Freddie Mac 2006 Annual Report Download - page 127

At December 31, 2006, our Guarantee asset totaled $6,070 million on our consolidated balance sheets and of that
amount, approximately $5,905 million (or approximately 97 percent), related to PCs and Structured Securities backed by
single-family mortgage loans. The key assumptions utilized in fair value measurements of the Guarantee asset presented in
Table 2.2 and the sensitivity analysis presented in Table 2.3 and Table 2.4 relate solely to the Guarantee asset associated
with PCs and Structured Securities backed by single-family mortgage loans.
Table 2.2 Ì Key Assumptions Utilized in Fair Value Measurements of the Guarantee Asset
2006 2005 2004
Valuation Assumptions for the Guarantee Asset Range(3) Mean(4) Range(3) Mean(4) Range(3) Mean(4)
Internal rates of return(1) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 2.3% - 13.5% 8.4% 1.8% - 13.8% 8.7% (1.4)% - 13.6% 6.7%
Prepayment rates(2)ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 7.4% - 57.8% 15.7% 7.6% - 59.8% 17.2% 6.9% - 58.6% 19.1%
(1) The IRRs reported above represent an unpaid principal balance weighted average of the discount rates inherent in the fair value of the recognized
Guarantee asset.
(2) Average Prepayment rates are simulated on a monthly frequency, although rates reported above represent an unpaid principal balance weighted
average of annualized values of such Prepayment rates.
(3) The lowest value in each presented range represents the Ñrst percentile IRRs and prepayment rates throughout 2006, 2005 and 2004. Likewise, the
highest value in each range represents the 99th percentile IRRs and prepayment rates throughout 2006, 2005 and 2004.
(4) Reported values represent the weighted average value of all IRRs and prepayment rates throughout the 2006, 2005 and 2004 periods.
Weighted average lives of the Guarantee asset during 2006, 2005 and 2004 ranged between 1.7 and 9.0 years, 1.6 and
8.9 years, and 1.2 and 8.7 years, respectively, while the derived weighted average lives of the Guarantee asset for the same
periods were 5.5, 5.1 and 5.3 years, respectively. Such derived weighted average lives are reÖective of prepayment speed
assumptions cited in Table 2.2 above.
At December 31, 2006 and 2005, the fair value of the recognized Guarantee asset was based upon a valuation approach
that incorporates market-based information. In order to report the hypothetical sensitivity of the carrying value of the
Guarantee asset to changes in key assumptions, we used internal models to approximate their reported carrying values. We
then measured the hypothetical impact of changes in key assumptions using our models to estimate the potential view of
fair value the market might have in response to those changes. In our models, the assumed Internal Rates of Return were
adjusted to calibrate our model results with the reported carrying value. However, the weighted average prepayment rate
assumption used in this hypothetical sensitivity was based on our internal model which is benchmarked periodically to
market prepayment estimates. The sensitivity analysis in Table 2.3 illustrates hypothetical adverse changes in the fair value
of the Guarantee asset for changes in key assumptions.
Table 2.3 Ì Sensitivity Analysis of the Guarantee Asset
December 31, 2006
Guarantee Asset
(dollars in millions)
Fair value(1) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $5,905
Weighted average IRR assumptions: ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 7.0%
Impact on fair value of 100 bps upward change ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ (224)
Impact on fair value of 200 bps upward change ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ (431)
Weighted average prepayment rate assumptions: ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 18.4%
Impact on fair value of 10% upward change ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ (298)
Impact on fair value of 20% upward change ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ (565)
(1) At December 31, 2006, our Guarantee asset totaled $6,070 million on our consolidated balance sheet and of that amount, approximately $165 million
(or approximately 3 percent), related to PCs backed by multifamily mortgage loans. The sensitivity analysis presented in Table 2.3 relates solely to the
Guarantee asset associated with PCs backed by single-family mortgage loans.
Valuation of Other Retained Interests
Other retained interests include securities that were issued by us as part of a resecuritization transaction which was
recorded as a sale. The majority of these securities are classiÑed as available-for-sale. The fair value of Other retained
interests is generally based on independent price quotations obtained from third-party pricing services or dealer marks.
To report the hypothetical sensitivity of the carrying value of Other retained interests, we used internal models
calibrated to the fair values. The sensitivity analysis in Table 2.4 illustrates hypothetical adverse changes in the fair value of
Other retained interests for changes in key assumptions based on these models.
115 Freddie Mac