Freddie Mac 2006 Annual Report Download - page 49

Gains (losses) on sale of available-for-sale securities
In 2006, gains on sales of available-for-sale securities included net gains of $188 million related to the sale of certain
commercial mortgage-backed securities as discussed in ""Total security impairments.'' These gains were partly oÅset by net
losses due primarily to the increase in interest rates during the year. In 2005, gains on sales of available-for-sale securities
declined as the impact of rising interest rates was partly oÅset by an increase in the volume of resecuritization activity.
Total security impairments
Total security impairments in 2006, 2005 and 2004 included:
‚ $147 million, $71 million and $66 million, respectively, related to mortgage-related interest-only securities, primarily
due to periodic declines in mortgage interest rates experienced during those years;
‚ $332 million, $115 million and $60 million, respectively, related to mortgage-related securities where we determined
that a decline in fair value below amortized cost was other-than-temporary due to the deterioration of the credit
quality of the underlying mortgage loans or because the impairment was interest-rate related and we did not have the
intent to hold the security until the loss would be recovered; and
‚ $61 million, $185 million and $Ì million, respectively, related to impairments of certain commercial mortgage-
backed securities which involved cash Öows from mixed pools of multifamily and non-residential commercial
mortgages. In December 2005, HUD determined that these mixed-pool investments were not authorized under our
charter and OFHEO subsequently directed us to divest these investments, which we did in 2006.
Gains (Losses) on Debt Retirement
We repurchase or call our outstanding debt securities from time to time to help support the liquidity and predictability
of the market for our debt securities and to manage our mix of assets and liabilities. When we repurchase outstanding debt,
we recognize a gain or loss related to the diÅerence between its fair value and its carrying value, including any remaining
unamortized deferred items (e.g., premiums, discounts, issuance costs and hedging-related basis adjustments). When we
exercise a call option on our callable debt, we recognize a gain or loss related to the diÅerence between its call price and its
carrying value, including any remaining unamortized deferred items.
In 2006 and 2005, we recognized net gains on debt retirements due primarily to the repurchases of outstanding debt
trading at attractive prices to take advantage of favorable funding spreads relative to LIBOR on our new debt issuances. In
2004, we recognized net losses on debt retirements due primarily to the repurchase of outstanding debt to help preserve the
liquidity and price performance of our debt securities as market interest rates declined, particularly in the early part of the
year.
Other Income
Other income increased in 2006 as we recognized net foreign-currency gains on foreign-currency denominated debt as
the U.S. dollar strengthened relative to the Euro during December 2006. We actively manage the foreign-currency risk
associated with our foreign-currency denominated debt using derivatives, which were designated in fair value hedge
accounting relationships until we voluntarily discontinued hedge accounting for those derivatives on December 1, 2006.
After that date, we continued to manage our foreign-currency risk; however, translation gains and losses on our foreign-
currency denominated debt were recorded in Other income and were substantially oÅset by net losses we recorded in
Derivative gains (losses). In 2005, Other income included approximately $80 million of expense, net, related to certain errors
not material to our consolidated Ñnancial statements with respect to income in previously reported periods.
37 Freddie Mac