Freddie Mac 2011 Annual Report Download - page 267

Cash Flows Associated with Non-Consolidated Trusts
We receive proceeds in securitizations accounted for as sales for those securities sold to third parties. Subsequent to
these securitizations, we receive cash flows related to interest income and repayment of principal on the securities we
retain for investment. Regardless of whether our issued mortgage-related security is sold to third parties or held by us for
investment, we are obligated to make cash payments to acquire foreclosed properties and certain delinquent or impaired
mortgages under our financial guarantees. In addition to the securitization and sale transactions discussed below, the cash
flows on retained interests related to securitizations accounted for as sales during 2009 consisted of: (a) cash receipts
associated with our guarantee asset of $2.9 billion; (b) cash receipts associated with principal and interest on our retained
interests of $21.4 billion; and (c) cash payments associated with delinquent or foreclosed loans and required purchase of
balloon mortgages of $26.3 billion. In addition, we are obligated under our guarantee to make up any shortfalls in
principal and interest to the holders of our securities. See “NOTE 9: FINANCIAL GUARANTEES” for additional
information on these payments in 2009. Cash flows associated with our retained interests in 2011 and 2010 were not
significant.
Gains and Losses on Securitizations Accounted for as Sales
The gain or loss on a securitization that qualifies as a sale is determined, in part, based on the carrying amounts of
the financial assets sold. The carrying amounts of the assets sold are allocated between those sold to third parties and
those held as retained interests based on their relative fair value at the date of sale. We recognized net pre-tax gains
(losses) on transfers of mortgage loans, PCs and REMICs and Other Structured Securities that were accounted for as sales
of approximately $1.5 billion for the year ended December 31, 2009. These transactions were not significant in 2011 and
2010 due to the changes in the accounting guidance for consolidation of VIEs that became effective January 1, 2010.
NOTE 11: DERIVATIVES
Use of Derivatives
We use derivatives primarily to:
• hedge forecasted issuances of debt;
• synthetically create callable and non-callable funding;
• regularly adjust or rebalance our funding mix in response to changes in the interest-rate characteristics of our
mortgage-related assets; and
• hedge foreign-currency exposure.
Hedge Forecasted Debt Issuances
When we commit to purchase mortgage investments, such commitments are typically for a future settlement ranging
from two weeks to three months after the date of the commitment. To facilitate larger and more predictable debt issuances
that contribute to lower funding costs, we use interest-rate derivatives to economically hedge the interest-rate risk
exposure from the time we commit to purchase a mortgage to the time the related debt is issued.
Create Synthetic Funding
We also use derivatives to synthetically create the substantive economic equivalent of various debt funding structures.
For example, the combination of a series of short-term debt issuances over a defined period and a pay-fixed interest rate
swap with the same maturity as the last debt issuance is the substantive economic equivalent of a long-term fixed-rate
debt instrument of comparable maturity. Similarly, the combination of non-callable debt and a call swaption, or option to
enter into a receive-fixed interest rate swap, with the same maturity as the non-callable debt, is the substantive economic
equivalent of callable debt. These derivatives strategies increase our funding flexibility and allow us to better match asset
and liability cash flows, often reducing overall funding costs.
Adjust Funding Mix
We generally use interest-rate swaps to mitigate contractual funding mismatches between our assets and liabilities.
We also use swaptions and other option-based derivatives to adjust the contractual terms of our debt funding in response
to changes in the expected lives of our investments in mortgage-related assets. As market conditions dictate, we take
rebalancing actions to keep our interest-rate risk exposure within management-set limits. In a declining interest-rate
environment, we typically enter into receive-fixed interest rate swaps or purchase Treasury-based derivatives to shorten the
duration of our funding to offset the declining duration of our mortgage assets. In a rising interest-rate environment, we
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