Freddie Mac 2005 Annual Report Download - page 130

T-Series transactions, in which we had a signiÑcant variable interest, was $88 million and $147 million, respectively,
consisting of the book value of our investments plus incremental guarantees of the senior interests that are held by third
parties.
NOTE 4: FINANCIAL GUARANTEES
Principal and Interest Guarantees of PCs and Structured Securities
We guarantee the payment of principal and interest on the PCs and Structured Securities we issue that are held by third
parties. At December 31, 2005 and 2004, the maximum potential amount of future payments under these guarantees is
approximately the amount of the total unpaid principal balance of our PCs and Structured Securities held by third parties
which was $974 billion and $852 billion, respectively. However, the actual amount of future payments under these
guarantees will be determined by the performance of the mortgage loans that underlie these PCs and Structured Securities.
During 2005 and 2004, we guaranteed $397.9 billion and $365.1 billion, respectively, of PCs and Structured Securities
to third parties. Upon completion of the transfer of PCs or Structured Securities to third parties, we recognize the initial fair
value of our obligation to make guarantee payments. The accounting methods for our guarantees of PCs and Structured
Securities are further discussed in ""NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES.'' At
December 31, 2005 and 2004, we had a recognized Guarantee obligation on the consolidated balance sheets of $5.5 billion
and $4.1 billion, respectively, which included $1.8 billion and $1.4 billion, respectively, of Deferred Guarantee Income. In
addition, we have a Reserve for guarantee losses on Participation CertiÑcates that totals $295 million and $150 million at
December 31, 2005 and 2004, respectively, for incurred credit losses that were recognized in conjunction with PCs and
Structured Securities held by third parties. The balance of PCs and Structured Securities held by third parties also includes
securities issued by third parties that we guarantee totaling $6.6 billion and $6.8 billion at December 31, 2005 and 2004,
respectively. Details of these guarantees are as follows:
‚Multifamily: We guarantee multifamily housing revenue bonds totaling $5.8 billion and $5.0 billion at
December 31, 2005 and 2004, respectively, via two principal forms. First, we provide 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, we provide a guarantee of principal and interest on
multifamily mortgage loans that are originated and held by state and municipal housing Ñnance agencies to
support tax-exempt multifamily housing revenue bonds.
‚Single-family: We guarantee single-family mortgage loans held by third parties totaling $0.8 billon and
$1.8 billion at December 31, 2005 and 2004, respectively.
As part of the guarantee arrangements pertaining to multifamily housing revenue bonds, we also provide a commitment
to advance funds, commonly referred to as ""liquidity guarantees,'' totaling $5.7 billion and $5.1 billion at December 31,
2005 and 2004, 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 us to secure such
funding until such time as the securities could be remarketed. We have not made any payments to date under these liquidity
guarantees.
Generally, the contractual terms of our 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 term due to the prepayment characteristics of
the mortgage-related assets that back PCs and Structured Securities. We do not expect the maximum potential interest
payments we would be required to make associated with these guarantees to signiÑcantly exceed 120 days of interest at the
certiÑcate rate, given that we generally begin a process to purchase the defaulted mortgages when they have been delinquent
for 120 consecutive days.
At December 31, 2005 and 2004, in connection with PCs or Structured Securities backed by single-family mortgage
loans, we had maximum coverage totaling $27.5 billion and $27.2 billion, respectively, in primary mortgage insurance,
$3.6 billion and $3.5 billion, respectively, in pool insurance and other credit enhancements and $5.6 billion and $4.1 billion,
respectively, in recourse to lenders. In addition, at December 31, 2005 and 2004, $1.9 billion and $2.6 billion, respectively, of
outstanding Structured Securities related to Ginnie Mae CertiÑcates, which are backed by the full faith and credit of the
U.S. government. With respect to PCs and Structured Securities backed by multifamily mortgage loans, we had maximum
combined credit enhancements totaling $7.3 billion and $9.1 billion at December 31, 2005 and 2004, respectively. At
December 31, 2005 and 2004, our recorded balance of credit enhancements on our consolidated balance sheets was
$420 million and $295 million, respectively.
114 Freddie Mac