Freddie Mac 2006 Annual Report Download - page 130

NOTE 4: FINANCIAL GUARANTEES
Principal and Interest Guarantees of PCs and Structured Securities
We guarantee the payment of principal and interest on the PCs and Structured Securities we issue that are held by third
parties. At December 31, 2006 and 2005, the maximum potential amount of future payments under these guarantees
approximates the total unpaid principal balance of our PCs and Structured Securities held by third parties, which was
$1,123 billion and $974 billion, respectively. However, the actual amount of future payments under these guarantees will be
determined by the performance of the mortgage loans that underlie these PCs and Structured Securities.
During 2006 and 2005, we guaranteed $360.0 billion and $397.9 billion, respectively, of PCs and Structured Securities
to third parties. Upon completion of the transfer of PCs or Structured Securities to third parties, we recognize the initial fair
value of our obligation to make guarantee payments. The accounting methods for our guarantees of PCs and Structured
Securities are further discussed in ""NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES.'' At
December 31, 2006 and 2005, we had a recognized Guarantee obligation on our consolidated balance sheets of $7.1 billion
and $5.5 billion, respectively, which included $2.2 billion and $1.8 billion, respectively, of deferred guarantee income. In
addition, we have a Reserve for guarantee losses on Participation CertiÑcates that totaled $350 million and $295 million at
December 31, 2006 and 2005, respectively, for incurred credit losses that were recognized in conjunction with PCs and
Structured Securities held by third parties. The balance of PCs and Structured Securities held by third parties also included
securities and loans issued by third parties that we guarantee totaling $6.7 billion and $6.6 billion at December 31, 2006 and
2005, respectively. Details of these guarantees are as follows:
‚Multifamily: We guaranteed multifamily housing revenue bonds totaling $6.0 billion and $5.8 billion at Decem-
ber 31, 2006 and 2005, respectively, via two principal forms. First, we provide a guarantee of the payment of principal
and interest on tax-exempt (and related taxable) multifamily housing revenue bonds that support pass-through
certiÑcates issued by third parties. These housing revenue bonds are collateralized by mortgage loans on low- and
moderate-income multifamily housing projects. Second, we provide a guarantee of principal and interest on
multifamily mortgage loans that are originated and held by state and municipal housing Ñnance agencies to support
tax-exempt (and related taxable) multifamily housing revenue bonds.
‚Single-family: We guaranteed single-family mortgage loans held by third parties totaling $0.7 billion and
$0.8 billion at December 31, 2006 and 2005, respectively.
As part of the guarantee arrangements pertaining to multifamily housing revenue bonds, we provided a commitment to
advance funds, commonly referred to as ""liquidity guarantees,'' totaling $5.8 billion and $5.7 billion at December 31, 2006
and 2005, respectively. These guarantees enable the repurchase by others of tendered tax-exempt (and related taxable)
pass-through certiÑcates and housing revenue bonds that are unable to be remarketed. Any repurchased securities would be
pledged to us to secure such funding until such time as the securities could be remarketed. We have not made any payments
to date under these liquidity guarantees.
Generally, the contractual terms of our guarantees on PCs and Structured Securities are 15 to 30 years. However, the
actual term of each guarantee may be signiÑcantly less than the contractual term due to the prepayment characteristics of
the mortgage-related assets that back PCs and Structured Securities. We generally purchase a defaulted mortgage when it
has been delinquent for 120 consecutive days, we do not expect the maximum potential interest payments we would be
required to make associated with these guarantees to signiÑcantly exceed 120 days of interest at the certiÑcate rate.
At December 31, 2006 and 2005, in connection with PCs or Structured Securities backed by single-family mortgage
loans, we had maximum coverage totaling $30.7 billion and $27.5 billion, respectively, in primary mortgage insurance,
$3.2 billion and $3.4 billion, respectively, in pool insurance and other credit enhancements and $8.9 billion and $5.6 billion,
respectively, in recourse to lenders. The coverage does not include credit enhancements related to the outstanding Structured
Transactions which had unpaid principal balances that totaled $7.8 billion and $8.6 billion, at December 31, 2006 and 2005,
respectively. In addition, at December 31, 2006 and 2005, $1.5 billion and $1.9 billion, respectively, of outstanding
Structured Securities related to Ginnie Mae CertiÑcates, which are backed by the full faith and credit of the U.S.
government. With respect to PCs and Structured Securities backed by multifamily mortgage loans, we had maximum
combined credit enhancements totaling $1.2 billion and $7.3 billion at December 31, 2006 and 2005, respectively. At
December 31, 2006 and 2005, our recorded balance of credit enhancements on our consolidated balance sheets was
$466 million and $420 million, respectively.
Guarantees of Stated Final Maturity of Issued Structured Securities
We commonly issue Structured Securities with stated Ñnal maturities that are shorter than the stated maturity of the
underlying mortgage loans. If the assets that back such Structured Securities have not been purchased by a third party or
fully matured as of the stated Ñnal maturity date of such securities, we may sponsor an auction of the underlying assets. To
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