Freddie Mac 2005 Annual Report Download - page 131

Guarantees of Stated Final Maturity of Issued Structured Securities
We commonly issue 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, we may sponsor an auction of the underlying assets. To the extent that auction proceeds
are insuÇcient to cover unpaid principal amounts due to investors in such Structured Securities, we are obligated to fund
such principal. Such guarantees of stated Ñnal maturity are accounted for as derivative instruments.
At December 31, 2005 and 2004, the maximum potential amount of payments we could be required to make under
guarantees of stated Ñnal maturity of issued Structured Securities was $11.7 billion and $9.0 billion, respectively, which
represents the outstanding unpaid principal balance of the underlying mortgage loans. At December 31, 2005 and 2004, the
total fair value of recognized liabilities concerning such guarantees was $2 million and $1 million, respectively.
IndemniÑcations
In connection with various business transactions, we provide 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 our
maximum exposure under these indemniÑcation arrangements since in many cases there are no stated or notional amounts
included in the indemniÑcation clauses. However, no claim for indemniÑcation pursuant to these provisions has been made.
At December 31, 2005, our assessment is that the risk of such claim for indemniÑcation is 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. We have not recorded any liabilities related to these
indemniÑcations in our consolidated balance sheets at December 31, 2005 and 2004 because we do not expect material
amounts to be paid under these agreements.
Other Guarantees
We have guaranteed the performance of interest-rate swap contracts in two circumstances. First, as part of a
resecuritization transaction, we transferred certain swaps and related assets to a third party. We guaranteed that interest
income generated from the assets would be suÇcient to cover the required payments under the interest-rate swap contracts.
Second, we guaranteed that a borrower would perform under an interest-rate swap contract linked to a customer's variable-
rate mortgage. The maximum remaining terms of any of these guarantees at both December 31, 2005 and 2004 was
29 years; however, the actual terms may be signiÑcantly less than the contractual terms because the mortgage loans
underlying the swaps are prepayable. The maximum potential amount of future undiscounted payments under the guarantees
was $717 million and $591 million at December 31, 2005 and 2004, respectively. At December 31, 2005 and 2004, the total
fair value of recognized liabilities concerning such guarantees was $2 million and $1 million, respectively.
During 2005, we issued written call options with a notional amount of $25 million with respect to PCs issued by us. The
maximum amount of future payments under these call options is unlimited. The fair value of these options recorded on our
consolidated balance sheet at December 31, 2005 was not material. We did not issue written options on our PCs in 2004.
We provide guarantees to reimburse servicers for premiums paid to acquire servicing in situations where we require the
original seller to repurchase the loan and the original seller is unable to perform under its separate servicing agreement to
reimburse the servicer for those servicing premiums. Our servicing-related premium guarantees are payable according to a
vesting schedule for up to Ñve years from the date of purchase of servicing rights. The maximum potential amount of future
payments under these servicing-related premium guarantees was $54 million and $113 million at December 31, 2005 and
2004, respectively. We have not established a liability on our consolidated balance sheets at December 31, 2005 and 2004
because we do not expect material amounts to be paid under these arrangements.
115 Freddie Mac