Freddie Mac 2008 Annual Report Download - page 76

compared to 2006 was partially offset by a decrease in our mortgage-related securities premium amortization expense as
purchases into our mortgage-related investments portfolio in 2007 largely consisted of securities purchased at a discount. In
addition, wider mortgage-to-debt OAS due to continued lower demand for mortgage-related securities from depository
institutions and foreign investors, along with heightened market uncertainty regarding mortgage-related securities, resulted in
favorable investment opportunities during 2007. However, to manage to our 30% mandatory target capital surplus then in
effect, we reduced our average balance of interest earning assets and as a result, we were not able to take full advantage of
these opportunities.
Non-Interest Income (Loss)
Management and Guarantee Income
Management and guarantee income primarily consists of contractual management and guarantee fees, representing a
portion of the interest collected on loans underlying our PCs and Structured Securities. The primary drivers affecting
management and guarantee income are changes in the average balance of our issued PCs and Structured Securities and
changes in management and guarantee fee rates for newly-issued guarantees. Contractual management and guarantee fees
reflect adjustments for buy-ups and buy-downs, whereby the management and guarantee fee rate is adjusted for up-front cash
payments we make (buy-up) or receive (buy-down) upon issuance of our guarantee. Our guarantee fee rates are established at
issuance and remain fixed over the life of the guarantee. Our average rates of management and guarantee income are affected
by the mix of products we issue, competition in the market and customer preference for buy-up and buy-down fees. The
appointment of FHFA as Conservator and the Conservator’s subsequent directive that we provide increased support to the
mortgage market has affected our guarantee pricing decisions by limiting our ability to adjust our fees for current
expectations of credit risk, and will likely continue to do so.
Table 12 provides summary information about management and guarantee income. Management and guarantee income
consists of contractual amounts due to us (reflecting buy-ups and buy-downs to base management and guarantee fees) as well
as amortization of pre-2003 deferred delivery and buy-down fees received by us which are recorded as deferred income as a
component of other liabilities. Beginning in 2003, delivery and buy-down fees are included within income on guarantee
obligation.
Table 12 — Management and Guarantee Income
Amount Rate Amount Rate Amount Rate
2008 2007 2006
Year Ended December 31,
(dollars in millions, rates in basis points)
Contractual management and guarantee fees
(1)
............................... $3,124 17.5 $2,591 16.3 $2,201 15.7
Amortization of deferred fees included in other liabilities . . . . . ................... 246 1.4 44 0.3 192 1.4
Total management and guarantee income . .................................. $3,370 18.9 $2,635 16.6 $2,393 17.1
Unamortized balance of deferred fees included in other liabilities, at period end . . ...... $ 176 $ 410 $ 440
(1) Consists of management and guarantee fees received related to our mortgage-related guarantees, including those issued prior to adoption of FIN 45,
“Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others, an interpretation of
FASB Statements No. 5, 57 and 107 and rescission of FASB Interpretation No. 34,” or FIN 45, in January 2003, which did not require the establishment
of a guarantee asset.
Management and guarantee income increased in 2008 compared to 2007 primarily due to a 12% increase in the average
balance of our issued PCs and Structured Securities. In addition, the average contractual management and guarantee fee rate
for 2008 was higher than 2007 primarily due to an increase in the preference for buy-ups in these rates by our customers.
Management and guarantee income and the related average rates also increased in 2008 compared to 2007 due to an increase
in the amortization of pre-2003 deferred fees due to declines in interest rates in 2008. To a lesser extent, increased purchases
of 30-year fixed-rate product during 2008, which has higher guarantee fee rates relative to 15-year fixed-rate and certain
other products, also contributed to the increase in guarantee fee rates.
Management and guarantee income increased in 2007 compared to 2006 resulting from a 13% increase in the average
balance of our issued PCs and Structured Securities. The total management and guarantee fee rate decreased in 2007
compared to 2006 due to declines in amortization income resulting from slowing prepayments. The decline was partially
offset by an increase in contractual management and guarantee fee rates as a result of an increase in buy-up activity in 2007.
Gains (Losses) on Guarantee Asset
Upon issuance of a guarantee of securitized assets, we record a guarantee asset on our consolidated balance sheets
representing the fair value of the management and guarantee fees (reflecting adjustments for buy-ups and buy-downs) we
expect to receive over the life of our PCs or Structured Securities. Subsequent changes in the fair value of the future cash
flows of the guarantee asset are reported in current period income as gains (losses) on guarantee asset.
73 Freddie Mac