Freddie Mac 2004 Annual Report Download - page 57

Table 18 provides summary information about Management and guarantee income for 2004, 2003 and
2002. The total management and guarantee rate consists of the contractual management and guarantee fee
rate, as adjusted for amortization of certain pre-2003 deferred fees, including credit fees and buy-down fees.
Table 18 Ì Management and Guarantee Income
Year Ended December 31,
2004 2003 2002
Amount Rate Amount Rate Amount Rate
(dollars in millions, rate in basis points)
Contractual management and guarantee fees ÏÏÏÏÏÏÏÏÏ $1,303 16.5 $1,229 17.3 $1,335 19.4
Amortization of deferred fees(1)(2) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 79 1.0 424 6.0 192 2.8
Total management and guarantee incomeÏÏÏÏÏÏÏÏÏÏÏÏ $1,382 17.5 $1,653 23.3 $1,527 22.2
Unamortized balance of credit and buy-down fees
included in Other Liabilities, at period end ÏÏÏÏÏÏÏÏ $ 215 $ 329 $ 804
(1) We reclassiÑed amounts from certain expenses related to uncollectible interest on PCs held by third parties from Management and
guarantee income to (Provision) beneÑt for credit losses to conform with the 2004 presentation. This resulted in a $15 million and an
$11 million increase in Management and guarantee income during 2003 and 2002, respectively.
(2) In accordance with SFAS 91, deferred items are amortized over the estimated lives of the underlying securities using the
retrospective eÅective interest method. This method of amortization results in periodic adjustments when the eÅective interest rate
changes due to diÅerences between actual and estimated prepayments and changes in estimated future prepayments. Catch-up
adjustments are made to the unamortized balances of the deferred items to reÖect the application of the updated eÅective yield as if
it had been in eÅect since acquisition.
Management and guarantee income decreased by $271 million, or 16 percent, to $1,382 million in 2004
from $1,653 million in 2003. This decrease in Total management and guarantee income was primarily driven
by an 81 percent decrease in amortization of pre-2003 deferred fees. Contributing to this decrease was the
eÅect of the change in our accounting treatment of certain fees beginning in 2003 and a model change
implemented in the Ñrst quarter of 2003, both of which are discussed in more detail below.
The management and guarantee rate related to the amortization of deferred fees decreased from 6.0 basis
points in 2003 to 1.0 basis point in 2004. The rate of amortization is determined based on the estimated lives of
the mortgage loans underlying our PCs using the eÅective interest method (as established by SFAS 91).
Periodic adjustments to deferred fees amortization are made to reÖect diÅerences between actual and
previously estimated mortgage prepayments and changes in estimated future prepayments. The primary
drivers of the decrease in amortization of deferred fees in 2004 were: (a) a reduction in the unamortized
balances being amortized through Management and guarantee income; (b) 2003 amortization methodology
changes; and (c) higher interest rates in 2004 resulting in longer estimated lives of the loans underlying
our PCs.
Management and guarantee income includes amortization of pre-2003 deferred fees, including credit fees
and buy-down fees on our PCs that have not previously been subject to guarantee accounting under FIN 45 or
have not previously been sold under SFAS 125/140. The existing unamortized balance of pre-2003 deferred
fees related to Outstanding PCs equaled approximately $215 million, $329 million and $804 million as of
December 31, 2004, 2003 and 2002, respectively, and will ultimately be reduced to zero over time. Beginning
in 2003, credit and buy-down fees on PCs issued through our Guarantor and MultiLender Programs have been
deferred as a component of our Guarantee obligation for Participation CertiÑcates, rather than recorded in
Other liabilities on our consolidated balance sheets as was the practice prior to 2003 before the adoption of
FIN 45. These fees are amortized into income as a component of Income on ""Guarantee obligation for
Participation CertiÑcates,'' as described more fully in ""Table 22 Ì Income on Guarantee Obligation for 2004
and 2003.'' For all periods presented, deferred balances related to credit and buy-down fees associated with PC
transactions that qualify as sales (i.e., non-Guarantor or non-MultiLender Program transactions) do not aÅect
Management and guarantee income nor Income on ""Guarantee obligation for Participation CertiÑcates.''
Instead, these deferred balances are included in the determination of the gain or loss on the sale of mortgage
loans, which we report as Gains (losses) on investment activity.
In the Ñrst quarter of 2003, we improved our methodology for estimating the expected weighted average
lives of mortgages with related deferred fees, including credit fees and buy-down fees. The improvements we
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