Freddie Mac 2006 Annual Report Download - page 115

derivative contracts where we are in a net unrealized gain position is recorded as Cash and cash equivalents. The vast
majority of the Cash and cash equivalents balance is interest-bearing in nature.
In the consolidated statements of cash Öows, cash Öows related to the acquisition and termination of derivatives other
than forward commitments are generally classiÑed in investing activities, without regard to whether the derivatives are
designated as a hedge of another item. Cash Öows from commitments accounted for as derivatives that result in the
acquisition or sale of mortgage securities or mortgage loans are classiÑed in either: (a) operating activities for trading
securities or mortgage loans classiÑed as held-for-sale, or (b) investing activities for available-for-sale securities or mortgage
loans classiÑed as held-for-investment. Cash Öows related to mortgage loans classiÑed as held-for-sale are classiÑed in
operating activities until the loans have been securitized and retained as available-for-sale PCs, at which time the cash Öows
are classiÑed as investing activities. Cash Öows related to guarantee fees, including buy-up and buy-down payments, are
classiÑed as operating activities, along with the cash Öows related to the collection and distribution of payments on the
mortgage loans underlying PCs. Buy-up and buy-down payments are discussed further below in ""Swap-Based Issuances of
PCs and Structured Securities.''
Transfers of PCs and Structured Securities that Qualify as Sales
Upon completion of a transfer of a Ñnancial asset that qualiÑes as a sale under SFAS No. 140, ""Accounting for
Transfers and Servicing of Financial Assets and Extinguishment of Liabilities, a replacement of FASB Statement No. 125,''
or SFAS 140, we de-recognize all assets sold and recognize all assets obtained and liabilities incurred. Upon sale, we
recognize the fair value of our obligation to guarantee the payment of principal and interest of PCs and Structured Securities
transferred in sale transactions. The portion of such obligation that relates to our non-contingent obligation to stand ready to
perform under our guarantee is recognized as a Guarantee obligation, while the portion of the obligation that relates to
estimated incurred losses on securitized assets is recognized for consolidated balance sheet purposes as Reserve for guarantee
losses on Participation CertiÑcates. The resulting gain (loss) on sale of transferred PCs and Structured Securities is
reÖected in our consolidated statements of income as a component of Gains (losses) on investment activity.
In recording a sales transaction, we also continue to carry on our consolidated balance sheets any retained interests in
securitized Ñnancial assets. Such retained interests include our right to receive management and guarantee fees on PCs or
Structured Securities, which is classiÑed on our consolidated balance sheets as a Guarantee asset. The carrying amount of
all such retained interests is determined by allocating the previous carrying amount of the transferred assets between assets
sold and the retained interests based upon their relative fair values at the date of transfer. Other retained interests include
PCs or Structured Securities that are not transferred to third parties upon the completion of a securitization or
resecuritization transaction.
Swap-Based Issuances of PCs and Structured Securities
We issue PCs and Structured Securities through cash-based sales transactions and through various swap-based
exchanges. In the case of PC-based swaps, we issue such securities to third parties through Guarantor and MultiLender
Swap transactions. Guarantor Swaps are transactions in which Ñnancial institutions transfer mortgage loans to us in exchange
for PCs we issue that are backed by such mortgage loans. MultiLender Swaps are similar to Guarantor Swaps, except that
formed pools include loans that are contributed by more than one other party or by us. In Guarantor and MultiLender
Swaps, as in sales transactions, in return for providing our guarantee, we earn a guarantee fee that is paid to us over the life of
an issued PC. It is also common for buy-up or buy-down payments to be exchanged between our counterparties and us upon
the issuance of a PC. Buy-ups are upfront payments made by us that increase the guarantee fee we will receive over the life
of the PC. Buy-downs are upfront payments that are made to us that decrease (i.e., partially prepay) the guarantee fee we
will receive over the life of the PC. We may also receive upfront, cash-based payments as additional compensation for our
guarantee of mortgage loans, referred to as credit fees. As additional consideration received on swap-based exchanges, we
may receive various types of seller-provided credit enhancements related to the underlying mortgage loans. We also issue
and transfer Structured Securities to third parties in exchange for PCs and non-Freddie Mac mortgage-related securities.
We recognize the fair value of our contractual right to receive guarantee fees as a Guarantee asset at the inception of an
executed guarantee. Additionally, at inception of an executed guarantee, we recognize a Guarantee obligation at the greater
of (a) fair value or (b) the contingent liability amount required by SFAS No. 5, ""Accounting for Contingencies,'' or
SFAS 5. Similar to transfers of PCs and Structured Securities that qualify as sales, that portion of our estimated guarantee
liability that relates to our non-contingent obligation to stand ready to perform under a PC guarantee is recognized as
Guarantee obligation, while that portion of such estimated guarantee liability that relates to our contingent obligation to
make payments under our guarantee is recognized on our consolidated balance sheets as Reserve for guarantee losses on
Participation CertiÑcates. Credit enhancements received in connection with Guarantor Swaps and other similar exchange
transactions of PCs are measured at fair value and recognized as follows: (a) pool insurance is recognized as an Other asset;
(b) recourse and/or indemniÑcations that are provided by counterparties to Guarantor Swap transactions are recognized as
103 Freddie Mac