Freddie Mac 2009 Annual Report Download - page 14

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We also issue PCs in exchange for cash. The following diagram illustrates an exchange for cash in a “cash auction” of
PCs:
Cash Auction of PCs
Mortgage Lender Securities Dealers
and Investors
Mortgage loan PC
Cash Cash
Cash (Delivery fees)
CASH PURCHASE
Freddie Mac
(administrator)
CASH AUCTION OF PC
TRUST
Mortgage
loans PC
Freddie Mac
(guarantor)
Guarantee
Fee
Institutional and other fixed-income investors, including pension funds, insurance companies, securities dealers, money
managers, commercial banks and foreign central banks, purchase our PCs. Treasury and the Federal Reserve have also
purchased mortgage-related securities issued by us, Fannie Mae and Ginnie Mae under their purchase programs. Treasury’s
purchase program was announced in September 2008 and ended in December 2009. The Federal Reserve’s purchase program
was announced in November 2008 and is expected to be completed by the end of the first quarter of 2010. For information
on the potential impact of the completion of the Federal Reserve’s mortgage-related securities purchase program on our
business, see “MD&A — LIQUIDITY AND CAPITAL RESOURCES — Liquidity.”
PCs differ from U.S. Treasury securities and other fixed-income investments in two ways. First, they can be prepaid at
any time because homeowners can 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 loan maturity. Consequently, mortgage-related securities such as
our PCs 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.
Structured Securities
Our Structured Securities represent beneficial interests in pools of PCs and certain other types of mortgage-related
assets. We create Structured Securities primarily by using PCs or previously issued Structured Securities as the underlying
collateral. Similar to our PCs, we guarantee the payment of principal and interest to the holders of tranches of our Structured
Securities. We do not charge a management and guarantee fee for Structured Securities, other than Structured Transactions,
11 Freddie Mac