Freddie Mac 2010 Annual Report Download - page 15

that, because of differences in our respective businesses, could place Freddie Mac at a competitive disadvantage to Fannie
Mae.
Overview of the Mortgage Securitization Process
Mortgage securitization is a process by which we purchase mortgage loans that lenders originate, and pool these loans
into mortgage securities that are sold in global capital markets, generating proceeds that support future purchases from
lenders. The following diagram illustrates how we support mortgage market liquidity when we create PCs through mortgage
securitizations. These PCs can be sold to investors or held by us:
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
The U.S. residential mortgage market consists of a primary mortgage market that links homebuyers and lenders and a
secondary mortgage market that links lenders and investors. We participate in the secondary mortgage market by purchasing
mortgage loans and mortgage-related securities for investment and by issuing guaranteed mortgage-related securities. In the
Single-family Guarantee segment, we purchase and securitize “single-family mortgages,” which are mortgages that are
secured by one- to four-family properties.
In general, the securitization and Freddie Mac guarantee process works as follows: 1) a lender originates a mortgage
loan to a borrower purchasing a home or refinancing an existing mortgage loan, 2) we purchase the loan from the lender and
place it with other mortgages that are “pooled” into a security that can be sold to investors, 3) the lender may then use the
proceeds from the sale to originate another mortgage loan, 4) we provide a credit guarantee, for a fee (generally a small
portion of the interest collected on the mortgage loan), to those who invest in the security, 5) the borrower’s monthly
payment of mortgage principal and interest is passed through to the investors in the security, and 6) if the borrower stops
making monthly payments — because a family member loses a job, for example — we step in and make the applicable
payments to investors in the security. In the event a borrower defaults on the mortgage, our servicer works with the borrower
to find a solution to help them stay in the home, if possible, through our many different workout options, or we ultimately
foreclose and sell the home.
The terms of single-family mortgages that we purchase or guarantee allow borrowers to prepay these loans, thereby
allowing borrowers to refinance their loans when mortgage rates decline. Because of the nature of long-term, fixed-rate
mortgages, borrowers are protected against rising interest rates, but are able to take advantage of declining rates through
refinancing. When a borrower prepays a mortgage that we have securitized, the outstanding balance of the security owned by
12 Freddie Mac