Freddie Mac 2010 Annual Report Download - page 183

they had not been transferred, and no gain or loss is recognized on these transfers. For all other VIEs that we consolidate, we
recognize the assets and liabilities of the VIE at fair value, and we recognize a gain or loss for the difference between:
(a) the fair value of the consideration paid and the fair value of any noncontrolling interests held by third parties; and (b) the
net amount, as measured on a fair value basis, of the assets and liabilities consolidated.
For entities that are not VIEs, the usual condition of a controlling financial interest is ownership of a majority voting
interest in an entity. We use the equity method of accounting for entities over which we have the ability to exercise
significant influence, but not control.
Securitization Activities through Issuances of Freddie Mac Mortgage-Related Securities
Overview
We securitize substantially all of the single-family mortgages we purchase and issue mortgage-related securities called
PCs that can be sold to investors or held by us. Guarantor swaps are transactions where financial institutions exchange
mortgage loans for PCs backed by these mortgage loans. Multilender swaps are similar to guarantor swaps, except that
formed PC pools include loans that are contributed by more than one party. We issue PCs through various swap-based
exchanges significantly more often than through cash-based exchanges. We issue REMICs and Other Structured Securities in
transactions in which securities dealers or investors sell us mortgage-related assets in exchange for REMICs and Other
Structured Securities. We also issue Other Guarantee Transactions to third parties in exchange for non-Freddie Mac
mortgage-related securities.
PCs
Our PCs are pass-through debt securities that represent undivided beneficial interests in a pool of mortgages held by a
securitization trust. For our fixed-rate PCs, we guarantee the timely payment of interest and principal. For our ARM PCs, we
guarantee the timely payment of the weighted average coupon interest rate for the underlying mortgage loans. We do not
guarantee the timely payment of principal for ARM PCs; however, we do guarantee the full and final payment of principal.
Various types of fixed income investors purchase our PCs, including pension funds, insurance companies, securities
dealers, money managers, commercial banks and foreign central banks. PCs differ from U.S. Treasury securities and certain
other fixed-income investments in two primary ways. First, they can be prepaid at any time because homeowners may pay
off the underlying mortgages at any time prior to a loan’s maturity. Because homeowners have the right to prepay their
mortgage, the securities implicitly have a call option that significantly reduces the average life of the security as compared to
the contractual maturity of the underlying loans. Consequently, mortgage-related securities generally provide a higher
nominal yield than certain other fixed-income products. Second, PCs are not backed by the full faith and credit of the United
States, as are U.S. Treasury securities. However, we guarantee the payment of interest and principal on all of our PCs, as
discussed above.
In return for providing our guarantee of the payment of principal and interest, we earn a management and guarantee fee
that is paid to us over the life of an issued PC, representing a portion of the interest collected on the underlying loans.
PC Trusts
Prior to January 1, 2010, our PC trusts met the definition of QSPEs and were not consolidated. Effective January 1,
2010, the concept of a QSPE was removed from GAAP and entities previously considered QSPEs were required to be
evaluated for consolidation. Based on our evaluation, we determined that we are the primary beneficiary of trusts that issue
our single-family PCs. Therefore, effective January 1, 2010, we consolidated on our balance sheet the assets and liabilities of
these trusts at their UPB, with accrued interest, allowance for credit losses or other-than-temporary impairments recognized
as appropriate, using the practical expedient permitted upon adoption since we determined that calculation of carrying values
was not practical. Other newly consolidated assets and liabilities that either do not have a UPB or are required to be carried
at fair value were measured at fair value. As such, we have recognized on our consolidated balance sheets the mortgage
loans underlying our issued single-family PCs as mortgage loans held-for-investment by consolidated trusts, at amortized
cost. We also recognized the corresponding single-family PCs held by third parties on our consolidated balance sheets as
debt securities of consolidated trusts held by third parties. After January 1, 2010, the assets and liabilities of trusts that we
consolidate are recorded at either their: (a) carrying value if the underlying assets are contributed by us to the trust; or
(b) fair value for those securitization trusts established for our guarantor swap program, rather than their UPB. Refer to
“Mortgage Loans” and “Debt Securities Issued” below for further information on the subsequent accounting treatment of
these assets and liabilities, respectively.
REMICs and Other Structured Securities
Our REMICs and Other Structured Securities use resecuritization trusts that meet the definition of a VIE. REMICs and
Other Structured Securities represent beneficial interests in groups of PCs and other types of mortgage-related assets. We
create these securities primarily by using PCs or previously issued mortgage-related securities as collateral. Similar to our
180 Freddie Mac