Freddie Mac 2009 Annual Report Download - page 296

throughout the life of the loan and up-front compensation received, trust management fees less related credit costs (i.e.,
provision for credit losses) and operating expenses. Our measure of Segment Earnings for these activities consists primarily
of these elements of revenue and expense. We believe this measure is a relevant indicator of operating performance for
specific periods, as well as trends in results over multiple periods because it more closely aligns with how we manage and
evaluate the performance of the credit guarantee business.
We purchase mortgages from seller/servicers in order to securitize and issue PCs and Structured Securities. See
“NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES” for a discussion of the accounting treatment of
these transactions. In addition to the components of earnings noted above, GAAP-basis earnings for these activities include
gains or losses upon the execution of such transactions, subsequent fair value adjustments to the guarantee asset and
amortization of the guarantee obligation.
Our credit guarantee activities also include the purchase of significantly past due mortgage loans from loan pools that
underlie our guarantees. Pursuant to GAAP, at the time of our purchase the loans are recorded at fair value. To the extent the
adjustment of a purchased loan to fair value exceeds our own estimate of the losses we will ultimately realize on the loan, as
reflected in our loan loss reserve, an additional loss is recorded in our GAAP-basis results.
When we determine Segment Earnings for our credit guarantee-related activities, the adjustments we apply to earnings
computed on a GAAP-basis include the following:
• Amortization and valuation adjustments pertaining to the guarantee asset and guarantee obligation are excluded from
Segment Earnings. Cash compensation exchanged at the time of securitization, excluding buy-up and buy-down fees,
is amortized into earnings.
• The initial recognition of gains and losses prior to January 1, 2008 and in connection with the execution of either
securitization transactions that qualify as sales or guarantor swap transactions, such as losses on certain credit
guarantees, is excluded from Segment Earnings.
• Fair value adjustments recorded upon the purchase of delinquent loans from pools that underlie our guarantees are
excluded from Segment Earnings. However, for Segment Earnings reporting, our GAAP-basis loan loss provision is
adjusted to reflect our own estimate of the losses we will ultimately realize on such items.
While both GAAP-basis results and Segment Earnings include a provision for credit losses determined in accordance
with the accounting standards for contingencies, GAAP-basis results also include, as noted above, measures of future cash
flows (the guarantee asset) that are recorded at fair value and, therefore, are subject to significant adjustment from period-to-
period as market conditions, such as interest rates, change. Over the longer-term, Segment Earnings and GAAP-basis results
both capture the aggregate cash flows associated with our guarantee-related activities. Although Segment Earnings differs
significantly from, and should not be used as a substitute for GAAP-basis results, we believe that excluding the impact of
changes in the fair value of expected future cash flows from our Segment Earnings provides a meaningful measure of
performance for a given period as well as trends in performance over multiple periods because it more closely aligns with
how we manage and evaluate the performance of the credit guarantee business.
In the third quarter of 2009, we reclassified our investments in commercial mortgage-backed securities and all related
income and expenses from the Investments segment to the Multifamily segment. This reclassification better aligns the
financial results related to these securities with management responsibilities. Prior periods have been reclassified to conform
to the current presentation.
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