Freddie Mac 2008 Annual Report Download - page 12

primarily to provide us with flexibility in determining what to sell or hold and to allow for more cost effective interest-rate
risk management.
The compensation we receive in exchange for our guarantee activities includes a combination of management and
guarantee fees paid on a monthly basis as a percentage of the underlying unpaid principal balance of the loans and initial
upfront payments referred to as delivery fees. We recognize the fair value of the right to receive ongoing management and
guarantee fees as a guarantee asset at the inception of a guarantee. We subsequently account for the guarantee asset like a
debt security which performs similarly to an excess-servicing, interest-only security, classified as trading, and reflect changes
in the fair value of the guarantee asset in earnings. We recognize a guarantee obligation at inception equal to the fair value
of the compensation received, including any upfront delivery fees, less upfront payments by us to buy-up the monthly
management and guarantee fee rate, plus any upfront payments received by us to buy-down the monthly management and
guarantee fee rate, plus any seller-provided credit enhancements. Buy-up and buy-down fees are paid in conjunction with the
formation of a PC to provide for a uniform PC coupon rate. The guarantee obligation represents deferred revenue that is
amortized into earnings as we are relieved from risk under the guarantee.
The guarantee we provide increases the marketability of our mortgage-related securities, providing additional liquidity to
the mortgage market. The types of mortgage-related securities we guarantee include the following:
• PCs we issue;
• single-class and multi-class Structured Securities (including Structured Transactions discussed below) we issue; and
• securities related to tax-exempt multifamily housing revenue bonds (see “Multifamily Segment”).
PCs
Our PCs are pass-through securities that represent undivided beneficial interests in trusts that own pools of mortgages
we have purchased. For our fixed-rate PCs, we guarantee the timely payment of interest and the timely payment of principal.
For our ARM PCs, we guarantee the timely payment of the weighted average coupon interest rate for the underlying
mortgage loans. We also guarantee the full and final payment of principal for ARM PCs; however, we do not guarantee the
timely payment of principal on ARM PCs. In exchange for providing this guarantee, we receive a management and guarantee
fee and up-front delivery fees. We issue most of our PCs in transactions in which our customers exchange mortgage loans for
PCs. We refer to these transactions as guarantor swaps. The following diagram illustrates a guarantor swap transaction:
Guarantor Swap
Mortgage Lender
Mortgage loans
PC
Freddie Mac
(administrator)
TRUST
Mortgage
loans PC
Freddie Mac
(guarantor)
Guarantee
Fee
Cash (Buy-ups)
Cash (Buy-downs, delivery fees)
9Freddie Mac