.1 billion in primary mortgage insurance at
Freddie Mac
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