Freddie Mac 2006 Annual Report Download - page 116

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Other assets; and (c) primary mortgage insurance is recognized at inception as a component of the recognized Guarantee
obligation.
Because Guarantee asset, Guarantee obligation and credit enhancement-related assets that are recognized at the
inception of an executed Guarantor Swap are valued independently of each other, net diÅerences between these recognized
assets and liabilities may exist at inception. If the amount of the Guarantee asset plus the credit enhancement-related assets
is greater than the total amount of the Guarantee obligation, the diÅerence between such amounts is deferred on our
consolidated balance sheets as a component of Guarantee obligation and referred to as deferred guarantee income. If the
amount of the Guarantee asset and the credit enhancement-related assets is less than the total amount of the Guarantee
obligation, the diÅerence between such amounts is expensed immediately to earnings as a component of Non-interest
expense Ì Other expenses. Additionally, cash payments that are made or received in connection with buy-ups and buy-
downs are recognized as adjustments of recognized deferred guarantee income. Likewise, credit fees that we receive at
inception are also recognized as adjustments of recognized deferred guarantee income.
We account for a portion of PCs that we issue through our MultiLender Swap Program in the same manner as transfers
that are accounted for as sales. The remaining portion of such PC issuances is accounted for in a manner consistent with the
accounting for PCs issued through the Guarantor Swap program.
For Structured Securities that we issue to third parties in exchange for PCs and non- Freddie Mac mortgage-related
securities, we generally do not recognize any incremental Guarantee asset or Guarantee obligation. Rather, we defer and
amortize into income on a straight-line basis that portion of the transaction fee that we receive that relates to the estimated
fair value of our future administrative responsibilities for issued Structured Securities. In cases where we retain portions of
Structured Securities issued in such transactions, a portion of the received transaction fee is deferred as a carrying value
adjustment of retained Structured Securities. The balance of transaction fees received, which relates to compensation earned
in connection with structuring-related services we rendered to third parties, is recognized immediately in earnings as Non-
interest income Ì Resecuritization fees.
Purchases of PCs or Structured Securities
The purchase of a PC or Structured Security prompts the extinguishment of the corresponding, recognized Guarantee
obligation. We de-recognize an extinguished Guarantee obligation against earnings as a component of Gains (losses) on
investment activity. Correspondingly, the recognized Guarantee asset is reclassiÑed on our consolidated balance sheets as a
component of PC residuals. PC residuals are remeasured at fair value, including the fair value of the inherent credit
obligation associated with the purchased PC or Structured Security. The unamortized balance of deferred guarantee income
is extinguished as a basis adjustment to the recognized value of purchased PCs. Such basis adjustments are subsequently
amortized into earnings as Interest income pursuant to the requirements of SFAS No. 91, ""Accounting for Nonrefundable
Fees and Costs Associated with Originating or Acquiring Loans and Initial Direct Costs of Leases, an amendment of FASB
Statements No. 13, 60 and 65 and a rescission of FASB Statement No. 17,'' or SFAS 91, using the eÅective interest
method.
Subsequent Measurement of Recognized Guarantee-Related Assets and Liabilities
Deferred Guarantee Income
Deferred guarantee income is amortized into earnings at a rate that is commensurate with the observed rate of decline in
the unpaid principal balance of securitized mortgage loans. Periodic amortization of recognized deferred guarantee income
is reÖected in earnings as a component of Income on Guarantee obligation.
Recognized Guarantee Asset
We generally account for a Guarantee asset like a debt instrument classiÑed as trading under SFAS 115, ""Accounting
for Certain Investments in Debt and Equity Securities,'' or SFAS 115. Changes in the fair value of the recognized
Guarantee asset are reÖected in earnings as a component of Gains (losses) on Guarantee asset. Cash collections of our
contractual guarantee fee reduce the value of the Guarantee asset. All guarantee-related compensation that is received over
the life of the loan in cash is reÖected in earnings as a component of Management and guarantee income.
Recognized Guarantee Obligation
We amortize the recognized Guarantee obligation into earnings commensurate with the observed decline in the unpaid
principal balance of securitized mortgage loans. Periodic amortization of a recognized Guarantee obligation is reÖected in
earnings as a component of Income on Guarantee obligation. Separately, the subsequent measurement of our contingent
obligation to make guarantee payments is further discussed below in ""Reserves for Losses on Mortgage Loans Held-for-
Investment and Losses on PCs.''
104 Freddie Mac