Freddie Mac 2012 Annual Report Download - page 217

For example, and most significantly, single-family PCs can be partially or fully prepaid at any time. Homeowners have the
right to prepay their mortgage at any time (known as the prepayment option), and homeowner mortgage payments are passed
through to the PC holder. Consequently, mortgage-related securities implicitly have a call option that significantly reduces
the average life of the security from the contractual loan maturity. As a result, our PCs generally provide a higher nominal
yield than certain other fixed-income products. In contrast to U.S. Treasury securities, PCs are not backed by the full faith
and credit of the United States and are instead backed by interests in real estate, in addition to our own guarantee.
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
We are the primary beneficiary of VIE securitization trusts that issue our single-family PCs and therefore consolidate
the assets and liabilities of these trusts 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. Mortgage loans underlying
our issued single-family PCs are recognized on our consolidated balance sheets as mortgage loans held-for-investment by
consolidated trusts, at amortized cost. The corresponding single-family PCs held by third parties are recognized on our
consolidated balance sheets as debt securities of consolidated trusts held by third parties. 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
PCs, we guarantee the payment of principal and interest to the holders of the tranches of our REMICs and Other Structured
Securities. However, for REMICs and Other Structured Securities where we have already guaranteed the underlying assets,
there is no incremental exposure to credit loss assumed by us.
With respect to the resecuritization trusts used for REMICs and Other Structured Securities whose underlying assets are
PCs, we do not have rights to receive benefits or obligations to absorb losses that could potentially be significant to the trusts
because we have already provided a guarantee on the underlying assets. Additionally, our involvement with these trusts does
not provide us with any power that would enable us to direct the significant economic activities of these entities. Although
we may be exposed to prepayment risk through our ownership of the securities issued by these trusts, we do not have the
ability through our involvement with the trust to impact the economic risks to which we are exposed. As a result, we are not
the primary beneficiary of, and therefore do not consolidate, the resecuritization trusts used for REMICs and Other
Structured Securities whose underlying assets are PCs unless we hold substantially all of the outstanding beneficial interests
that have been issued by the trust.
We receive a transaction fee from third parties for issuing REMICs and Other Structured Securities in exchange for PCs
or other mortgage-related assets. We defer the portion of the transaction fee that is equal to the estimated value of our future
administrative responsibilities for issued REMICs and Other Structured Securities. These responsibilities include ongoing
trustee services, administration of pass-through amounts, paying agent services, tax reporting, and other required services.
We estimate the value of these future responsibilities based on quotes from third-party vendors who perform each type of
service and, where quotes are not available, based on our estimates of what those vendors would charge. The remaining
portion of the transaction fee relates to compensation earned in connection with structuring-related services we rendered to
third parties and is allocated between REMICs and Other Structured Securities we retain, if any, and the REMICs and Other
Structured Securities acquired by third parties, based on the relative fair value of the securities. The portion of the fee
allocated to any REMICs and Other Structured Securities we retain is deferred as a carrying value adjustment and is
amortized into interest income using the effective interest method over the contractual lives of these securities. The fee
allocated to REMICs and Other Structured Securities acquired by third parties is recognized immediately in earnings as other
income.
Other Guarantee Transactions
Other Guarantee Transactions are mortgage-related securities that we issue to third parties in exchange for non-Freddie
Mac mortgage-related securities. Other Guarantee Transactions typically involve us purchasing either the senior tranches
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