Freddie Mac 2005 Annual Report Download - page 118

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and Buy-Downs are recognized as adjustments of recognized Deferred Guarantee Income. Likewise, Credit Fees that we
receive at inception are also recognized as adjustments of recognized Deferred Guarantee Income.
With regard to PCs that we issue through our MultiLender Swap Program, we account for a portion of such transactions
in the same manner as transfers described above that are accounted for as sales. The remaining portion of such PC issuances
are accounted for in a manner consistent with the accounting for PCs issued through the Guarantor Swap program.
Concerning Structured Securities that we issue to third parties in exchange for PCs and non- Freddie Mac mortgage-
related securities, we do not recognize any incremental Guarantee asset or Guarantee obligation on such transactions.
Rather, we defer and amortize into income on a straight-line basis that portion of the transaction fee that we receive on such
transactions that relates to the estimated fair value of our future administrative responsibilities for issued Structured
Securities. In cases where we retain portions of Structured Securities issued in such transactions, a portion of the received
transaction fee is deferred as a carrying value adjustment of retained Structured Securities. The balance of transaction fees
received, which relates to compensation earned in connection with structuring-related services rendered by us to third
parties, is recognized immediately in earnings as Non-interest income Ì Resecuritization fees.
Purchases of PCs or Structured Securities
The purchase of a PC or Structured Security prompts the extinguishment of the corresponding, recognized Guarantee
obligation. Likewise, and where applicable, the purchase of such securities also prompts the extinguishment of the related
unamortized balance of Deferred Guarantee Income.
We de-recognize an extinguished Guarantee obligation against earnings as a component of Gains (losses) on
investment activity. Correspondingly, the recognized Guarantee asset is reclassiÑed on our consolidated balance sheets as a
component of Participation CertiÑcate residuals, at fair value, or PC Residuals.
The unamortized balance of Deferred Guarantee Income is 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 No. 91, ""Accounting for Nonrefundable Fees and Costs Associated with
Originating or Acquiring Loans and Initial Direct Costs of Leases,'' or SFAS 91, using the eÅective interest method.
Subsequent Measurement of Recognized Guarantee-Related Assets and Liabilities
Deferred Guarantee Income
Deferred Guarantee Income is amortized into earnings at a rate that is commensurate with the observed decline in the
unpaid principal balance of securitized mortgage loans. Periodic amortization of recognized Deferred Guarantee Income is
reÖected in earnings as a component of Income on Guarantee obligation.
Recognized Guarantee Asset
We generally account for a Guarantee asset like a debt instrument classiÑed as trading under SFAS 115. As such, all
changes in the fair value of recognized Guarantee asset are reÖected in earnings as a component of Gains (losses) on
Guarantee asset. All guarantee-related compensation that is received over the life of the loan in cash is reÖected in earnings
as a component of Management and guarantee income.
Recognized Guarantee Obligation
We subsequently amortize the recognized Guarantee obligation into earnings in proportion to the rate of the unpaid
principal balance decline of securitized mortgage loans. Periodic amortization of a recognized Guarantee obligation is
reÖected in earnings as a component of Income on Guarantee obligation. The subsequent measurement of our contingent
obligation to make guarantee payments is further discussed below in ""Reserves for Losses on Mortgage Loans Held-for-
Investment and Losses on PCs''.
Recognized Credit Enhancements
Credit enhancements that are separately recognized as Other assets are amortized into earnings as Non-interest
expense. Such assets are amortized over related contract terms at the greater of results calculated by amortizing recognized
credit enhancements (a) in proportion to the rate of unpaid principal balance decline of covered mortgage loans or (b) on a
straight-line basis over a credit enhancement's contract term, whichever is shorter. Recurring insurance premiums are
recorded at the amount paid and amortized over their contractual life and, if provided quarterly, then the amortization period
is three months.
PC Residuals
PC residuals relate to certain PCs or Structured Securities held by us as investments and represent the fair value of the
expected future cash Öows associated with the guarantee contracts (including cash Öows related to Management and
guarantee fees and our Guarantee obligation) that are inherent within such securities.
102 Freddie Mac