Freddie Mac 2008 Annual Report Download - page 210

property. At December 31, 2008, our assessment is that the risk of any material loss from such a claim for indemnification is
remote and there are no probable and estimable losses associated with these contracts. We have not recorded any liabilities
related to these indemnifications on our consolidated balance sheets at December 31, 2008 and 2007.
NOTE 3: RETAINED INTERESTS IN MORTGAGE-RELATED SECURITIZATIONS
In connection with transfers of financial assets that qualify as sales under SFAS 140, we may retain certain newly-issued
PCs and Structured Securities not transferred to third parties upon the completion of a securitization transaction. These
securities may be backed by mortgage loans purchased from our customers, PCs and Structured Securities, or previously
resecuritized securities. These Freddie Mac PCs and Structured Securities are included in investments in securities in our
consolidated balance sheets.
Our exposure to credit losses on the loans underlying our retained securitization interests and our guarantee asset is
recorded within our reserve for guarantee losses on PCs and as a component of our guarantee obligation, respectively. For
additional information regarding our delinquencies and credit losses, see “NOTE 6: MORTGAGE LOANS AND LOAN
LOSS RESERVES.” Table 3.1 below presents the carrying values of our retained interests in securitization transactions as of
December 31, 2008 and 2007.
Table 3.1 — Carrying Value of Retained Interests
2008 2007
December 31,
(in millions)
Retained Interests, mortgage-related securities . . ................................................... $98,307 $107,931
Retained Interests, guarantee asset
(1)
........................................................... $ 4,577 $ 9,417
(1) Includes guarantees that relate to single-family mortgage loans only.
Retained Interests, Mortgage-Related Securities
We estimate the fair value of retained interests in mortgage-related securities based on independent price quotes
obtained from third-party pricing services or dealer provided prices. The hypothetical sensitivity of the carrying value of
retained securitization interests is based on internal models adjusted where necessary to align with fair values.
Retained Interests, Guarantee Asset
Our approach for estimating the fair value of the guarantee asset at December 31, 2008 used third-party market data as
practicable. For approximately 75% of the fair value of the guarantee asset, which relates to fixed-rate loan products that
reflect current market rates, the valuation approach involved obtaining dealer quotes on proxy securities with collateral
similar to aggregated characteristics of our portfolio. This effectively equates the guarantee asset with current, or “spot,”
market values for excess servicing interest-only securities. We consider these securities to be comparable to the guarantee
asset, in that they represent interest-only cash flows, and do not have matching principal-only securities. The remaining 25%
of the fair value of the guarantee asset related to underlying loan products for which comparable market prices were not
readily available. These amounts relate specifically to ARM products, highly seasoned loans or fixed-rate loans with coupons
that are not consistent with current market rates. This portion of the guarantee asset was valued using an expected cash flow
approach including only those cash flows expected to result from our contractual right to receive management and guarantee
fees, with market input assumptions extracted from the dealer quotes provided on the more liquid products, reduced by an
estimated liquidity discount.
The fair values at the time of securitization and the subsequent fair value measurements were primarily estimated using
third-party information. Consequently, we derived the assumptions presented in Table 3.2 by determining those implied by
our valuation estimates, with the internal rates of return, or IRRs, adjusted where necessary to align our internal models with
estimated fair values determined using third-party information. Prepayment rates are presented as implied by our internal
models and have not been similarly adjusted. For the portion of our guarantee asset that is valued by obtaining dealer quotes
on proxy securities, we derive the assumptions from the prices we are provided. Table 3.2 contains estimates of the key
assumptions used to derive the fair value measurement that relates solely to our guarantee asset on financial guarantees of
single family loans. These represent the assumptions used both at the end of each quarter during the year and at the time of
guarantee issuance presented on a combined basis.
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