Freddie Mac 2006 Annual Report Download - page 128

Table 2.4 Ì Sensitivity Analysis of Other Retained Interests
December 31, 2006
Other Retained
Interests(1)
(dollars in millions)
Fair valueÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $127,490
Weighted average IRR assumptions: ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 5.6%
Impact on fair value of 100 bps upward change ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ (4,551)
Impact on fair value of 200 bps upward change ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ (8,813)
Weighted average prepayment rate assumptions: ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 11.0%
Impact on fair value of 10% upward change ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ (66)
Impact on fair value of 20% upward change ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ (132)
(1) The fair value of Other retained interests includes accrued interest. The sensitivity analysis presented in Table 2.4 includes only Other retained interests
whose fair value is impacted as a result of changes in IRR and prepayment rate assumptions. At December 31, 2006, the fair value of Other retained
interests not impacted due to IRR and prepayment assumptions was $51 million.
Cash Flows on Transfers of Securitized Interests and Corresponding Retained Interests
Table 2.5 below summarizes cash Öows on retained interests.
Table 2.5 Ì Details of Cash Flows
Year Ended December 31,
2006 2005 2004
(in millions)
Cash Öows from:
Transfers of Freddie Mac securities that were accounted for as sales ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $63,613 $74,005 $138,541
Cash Öows received on the Guarantee asset(1) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 1,475 1,270 1,086
Other Retained Interests principal and interest(2)ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 24,784 25,611 28,439
Purchases of delinquent or foreclosed loans(3)ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (4,748) (4,373) (4,931)
(1) Represents contractual guarantee-related cash Öows received by us in connection with the recognized Guarantee asset.
(2) Excludes cash Öows related to retained interests held in the portfolio of our Securities Sales and Trading Group, or SS&TG, business unit which ceased
operations in the fourth quarter of 2004. Such cash Öows were not material.
(3) Represents delinquent mortgage loans purchased out of securitized pools that back issued PCs or Structured Securities.
NOTE 3: VARIABLE INTEREST ENTITIES
We are a party to numerous entities that are considered to be variable interest entities, or VIEs. A VIE is an entity
(a) that has a total equity investment at risk that is not suÇcient to Ñnance its activities without additional subordinated
Ñnancial support from other entities or (b) where the group of equity holders does not have the ability to make signiÑcant
decisions about the entity's activities, or obligation to absorb the entity's expected losses or right to receive the entity's
expected residual returns, or both. Our investments in VIEs include LIHTC partnerships, certain Structured Securities
transactions and a mortgage reinsurance entity. In addition, we buy the highly-rated senior securities in certain securitization
trusts that are VIEs. Highly-rated senior securities issued by these securitization trusts are not designed to absorb a
signiÑcant portion of the variability created by the assets/collateral in the trusts. Therefore, our investments in these
securities do not represent a signiÑcant variable interest in the securitization trusts and we do not consolidate them. Further,
we invest in securitization entities that are qualifying special purpose entities, which are not subject to consolidation because
of our inability to unilaterally liquidate or change the qualifying special purpose entity. See ""NOTE 1: SUMMARY OF
SIGNIFICANT ACCOUNTING POLICIES Ì Consolidation and Equity Method of Accounting'' for further informa-
tion regarding the consolidation practices of our VIEs.
Low-Income Housing Tax Credit Partnerships
We invest as a limited partner in LIHTC partnerships formed for the purpose of providing funding for aÅordable
multifamily rental properties. These LIHTC partnerships invest directly in limited partnerships that develop or rehabilitate
multifamily rental properties. Completed properties are rented to qualiÑed low-income tenants, allowing the properties to be
eligible for federal tax credits. Most of these LIHTC partnerships are VIEs. A general partner operates the partnership,
identifying investments and obtaining debt Ñnancing as needed to Ñnance partnership activities. Although these partnerships
generate operating losses, we realize a return on our investment through reductions in income tax expense that result from
tax credits and the deductibility of the operating losses of these partnerships. The partnership agreements are typically
structured to meet a required 15-year period of occupancy by qualiÑed low-income tenants. These investments were made
between 1989 and 2006. At December 31, 2006 and 2005, we did not guarantee any obligations of these partnerships and our
exposure was limited to the amount of our investments. At December 31, 2006 and 2005, we were the primary beneÑciary
of investments in six LIHTC partnerships and we consolidated these investments. The investors in the obligations of the
consolidated LIHTC partnerships have recourse only to the assets of those VIEs and do not have recourse to us.
116 Freddie Mac