Freddie Mac 2009 Annual Report Download - page 242

principal balance as of December 31, 2009 and 2008, respectively. Additionally, certain of our Structured Transactions
include subordination protection or other forms of credit enhancement. At December 31, 2009 and 2008, the unpaid principal
balance of Structured Transactions with subordination coverage was $4.5 billion and $5.3 billion, respectively, and the
average subordination coverage on these securities was 17% and 19% of the balance, respectively. The remaining
$19.3 billion and $18.3 billion in unpaid principal balance of single-family Structured Transactions at December 31, 2009
and 2008, respectively, have pass-through structures with no additional credit enhancement.
We use credit enhancements to mitigate risk on certain multifamily mortgages and mortgage revenue bonds. The types
of credit enhancements used for multifamily mortgage loans include third-party guarantees or letters of credit, cash escrows,
subordinated participations in mortgage loans or structured pools, sharing of losses with sellers, and cross-default and cross-
collateralization provisions. Cross-default and cross-collateralization provisions typically work in tandem. With a cross-
default provision, if the loan on a property goes into default, we have the right to declare specified other mortgage loans of
the same borrower or certain of its affiliates to be in default and to foreclose those other mortgages. In cases where the
borrower agrees to cross-collateralization, we have the additional right to apply excess proceeds from the foreclosure of one
mortgage to amounts owed to us by the same borrower or its specified affiliates relating to other multifamily mortgage loans
we own that are owed to us by the same borrower of certain affiliates and also are in default. The total of multifamily
mortgage loans held for investment and underlying our PCs and Structured Securities for which we have credit enhancement
coverage was $10.5 billion and $10.0 billion as of December 31, 2009 and 2008, respectively, and we had maximum
coverage of $3.0 billion and $3.3 billion, respectively.
PC Trust Documents
In December 2007, we introduced trusts into our security issuance process. Under our PC master trust agreement, we
established trusts for all of our PCs issued both prior and subsequent to December 2007. In addition, each PC trust,
regardless of the date of its formation, is governed by a pool supplement documenting the formation of the PC trust and the
issuance of the related PCs by that trust. The PC master trust agreement, along with the pool supplement, offering circular,
any offering circular supplement, and any amendments, are the “PC trust documents” that govern each individual PC trust.
In accordance with the terms of our PC trust documents, we have the right, but are not required, to purchase a mortgage
loan from a PC trust under a variety of circumstances. Through November 2007, our general practice was to purchase the
mortgage loans out of PCs after the loans became 120 days delinquent. In December 2007, we changed our practice to
purchase mortgages from pools underlying our PCs when:
• the mortgages have been modified;
• a foreclosure sale occurs;
• the mortgages are delinquent for 24 months; or
• the mortgages are 120 days or more delinquent and the cost of guarantee payments to PC holders, including advances
of interest at the security coupon rate, exceeds the cost of holding the nonperforming loans on our consolidated
balance sheet.
See “NOTE 22: SUBSEQUENT EVENTS” for further information about our practice for purchases of mortgage loans
from PC trusts. In accordance with the terms of our PC trust documents, we are required to purchase a mortgage loan from a
PC trust in the following situations:
• if a court of competent jurisdiction or a federal government agency, duly authorized to oversee or regulate our
mortgage purchase business, determines that our purchase of the mortgage was unauthorized and a cure is not
practicable without unreasonable effort or expense, or if such a court or government agency requires us to repurchase
the mortgage;
• if a borrower exercises its option to convert the interest rate from an adjustable rate to a fixed rate on a convertible
ARM; and
• in the case of balloon loans, shortly before the mortgage reaches its scheduled balloon repayment date.
We purchase these mortgages at an amount equal to the current unpaid principal balance, less any outstanding advances
of principal on the mortgage that have been paid to the PC holder.
Based on the timing of the principal and interest payments to the holders of our PCs and Structured Securities, we may
have a payable due to the PC trusts at a period end. The payables due to the PC trusts were $2.4 billion and $842 million at
December 31, 2009 and 2008, respectively.
Indemnifications
In connection with various business transactions, we may provide indemnification to counterparties for claims arising
out of breaches of certain obligations (e.g., those arising from representations and warranties) in contracts entered into in the
239 Freddie Mac