Freddie Mac 2004 Annual Report Download - page 60

estimated prepayment speeds used in our amortization models. This estimated decline in prepayment speeds
caused slower amortization and resulted in net amortization expense for the second quarter of 2004.
1Q04 vs. 4Q03
Management and guarantee income increased by $12 million, or 3 percent, to $384 million in the Ñrst
quarter of 2004 from $372 million in the fourth quarter of 2003. This increase in guarantee income was
primarily driven by an increase in average outstanding PCs that more than oÅset the decline in the contractual
guarantee fee rates caused by generally lower rates on new guarantees and the liquidation of seasoned loans
with higher guarantee fee rates.
4Q03 vs. 3Q03
Management and guarantee income increased by $132 million, or 55 percent, to $372 million in the
fourth quarter of 2003 from $240 million in the third quarter of 2003. This increase was driven primarily by an
increase in the portion of Management and guarantee income representing the amortization of deferred fees.
The change in amortization recognition was driven by a return to income amortization after the downward
adjustment made to amortization in the third quarter, together with a decrease in the expected weighted
average lives of mortgages underlying our PCs. The change in the contractual guarantee fee portion of
Management and guarantee income reÖected an increase in average outstanding PCs.
3Q03 vs. 2Q03
Management and guarantee income decreased by $239 million, or 50 percent, to $240 million in the third
quarter of 2003 from $479 million in the second quarter of 2003. This decrease was driven primarily by
amortization expenses that were recorded due to an increase of approximately 70 basis points in the 30-year
mortgage rate during the quarter. The change in the contractual guarantee fee portion of Management and
guarantee income was relatively small and reÖected the decrease in average outstanding PCs.
2Q03 vs. 1Q03
Management and guarantee income decreased by $83 million, or 15 percent, to $479 million in the
second quarter of 2003 from $562 million in the Ñrst quarter of 2003. This decrease primarily reÖects the eÅect
of the $110 million model-related adjustment made in the Ñrst quarter of 2003 discussed above. The change in
the cash Öow portion of Management and guarantee income was relatively small, reÖective of the decrease in
average outstanding PCs.
Gains (Losses) on Guarantee Asset
Gains (losses) on Guarantee asset for Participation CertiÑcates, at fair value, represents the change in
fair value of the guarantee asset. Guarantee assets are recognized in connection with transfers of PCs and
Structured Securities that are accounted for as sales under SFAS 125/140. Additionally, beginning on
January 1, 2003, we began recognizing guarantee assets for PCs issued through our Guarantor Programs and
for certain Structured Securities that we issue to third parties in exchange for non-agency mortgage-backed
securities, as well as for that portion of PCs issued through MultiLender Program transactions that are not
accounted for as sales under SFAS 125/140. This change in accounting, which was triggered by our adoption
of FIN 45, resulted in a signiÑcant increase in guarantee assets that are recognized on our consolidated balance
sheets. Consequently, the size of our guarantee asset subject to this mark to fair value adjustment was larger in
2004 and 2003 compared with 2002.
The change in fair value of the guarantee asset reÖects:
‚ The portion of cash received that is considered a return of our recorded investment in the
guarantee asset; and
‚ Changes in the fair value of expected future cash inÖows.
Factors AÅecting the Fair Value of the Guarantee Asset. With the passage of time, actual expected cash
Öows are received and are no longer included in the valuation of the guarantee asset. Cash Öows received,
which are recorded as Management and guarantee income, represent a reduction of our investment in the
Freddie Mac
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