Freddie Mac 2009 Annual Report Download - page 83

Basic amortization under the static effective yield method increased in 2009, compared to 2008, due to growth in the
balance of our issued PCs and Structured Securities. Higher prepayment rates on the related loans, which was attributed to
higher refinance activity during 2009, also resulted in increased basic amortization in 2009, compared to 2008.
Cumulative catch-up amortization was higher in 2008 than in 2009 principally due to significant home price declines
that occurred during 2008, which caused us to recognize significant cumulative catch-up adjustments in 2008. This was
partially offset by higher prepayment rates experienced in 2009, resulting from higher refinance activity. We estimate that
home prices decreased nationwide by approximately 0.8% during 2009, based on our own index of our single-family
mortgage portfolio, compared to an estimated decrease of 11.7% during 2008.
Amortization income increased in 2008 compared to 2007. This increase was due to (1) higher amortization income
recognized from guarantee obligation balances associated with 2007 issuances, which included significant market risk
premiums, (2) higher cumulative catch-up adjustments during 2008, and (3) higher average balances of our issued PCs and
Structured Securities during 2008. The cumulative catch-up adjustments recognized during 2008 were due to significant
declines in home prices.
Derivative Overview
We use derivatives to: (a) regularly adjust or rebalance our funding mix in order to more closely match changes in the
interest rate characteristics of our mortgage-related assets; (b) hedge forecasted issuances of debt; (c) synthetically create
callable and non-callable funding; and (d) hedge foreign-currency exposure. We account for our derivatives pursuant to the
accounting standards for derivatives and hedging. See “NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES — Derivatives” to our consolidated financial statements for additional information.
At December 31, 2009 and 2008, we did not have any derivatives in hedge accounting relationships; however, there are
amounts recorded in AOCI related to terminated or de-designated cash flow hedge relationships. Changes in fair value and
interest accruals on derivatives not in hedge accounting relationships are recorded as derivative gains (losses) in our
consolidated statements of operations. The deferred amounts in AOCI related to closed cash flow hedges are reclassified to
earnings when the forecasted transactions affect earnings.
Derivative Gains (Losses)
Table 16 presents the gains and losses related to derivatives that were not accounted for in hedge accounting
relationships. Derivative gains (losses) represents the change in fair value of derivatives not accounted for in hedge
accounting relationships because the derivatives did not qualify for, or we did not elect to pursue, hedge accounting, resulting
in fair value changes being recorded to earnings. Derivative gains (losses) also includes the accrual of periodic settlements
for derivatives that are not in hedge accounting relationships. Although derivatives are an important aspect of our
management of interest-rate risk, they generally increase the volatility of reported net income (loss), particularly when they
are not accounted for in hedge accounting relationships.
80 Freddie Mac