Freddie Mac 2008 Annual Report Download - page 207

Table 2.1 — Financial Guarantees
Maximum
Exposure
(1)
Recognized
Liability
Maximum
Remaining
Term
Maximum
Exposure
(1)
Recognized
Liability
Maximum
Remaining
Term
December 31, 2008 December 31, 2007
(dollars in millions, terms in years)
Guaranteed PCs and Structured Securities . . .............. $1,807,553 $11,480 44 $1,701,207 $13,207 40
Other mortgage-related guarantees . . ................... 19,685 618 39 37,626 505 37
Liquidity guarantees . . . . . . . . . . . . ................... 12,260 — 44 7,983 — 40
Derivative instruments . . . . . . . . . . . ................... 39,488 111 34 32,538 129 30
Servicing-related premium guarantees ................... 63 — 5 37 — 5
(1) Maximum exposure represents the contractual amounts that could be lost under the guarantees if counterparties or borrowers defaulted, without
consideration of possible recoveries under credit enhancement arrangements, such as recourse provisions, third-party insurance contracts or from
collateral held or pledged. The maximum exposure disclosed above is not representative of the actual loss we are likely to incur, based on our historical
loss experience and after consideration of proceeds from related collateral liquidation. In addition, the maximum exposure for our liquidity guarantees is
not mutually exclusive of our default guarantees on the same securities; therefore, the amounts are also included within the maximum exposure of
guaranteed PCs and Structured Securities.
Guaranteed PCs and Structured Securities
We issue two types of mortgage-related securities: PCs and Structured Securities and we refer to certain Structured
Securities as Structured Transactions. See “NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES” for a
discussion of our Structured Transactions. We guarantee the payment of principal and interest on these securities, which are
backed by pools of mortgage loans, irrespective of the cash flows received from the borrowers. For our fixed-rate PCs, we
guarantee the timely payment of interest at the applicable PC coupon rate and scheduled principal payments for the
underlying mortgages. For our ARM PCs, we guarantee the timely payment of the weighted average coupon interest rate and
the full and final payment of principal for the underlying mortgages. We do not guarantee the timely payment of principal
for ARM PCs. To the extent the interest rate is modified and reduced for a loan underlying a fixed-rate PC, we pay the
shortfall between the original contractual interest rate and the modified interest rate. To the extent the interest rate is
modified and reduced for a loan underlying an ARM PC, we only guarantee the timely payment of the modified interest rate
and we are not responsible for any shortfalls between the original contractual interest rate and the modified interest rate.
When our Structured Securities consist of re-securitizations of PCs, our guarantee and the impacts of modifications to the
interest rate of the underlying loans operate in the same manner as PCs. We establish trusts for all of our issued PC’s
pursuant to our master trust agreement and we serve a role to the trust as administrator, trustee, guarantor, and master
servicer of the underlying loans. We do not perform the servicing directly on the loans within PCs; however, we assist our
seller/servicers in their loss mitigation activities on loans within PCs that become delinquent, or past due. During 2008 and
2007, we executed foreclosure alternatives on approximately 88,000 and 52,000 single-family mortgage loans, respectively,
including those loans held by us on our consolidated balance sheets. Foreclosure alternatives include modifications with and
without concessions to the borrower, forbearance agreements, pre-foreclosure sales and repayment plans. Our practice is to
purchase these loans from the trusts when foreclosure sales occur, they are modified, or in certain other circumstances. See
“NOTE 7: REAL ESTATE OWNED” for more information on properties acquired under our financial guarantees. See
“NOTE 6: MORTGAGE LOANS AND LOAN LOSS RESERVES” and “NOTE 18: CONCENTRATION OF CREDIT AND
OTHER RISKS” for delinquency information on loans we own or have securitized, information on our purchases of impaired
loans under our financial guarantees and other risks associated with our securitization activities.
During 2008 and 2007 we issued $353 billion and $467 billion of our PCs and Structured Securities backed by single-
family mortgage loans and the vast majority of these were in securitizations accounted for in accordance with FIN 45 at time
of issuance. We also issued approximately $700 million and $2.8 billion of PCs and Structured Securities backed by
multifamily mortgage loans during 2008 and 2007, respectively. At December 31, 2008 and 2007, we had $1,807.6 billion
and $1,701.2 billion of issued and outstanding PCs and Structured Securities, respectively, of which $424.5 billion and
$357.0 billion, respectively, were held as investments in mortgage-related securities on our consolidated balance sheets. The
assets that underlie issued PCs and Structured Securities as of December 31, 2008 consisted of approximately
$1,796.0 billion in unpaid principal balance of mortgage loans or mortgage-related securities and $11.6 billion of cash and
short-term investments, which we invest on behalf of the PC trusts until the time of payment to PC investors. As of
December 31, 2008 and 2007, there were $1,800.6 billion and $1,518.8 billion, respectively, of Structured Securities backed
by PCs and other of our previously issued Structured Securities. These restructured securities do not increase our credit-
related exposure and consist of single-class and multi-class Structured Securities backed by PCs, Real Estate Mortgage
Investment Conduits, or REMICs, interest-only strips, and principal-only strips. In addition, there were $25.5 billion and
$21.5 billion of Structured Transactions outstanding at December 31, 2008 and 2007, respectively.
At inception of an executed guarantee, we recognize a guarantee obligation at fair value. Subsequently, we amortize our
guarantee obligation under the static effective yield method. However, we continue to determine the fair value of our
guarantee obligation for disclosure purposes as discussed in “NOTE 17: FAIR VALUE DISCLOSURES.”
204 Freddie Mac