Freddie Mac 2004 Annual Report Download - page 188

December 31, 2004 and 2003, respectively, $3.5 billion and $4.1 billion in pool insurance and other credit
enhancements at December 31, 2004 and 2003, respectively, and $4.1 billion and $4.6 billion in recourse to
lenders at December 31, 2004 and 2003, respectively. In addition, $2.6 billion and $4.1 billion of outstanding
Structured Securities relate to Ginnie Mae CertiÑcates, which are backed by the full faith and credit of the
U.S. government, at December 31, 2004 and 2003, respectively. With respect to PCs and Structured
Securities backed by multifamily mortgage loans, Freddie Mac had maximum combined credit enhancements
totaling $9.1 billion and $9.5 billion at December 31, 2004 and 2003, respectively.
At December 31, 2004, Freddie Mac had a recognized Guarantee obligation for Participation CertiÑcates
on the consolidated balance sheets of $4.1 billion, which included $1.3 billion of Deferred Guarantee Income.
At December 31, 2003, the Guarantee obligation for Participation CertiÑcates totaled $2.9 billion, which
included $0.8 billion of Deferred Guarantee Income. In addition, the company had a Reserve for Guarantee
Losses on Participation CertiÑcates that totaled $150 million and $125 million at December 31, 2004 and
2003, respectively, for incurred credit losses that were recognized in conjunction with PCs and Structured
Securities held by third parties.
Guarantees of Stated Final Maturity of Issued Structured Securities
Freddie Mac commonly issues Structured Securities with stated Ñnal maturities that are shorter than the
stated maturity of the underlying mortgage loans. If the assets that back such Structured Securities have not
fully matured as of the stated Ñnal maturity date of such securities, either Freddie Mac will sponsor an auction
of the underlying assets or a third party who holds a par-based call option on such underlying assets will
exercise its option to purchase such underlying assets (an option which, if exercised, would provide cash Öows
that Freddie Mac would pass through to investors in such Structured Securities). If an auction occurs, Freddie
Mac would pass through proceeds received to investors of such Structured Securities. To the extent, however,
that auction proceeds are insuÇcient to cover unpaid principal amounts due to investors in such Structured
Securities, Freddie Mac is obligated to fund such principal. With respect to such guarantees of stated Ñnal
maturity, Freddie Mac eÅectively writes a cash-settled put option to investors in such Structured Securities.
Such guarantees are accounted for as derivative instruments pursuant to the requirements of SFAS 133.
As of December 31, 2004 and 2003, the maximum potential amount of payments Freddie Mac could be
required to make under such guarantees was $9.2 billion and $8.4 billion, respectively, which represents the
outstanding unpaid principal balance of the underlying mortgage loans. At both December 31, 2004 and 2003,
the total fair value of recognized liabilities concerning such guarantees was $1.0 million. The longest
remaining contractual maturity of any outstanding written put option was 15 years and 16 years at
December 31, 2004 and 2003, respectively; however, the actual terms may be signiÑcantly less than the
contractual terms as the amortizing notional balance is linked to prepayable mortgage loans.
IndemniÑcations
In connection with various business transactions, Freddie Mac provides indemniÑcation to counterparties
for breaches of standard representations and warranties in contracts entered into in the normal course of
business. It is diÇcult to estimate Freddie Mac's maximum exposure under these indemniÑcation agreements
since in many cases there are no stated or notional amounts included in the indemniÑcation clauses. However,
the contingencies triggering the obligation to indemnify have not occurred. Freddie Mac's assessment is that
the risk would be remote. Such representations and warranties pertain to hold harmless clauses, adverse
changes in tax laws and potential claims from third parties related to items such as actual or alleged
infringement of intellectual property. At December 31, 2004 and 2003, there were 14 and 13 identiÑed
transactions, respectively, that contain intellectual property related indemniÑcations, as deÑned by FASB StaÅ
Position No. 45-1, ""Accounting for Intellectual Property Infringement IndemniÑcations under FASB
Interpretation No. 45.'' Freddie Mac had not recorded any liabilities related to these indemniÑcations in its
consolidated balance sheets as of December 31, 2004 and 2003 because it was not probable that the company
would be required to make payments under these contractual agreements on those dates.
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