Freddie Mac 2005 Annual Report Download - page 44

Table 10 Ì Attribution of Change Ì Gains (Losses) on Guarantee Asset(1)
Year Ended December 31,
2005 2004 2003
(in millions)
Total cash Öows received(2) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $(1,270) $(1,086) $ (891)
Portion of cash Öows received related to imputed interest income ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 371 257 244
Return of investment in Guarantee assetÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (899) (829) (647)
Change in fair value of future cash Öows ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (138) (306) (814)
Change in estimate(3) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (27) Ì Ì
Gains (losses) on Guarantee asset ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $(1,064) $(1,135) $(1,461)
(1) Represents the change in fair value of the Guarantee asset related to PCs held by third parties that have previously been sold pursuant to SFAS 140 or
PCs issued through our Guarantor Swap program, where we primarily exchange mortgage loans for PCs.
(2) Represents guarantee fees received related to PCs and Structured Securities held by third parties for which a recognized Guarantee asset exists.
(3) Represents a change in estimate resulting from enhancing our approach for determining the fair value of the Guarantee asset. See ""NOTE 1:
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES'' to our consolidated Ñnancial statements for further information.
Losses on the Guarantee asset decreased $71 million, or 6 percent, in 2005 as compared with 2004. The decrease in the
change in fair value of future cash Öows during 2005 reÖects, in part, the new valuation approach implemented for 2005,
which uses more market-based information to determine the fair value of the Guarantee asset. Our new valuation approach
eÅectively equates the majority of the fair value of the Guarantee asset with the current, or ""spot,'' market values quoted by
third-party dealers as if the cash Öows were structured in excess-servicing interest-only securities and uses other market
inputs for valuing the remaining portion. Accordingly, changes in the fair value of the Guarantee asset, which are recorded
in current period earnings through Gains (losses) on Guarantee asset, will reÖect the volatility associated with these
market-based inputs. See ""NOTE 2: TRANSFERS OF SECURITIZED INTERESTS IN MORTGAGE-RELATED
ASSETS'' to our consolidated Ñnancial statements for more information about this new approach.
The decrease in the change in the fair value of future cash Öows during 2004 was primarily due to a smaller overall
decline in mortgage interest rates in 2004 compared to 2003, which aÅected actual and expected prepayments. Return of
investment for each year was consistent with the growth of the outstanding PCs and Structured Securities, as shown in
""Table 46 Ì Total Mortgage Portfolio and Total Guaranteed PCs and Structured Securities Issued Based on Unpaid
Principal Balances.''
Income on Guarantee Obligation
Table 11 summarizes our income on Guarantee obligation.
Table 11 Ì Income on Guarantee Obligation
Year Ended December 31,
2005 2004 2003
(dollars in millions)
Amortization income related to:
Credit and buy-down fees received in FIN 45 transactions(1)ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 197 $ 128 $ 57
Other components of recognized Guarantee obligation ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 723 604 868
Income on Guarantee obligationÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 920 $ 732 $ 925
Components of the Guarantee obligation, at period end:
Unamortized balance that is attributable to credit and buy-down fees received in FIN 45 transactions(1) ÏÏÏÏÏÏÏÏ $1,167 $ 940 $ 612
Unamortized balance that is attributable to the other components of the Guarantee obligation ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 4,374 3,125 2,292
Guarantee obligation ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $5,541 $4,065 $2,904
Liquidation rate for outstanding PCs and Structured Securities(2) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 24% 29% 63%
(1) Related to upfront cash payments in the form of credit fees and buy-down payments that are received from counterparties to guarantee transactions
that are accounted for pursuant to FIN 45 (e.g., Guarantor Swaps).
(2) Related to outstanding PCs and Structured Securities (including other PCs and Structured Securities held in our Cash and investments portfolio
during 2004 and 2003).
In 2005, Income on Guarantee obligation increased as the balance of the Guarantee obligation increased during the
year, oÅsetting the impact of lower PC and Structured Security liquidation rates. The amortization of the Guarantee
obligation is reduced by lower liquidation rates because the rate of amortization is based on changes in the unpaid principal
balance of the underlying mortgage loans. Amortization of credit fees and buy-downs increased in 2005 and 2004 as deferred
balances increased.
In 2004, our Guarantee obligation increased, but our Income on Guarantee obligation decreased as the 2004 full-year
liquidation rate for our outstanding PCs and Structured Securities was signiÑcantly lower than 2003 resulting in
comparatively lower amortization.
28 Freddie Mac