Freddie Mac 2009 Annual Report Download - page 8

The following diagram illustrates how we create PCs through mortgage securitizations that can be sold to investors or
held by us to provide liquidity to the mortgage market:
Cash
Mortgage
Homeowners Our Customers:
Originate Loans with
Homeowners
Sell or Exchange
Mortgages for PCs or Cash
Invest in PCs or Sell PCs
to Investors
Investors
Freddie Mac:
Buys Mortgages
Guarantees PCs
Retains Investments
in PCs and Mortgages
Sells PCs to
Investors
Cash
PC
PC or Cash
Mortgage
PC
Mortgage
PC Trusts
Mortgage Securitizations
Cash
PC
We guarantee the payment of principal and interest of PCs created in this process in exchange for a combination of
monthly management and guarantee fees and initial upfront cash payments referred to as delivery fees. Our guarantee
increases the marketability of the PCs, providing liquidity to the mortgage market. Various other participants also play
significant roles in the residential mortgage market. Mortgage brokers advise prospective borrowers about mortgage products
and lending rates, and they connect borrowers with lenders. Mortgage servicers administer mortgage loans by collecting
payments of principal and interest from borrowers as well as amounts related to property taxes and insurance. They remit the
principal and interest payments to us, less a servicing fee, and we pass these payments through to mortgage investors, less a
fee we charge to provide our guarantee (i.e., the management and guarantee fee). In addition, private mortgage insurance
companies and other financial institutions sometimes provide third-party insurance for mortgage loans or pools of loans.
Most mortgage insurers increased premiums and tightened underwriting standards beginning in 2008. Because of the
restrictions of our charter, these actions limit our ability to purchase loans made to borrowers who do not make a down
payment at least equal to 20% of the value of the property at the time of loan origination.
Our charter generally prohibits us from purchasing first-lien conventional single-family mortgages if the outstanding
principal balance of the mortgage at the time of our purchase exceeds 80% of the value of the property securing the
mortgage unless we have one of the following credit protections:
• mortgage insurance from a mortgage insurer that we determine is qualified on the portion of the unpaid principal
balance of the mortgage that exceeds 80%;
• a seller’s agreement to repurchase or replace any mortgage that has defaulted; or
• retention by the seller of at least a 10% participation interest in the mortgage.
In conjunction with the MHA Program, FHFA determined that, consistent with our charter, until June 10, 2010, we may
purchase single-family mortgages that refinance borrowers whose mortgages we currently own or guarantee, without
obtaining additional credit enhancement in excess of that already in place for any such loan, provided that the current LTV
ratio of the loan at the time of refinance does not exceed 125%.
5Freddie Mac