Freddie Mac 2008 Annual Report Download - page 133

OFF-BALANCE SHEET ARRANGEMENTS
We enter into certain business arrangements that are not recorded on our consolidated balance sheets or may be
recorded in amounts that differ from the full contract or notional amount of the transaction. Most of these arrangements
relate to our financial guarantee and securitization activity for which we record guarantee assets and obligations, but the
related securitized assets are owned by third parties. These off-balance sheet arrangements may expose us to potential losses
in excess of the amounts recorded on our consolidated balance sheets.
Guarantee of PCs and Structured Securities
As discussed in “BUSINESS — Our Business and Statutory Mission — Our Business Segments — Single-Family
Guarantee Segment,” we guarantee the payment of principal and interest on PCs and Structured Securities we issue.
Mortgage-related assets that back PCs and Structured Securities held by third parties are not reflected as assets on our
consolidated balance sheets.
In some cases, we share the risks of our credit guarantee activity with third parties through the use of primary mortgage
insurance, pool insurance and other credit enhancements. “NOTE 2: FINANCIAL GUARANTEES AND MORTGAGE
SECURITIZATIONS” to our consolidated financial statements provides information about our guarantees, including details
related to credit protections and maximum coverages that we obtain through credit enhancements. Also, see “CREDIT
RISKS — Mortgage Credit Risks” for more information.
We also resecuritize our PCs and issue single- and multi-class Structured Securities and subsequently transfer such
Structured Securities to third parties in exchange for cash, PCs or other mortgage-related securities. We earn resecuritization
fees in connection with the creation of certain Structured Securities. We resecuritized a total of $507 billion and $457 billion
of Structured Securities during 2008 and 2007, respectively. The increase of our principal credit risk exposure on Structured
Securities relates only to that portion of resecuritized assets that consists of non-Freddie Mac mortgage-related securities.
In addition, we enter into long-term standby commitments for mortgage assets held by third parties that require that we
purchase loans from lenders when the loans subject to these commitments meet certain delinquency criteria. We have
included these transactions in the reported activity and balances of our PCs and Structured Securities. Long-term standby
commitments represented approximately 1% and 2% of the balance of our PCs and Structured Securities as of December 31,
2008 and 2007, respectively.
Our maximum potential off-balance sheet exposure to credit losses relating to our PCs and Structured Securities is
primarily represented by the unpaid principal balance of those securities held by third parties, which was $1,403 billion and
$1,382 billion at December 31, 2008 and 2007, respectively. Based on our historical credit losses, which in 2008 and 2007
averaged approximately 20.1 and 3.0 basis points, respectively, of the aggregate unpaid principal balance of our PCs and
Structured Securities, we do not believe that the maximum exposure is representative of our actual exposure on these
guarantees. The maximum exposure does not take into consideration the recovery we would receive through exercising our
rights to the collateral backing the underlying loans nor the available credit enhancements, which include recourse and
primary insurance with third parties. In addition, we provide for incurred losses each period on these guarantees to third
parties within our provision for credit losses. The accounting policies and fair value estimation methodologies we apply to
our credit guarantee activities significantly affect the volatility of our reported earnings. See “CONSOLIDATED RESULTS
OF OPERATIONS — Non-Interest Income (Loss)” for an analysis of the effects on our consolidated statements of operations
related to our credit guarantee activities.
Other
We extend other guarantees and provide indemnification to counterparties for breaches of standard representations and
warranties in contracts entered into in the normal course of business based on an assessment that the risk of loss would be
remote. See “NOTE 2: FINANCIAL GUARANTEES AND MORTGAGE SECURITIZATIONS” to our consolidated
financial statements for additional information.
We are a party to numerous entities that are considered to be variable interest entities, or VIEs, in accordance with
FIN 46(R). These variable interest entities include low-income multifamily housing tax credit partnerships, certain Structured
Transactions and certain asset-backed investment trusts. See “NOTE 4: VARIABLE INTEREST ENTITIES” to our
consolidated financial statements for additional information related to our significant variable interests in these VIEs,
including those not consolidated within our financial statements.
As part of our credit guarantee business, we routinely enter into forward purchase and sale commitments for mortgage
loans and mortgage-related securities. Some of these commitments are accounted for as derivatives. Their fair values are
reported as either derivative assets, net or derivative liabilities, net on our consolidated balance sheets. See
“QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK — Interest-Rate Risk and Other Market
Risks” for further information.
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