Freddie Mac 2006 Annual Report Download - page 125

NOTE 2: TRANSFERS OF SECURITIZED INTERESTS IN MORTGAGE-RELATED ASSETS
Securitization Transactions We Executed
As discussed in ""NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES,'' we issue two types of
mortgage-related securities: PCs and Structured Securities.
Table 2.1 below presents the unpaid principal balances of issued PCs and Structured Securities.
Table 2.1 Ì Guaranteed PCs and Structured Securities Issued Based on Unpaid Principal Balances(1)
December 31,
2006 2005
(in millions)
Guaranteed PCs and Structured Securities Issued:
Held by third parties ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $1,122,761 $ 974,200
Held in the Retained portfolio ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 354,262 361,324
Total Guaranteed PCs and Structured Securities issued(2)ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $1,477,023 $1,335,524
(1) Excludes mortgage loans and mortgage-related securities traded, but not yet settled. Due to timing diÅerences in our receipt of principal and interest
payments from mortgage servicers and subsequent pass-through of payments to PC investors, the unpaid principal balances of the underlying
mortgage loans do not equal the unpaid principal balances of issued PCs and Structured Securities. See ""NOTE 1: SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES Ì Due to Participation CertiÑcate Investors'' for more information.
(2) As further discussed in ""NOTE 4: FINANCIAL GUARANTEES,'' we guarantee certain mortgage-related securities issued by third parties.
Guaranteed PCs and Structured Securities exclude $1,240.2 billion and $961.8 billion at December 31, 2006 and 2005, respectively, of Structured
Securities backed by resecuritized PCs and other previously issued Structured Securities. These excluded Structured Securities do not increase our
credit-related exposure and consist of single-class and multi-class Structured Securities backed by PCs, Real Estate Mortgage Investment Conduits,
or REMICs, and principal-only strips. The notional balance of interest-only strips is excluded because this table is based on unpaid principal balances.
Also excluded are modiÑable and combinable REMIC tranches and interest and principal classes where the holder has the option to exchange the
security tranches for other pre-deÑned security tranches.
At December 31, 2006 and 2005, approximately 94 percent and 92 percent, respectively, of issued PCs and Structured
Securities (excluding securities we issued that are backed by Ginnie Mae CertiÑcates) had a corresponding Guarantee
asset, Guarantee obligation or PC residual recognized on our consolidated balance sheets. With respect to such securities
held by third parties at December 31, 2006 and 2005, 95 percent and 93 percent, respectively, had a related Guarantee asset
and Guarantee obligation established.
Of those issued PCs and Structured Securities that had a corresponding Guarantee asset, Guarantee obligation or PC
residual at December 31, 2006 and 2005, 57 percent and 50 percent, respectively, were issued in Ñnancial guarantee
transactions, while the rest of those securities were issued as a result of sales or secured borrowing transactions.
Gains and Losses on Transfers of PCs and Structured Securities that are Accounted for as Sales
We recognized net pre-tax gains of approximately $86 million, $364 million and $356 million for the years ended
December 31, 2006, 2005 and 2004, respectively, on transfers of PCs and Structured Securities that were accounted for as
sales under SFAS 140.
In connection with the derivation of such gains (losses) upon sale prior to October 1, 2005, we had consistently applied
a methodology for determining the order in which to record extinguishments of unamortized deferred guarantee income,
buy-down fees and credit fees as adjustments to the carrying value of the repurchased securities. Beginning October 1, 2005,
we changed our methodology for determining gains (losses) upon the re-sale of PCs and Structured Securities related to
unamortized deferred guarantee income, buy-down fees and credit fees. Our methodology now applies a speciÑc
identiÑcation method of associating the extinguished deferred guarantee income, buy-down fees and credit fees to the
speciÑc portions of purchased PCs and Structured Securities and relieves those carrying value adjustments through gains
(losses) when the speciÑc portion of the PC or Structured Security is re-sold. This change in accounting principle was
facilitated by system changes that allow us to apply and track the carrying value adjustments to the speciÑc portions of the
purchased PCs and Structured Securities.
Valuation of Recognized Guarantee Asset, Guarantee Obligation and PC Residuals
Recognized Guarantee asset
Our approach for estimating the fair value of the Guarantee asset makes use of third-party market data as practicable.
For approximately 75 percent of the fair value of the Guarantee asset, the valuation approach involves obtaining dealer
quotes on proxy securities with collateral similar to aggregated characteristics of our portfolio, eÅectively equating the
Guarantee asset with current, or ""spot,'' market values for excess servicing interest-only, or IO, securities, which trade at a
discount to trust IO security prices. We consider excess servicing securities to be comparable to the Guarantee asset, in that
they represent an IO-like income stream, have less liquidity than trust IO securities and do not have matching principal-
only securities. The remaining 25 percent of the fair value of the Guarantee asset related to underlying loan products for
which comparable market prices were not readily available. This portion of the Guarantee asset was valued using an expected
113 Freddie Mac