Freddie Mac 2004 Annual Report Download - page 19

Credit Guarantee Activities
The following discussion summarizes our credit guarantee activities.
Guarantees of PCs. One of the means by which we fund purchases of mortgage loans is through the use
of securitization-based Ñnancing. We issue PCs that represent undivided interests in the mortgage loans we
purchase and which, in some cases, we sell to investors for cash. However, most of our credit guarantee
activity occurs through mortgage swap transactions in which a mortgage lender or other seller delivers
mortgages to us in exchange for our PCs. Our customers may choose to hold these PCs in their portfolios or
sell them to other investors. We guarantee the payment of principal and interest on all PCs. Our guarantee
increases the marketability of our PCs, providing additional liquidity to the marketplace.
Guarantees Issued Through Resecuritization. Our credit guarantee activities also involve the resecuri-
tization of mortgage-related securities. In the resecuritization process, we issue securities representing
undivided interests in PCs and certain other types of mortgage-related securities. In general, we issue the
following two types of Structured Securities:
‚Single-Class Structured Securities. We issue single-class Structured Securities backed by PCs and
by non-Freddie Mac mortgage-related securities, including Ginnie Mae CertiÑcates.
‚Multi-Class Structured Securities. We issue multi-class Structured Securities that divide the cash
Öows of the underlying PCs, Ginnie Mae CertiÑcates and other mortgage-related securities into two or
more classes that meet the investment criteria and portfolio needs of diÅerent types of investors. Our
principal multi-class Structured Securities activity is the issuance and sale of securities that qualify for
tax treatment as Real Estate Mortgage Investment Conduits, or REMICs. Structured Securities
backed by non-agency mortgage-related securities are also referred to as multi-class Structured
Securities for purposes of this report.
The non-agency mortgage-related securities may be backed by mortgages originated using underwriting
standards that diÅer from our normal criteria; however, most of these securities are signiÑcantly credit-
enhanced at issuance. By issuing Structured Securities backed by these securities, we seek to provide liquidity
to alternative segments of the mortgage market. See ""MD&A Ì RISK MANAGEMENT Ì Credit
Risks Ì Mortgage Credit Risk Ì Mortgage Credit Risk Management Strategies Ì Portfolio DiversiÑcation''
for more information concerning the additional credit risk related to these transactions.
We commonly transfer Structured Securities to third parties in exchange for either cash or the collateral
underlying the Structured Securities (e.g., mortgage-related securities that third-party securities dealers
deliver to us).
Guarantees on Non-Freddie Mac-Issued Securities or Loan Portfolios. We also provide guarantees of the
payment of principal and interest on tax-exempt multifamily housing revenue bonds that support pass-through
certiÑcates issued by third parties. These housing revenue bonds are collateralized by mortgage loans on low-
and moderate-income multifamily housing projects. In addition, we guarantee the payment of principal and
interest related to low- and moderate-income multifamily mortgage loans that are originated and held by state
and municipal housing Ñnance agencies to support tax-exempt multifamily housing revenue bonds. For more
information see ""MD&A Ì OUR RETAINED AND TOTAL MORTGAGE PORTFOLIOS'' Ì ""Ta-
ble 10 Ì Freddie Mac Single-Class and Multi-Class PCs and Other Structured Securities Based on Unpaid
Principal Balances.''
The To-Be-Announced Market
In connection with our credit guarantee activities, we issue PCs that represent pools of mortgages with
similar characteristics Ì such as PCs relating to a pool of 30-year, fully amortizing Ñxed-rate mortgages with
mortgage coupons within a speciÑed range. Because these PCs are generally homogeneous and are issued in
high volume, they are highly liquid and trade on a ""generic'' basis, also referred to as trading in the To-Be-
Announced, or TBA, market. A TBA trade represents a contract for the purchase or sale of PCs to be
delivered at a future date; however, the speciÑc PCs that will be delivered to fulÑll the trade obligation, and
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