Freddie Mac 2004 Annual Report Download - page 21

Mortgage Security Performance and Other Market Support Activities
We support the liquidity and depth of the market for PCs through various activities, including:
‚ educating dealers and investors about the merits of trading and investing in PCs;
‚ purchasing and selling PCs and other mortgage-related securities through the Retained portfolio; and
‚ introducing new mortgage-related securities products and initiatives.
We may increase, reduce or discontinue these or other related activities at any time, which could aÅect
the liquidity and depth of the market for PCs. We support the execution of our credit guarantee business by
adjusting our guarantee fee. For example, if the price performance of, and demand for, our PCs is not
comparable to Fannie Mae securities on future mortgage deliveries by sellers, we may use market-adjusted
pricing where we provide guarantee fee price adjustments to partially oÅset weaknesses in prevailing security
prices and increase the competitiveness of our credit guarantee business. The use of such market-adjusted
pricing could have a material adverse eÅect on the proÑtability of our new credit guarantee business over its
life.
Our strategies to support PC price performance include the purchase and sale by our Retained portfolio
of TBA PCs and other agency securities, including Fannie Mae securities. While some purchases of PCs may
result in an expected return on equity substantially below our normal thresholds, this strategy is not currently
expected to have a material eÅect on the overall performance of our Retained portfolio. Depending upon
market conditions, including the relative prices and relative supply of and demand for PCs and comparable
Fannie Mae securities, there may be substantial variability in any period in the total amount of securities we
purchase or sell for our Retained portfolio in accordance with this strategy.
In the fourth quarter of 2004, as part of our eÅort to realign our business around our mission and core
business, we ceased our PC market making and support activities accomplished through our Securities Sales
& Trading Group business unit and our external Money Manager program. For more information, see
""CONSOLIDATED RESULTS OF OPERATION Ì Net Interest Income'' and ""NOTE 5: RETAINED
PORTFOLIO AND CASH AND INVESTMENTS PORTFOLIO'' to our consolidated Ñnancial
statements.
Predatory Lending
We have instituted anti-predatory lending policies designed to prevent the purchase or assignment of
mortgage loans with unacceptable terms or conditions or resulting from unacceptable practices. In accordance
with these policies, the following mortgages are not eligible for purchase:
‚ mortgages originated with single-premium credit insurance;
‚ mortgages with terms that exceed either the annual percentage rate or the points and fees threshold
under the Home Ownership and Equity Protection Act of 1994;
‚ subprime mortgages with prepayment penalty terms that exceed three years; or
‚ prime mortgages, and subprime mortgages originated on or after August 1, 2004, that required the
borrower to submit to arbitration.
In addition, we require the third parties who service the loans we hold in our Retained portfolio and the
loans underlying our PCs and Structured Securities to report all borrower credit information, including
monthly mortgage payments, to all credit bureau and reporting agencies. Several states have enacted laws
aimed at predatory lending practices, generally with regard to loans exceeding thresholds based on annual
percentage rates or Ñnancing costs. For some states, the high-cost home loan thresholds are deÑned by statutes
that trigger state law liabilities for subsequent purchasers or assignees of such loans that may be more
signiÑcant than liabilities imposed upon such purchasers or assignees under the Home Ownership and Equity
Protection Act. Currently, we do not purchase such ""high-cost home loans'' in the states of Arkansas,
Georgia, Illinois, Indiana, Kentucky, Maine, Massachusetts, Nevada, New Jersey, New Mexico, New York
and Oklahoma. We continue to assess newly enacted and proposed state laws to determine our policies with
respect to the purchase of loans aÅected by those laws.
Freddie Mac
9