Freddie Mac 2005 Annual Report Download - page 49

our debt securities and to manage our mix of assets and liabilities. For example, in early 2005, we executed a tender oÅer for
certain debt securities with expired European call options because the price of those securities had declined relative to other
debt securities. In 2005, we also recorded gains on repurchases of debt originally issued in response to investor requests. See
""LIQUIDITY AND CAPITAL RESOURCES'' for further discussion of our debt management activities. Our most
signiÑcant debt repurchases occurred in the second quarter of 2003, resulting in pre-tax losses of $(1,266) million, when we
repurchased an aggregate of $17.1 billion of U.S. dollar and Euro-denominated debt securities, most of which followed the
announcement of changes in our senior management. We executed these particular repurchases to support the liquidity and
price performance of these securities. In all periods, Gains (losses) on debt retirement include previously deferred amounts
related to cash Öow hedges associated with the repurchased debt securities.
Resecuritization Fees
Table 15 summarizes the components of our single-class and multi-class structured resecuritization activities.
Table 15 Ì Total Resecuritization Fees and Activity Year Ended December 31,
2005 2004 2003
(in millions)
Resecuritization fees(1):
Multi-classÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 119 $ 149 $ 338
Single-class ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 6 10 14
Total resecuritization fees ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 125 $ 159 $ 352
(1) Represents the portion of resecuritization fee income that we recognize as Resecuritization fees, which relate to resecuritization classes held by third
parties.
Investor demand for multi-class structured cash Öows tends to increase in periods characterized by a steep yield curve
and declining interest rates. Beginning in the second half of 2005, a Öattening of the yield curve accompanied by rising
mortgage interest rates slowed investor demand for our multi-class Structured Securities, particularly REMICs. Conversely,
during 2004 and 2003, investor demand for our multi-class Structured Securities remained high largely due to the
comparatively steep yield curve during these periods.
During 2005, partly in response to competitive market conditions, we began to issue select REMIC products (e.g.,
Reference REMICSM securities, Whole Loan REMIC and alternative collateral deals) and Giant PCs without charging up-
front transaction fees, which we previously charged under our normal practice.
Other Income
Other income totaled $24 million, $230 million and $493 million for 2005, 2004 and 2003, respectively. Absent
Öuctuations related to certain prior period accounting errors in 2005, 2004 and 2003 (discussed in more detail below), Other
income would have been $104 million, $172 million and $279 million in 2005, 2004 and 2003, respectively. Other income
declined in 2005 and 2004, primarily due to a decline in the use of Loan Prospector», our automated loan-underwriting tool,
as the proportion of loans underwritten using alternate underwriting tools prior to purchase has increased.
In the process of reviewing our accounting policies and practices during 2005, 2004 and 2003, we identiÑed certain
errors not material to our Ñnancial statements that related to income in previously reported periods. During 2005, 2004 and
2003, we identiÑed approximately $80 million of expense, net ($52 million after-tax), $58 million of income, net
($38 million after-tax) and $214 million of income, net ($139 million after-tax) of such errors, which were recorded in the
Ñrst quarter of each respective year. During 2005, our largest correction related to an error associated with the accrual of
interest income for certain mortgage-related securities during 2001 to 2004, which reduced Other income in 2005 by
approximately $210 million ($137 million after-tax). In addition, we corrected errors related to the ending balance of pre-
2003 deferred credit and buy-down fees at December 31, 2004 that increased Other income in 2005 by $103 million
($67 million after-tax) as well as other errors that increased Other income in 2005 by $27 million ($18 million after-tax).
33 Freddie Mac