Freddie Mac 2006 Annual Report Download - page 45

Table 12 provides information about the components of Income on Guarantee obligation.
Table 12 Ì Income on Guarantee Obligation
Year Ended December 31,
2006 2005 2004
(in millions)
Amortization income related to:
Performance and other related costs ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 584 $ 616 $ 537
Deferred guarantee income ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 283 304 195
Income on Guarantee obligation(1) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 867 $ 920 $ 732
Components of the Guarantee obligation, at period end:
Unamortized balance of performance and other related costsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $4,869 $3,743 $2,738
Unamortized balance of deferred guarantee incomeÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 2,248 1,798 1,327
Ending Guarantee obligation(2) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $7,117 $5,541 $4,065
Liquidation rate for outstanding PCs and Structured SecuritiesÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 17% 24% 29%
(1) Includes $170 million, $197 million and $128 million of amortization related to deferred credit and buydown fees received from counterparties in
Guarantor Swap and similar transactions, or ""upfront fees,'' at December 31, 2006, 2005 and 2004, respectively.
(2) Includes $1,391 million, $1,167 million and $940 million of unamortized upfront fees at December 31, 2006, 2005 and 2004, respectively.
In 2006, Income on Guarantee obligation decreased as increasing mortgage interest rates resulted in lower liquidation
rates on outstanding PCs and Structured Securities and lower rates of amortization. In 2005, Income on Guarantee
obligation increased as compared with 2004 as the additions to the Guarantee obligation from new business more than oÅset
the impact of lower PC and Structured Security liquidation rates caused by increases in mortgage interest rates. During
2006 and 2005, the growth in unamortized balances reÖects the increase in our portfolio of outstanding PCs and Structured
Securities and increased expected credit costs associated with newly-issued guarantees.
Derivative Overview
Table 13 presents the notional amount for each of our hedge accounting classiÑcations and the corresponding impact of
those positions on our consolidated Ñnancial statements.
Table 13 Ì Summary of the EÅect of Derivatives on Selected Consolidated Financial Statement Captions
Consolidated Balance Sheets
December 31, 2006 December 31, 2005
Notional Fair Value AOCI Notional Fair Value AOCI
Description Amount (Pre-Tax)(1) (Net of Taxes)(2) Amount (Pre-Tax)(1) (Net of Taxes)(2)
(in millions)
Fair value hedges-open ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ Ì $ Ì $ Ì $115,146 $3,402 $ Ì
Cash Öow hedges-openÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 70 Ì Ì 668 (26) 4
No hedge designationÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 757,127 7,729 Ì 567,558 3,131 Ì
Subtotal ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 757,197 7,729 Ì 683,372 6,507 4
Balance related to closed cash Öow hedges ÏÏÏÏ Ì Ì (5,033) Ì Ì (6,291)
TotalÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $757,197 $7,729 $(5,033) $683,372 $6,507 $(6,287)
Consolidated Statements of Income
Year Ended December 31,
2006 2005 2004
Hedge Hedge Hedge
Derivative Accounting Derivative Accounting Derivative Accounting
Gains Gains Gains Gains Gains Gains
Description (Losses) (Losses)(3) (Losses) (Losses)(3) (Losses) (Losses)(3)
(in millions)
Fair value hedges-open(4) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ Ì $ 2 $ Ì $22 $ Ì $742
Cash Öow hedges-open(4)(5) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Ì Ì (25) Ì 2 1
No hedge designationÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (1,164) Ì (1,332) Ì (4,477) Ì
TotalÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $(1,164) $ 2 $(1,357) $22 $(4,475) $743
(1) The fair values of derivatives (netted by counterparty) are presented as Derivative assets, at fair value, and Derivative liabilities, at fair value, on our
consolidated balance sheets.
(2) Derivatives that meet speciÑc criteria may be accounted for as cash Öow hedges. Changes in the fair value of the eÅective portion of these open
derivatives contracts are recorded in AOCI, net of taxes. Net deferred gains and losses on closed cash Öow hedges (i.e., where the derivative is either
terminated or redesignated) are also included in AOCI, net of taxes, until the related forecasted transaction aÅects earnings or is determined to be
probable of not occurring.
(3) Hedge accounting gains (losses) arise when the fair value change of a derivative does not exactly oÅset the fair value change of the hedged item
attributable to the hedged risk. For further information, see ""Hedge Accounting Gains (Losses)'' below and ""NOTE 12: DERIVATIVES'' to our
consolidated Ñnancial statements.
(4) For all derivatives in qualifying hedge accounting relationships, the accrual of periodic cash settlements is recorded in Net interest income on our
consolidated statements of income and those amounts are not included in the table. For derivatives not in qualifying hedge accounting relationships, the
accrual of periodic cash settlements is recorded in Derivative gains (losses) on our consolidated statements of income.
(5) Derivative gains (losses) in each period include gains or losses reclassiÑed from AOCI, net of taxes, as a result of the termination of cash Öow hedge
designations because we determined that the related forecasted transaction is probable of not occurring.
33 Freddie Mac