Freddie Mac 2010 Annual Report Download - page 17

our PCs in transactions in which our customers exchange mortgage loans for PCs. We refer to these transactions as
guarantor swaps. The following diagram illustrates a guarantor swap transaction:
Guarantor Swap
Mortgage Lender
Mortgage loans
PC
Freddie Mac
(administrator)
TRUST
Mortgage
loans PC
Freddie Mac
(guarantor)
Guarantee
Fee
Cash (Buy-ups)
Cash (Buy-downs, delivery fees)
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 ended in December 2009. The Federal Reserve’s purchase program ended in March 2010.
PCs differ from U.S. Treasury securities and other fixed-income investments in two ways. First, they can be prepaid at
any time. Homeowners have the right to prepay their mortgage at any time (known as the prepayment option), and
homeowner mortgage payments are passed through to the PC holder. Consequently, our securities implicitly have a call
option that significantly reduces the average life of the security from the contractual loan maturity. As a result, 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.
In addition, we seek to support the liquidity of the market for our PCs through a variety of activities, including
educating dealers and investors about the merits of PCs, and enhancing disclosures related to the collateral underlying our
securities.
REMICs and Other Structured Securities
We issue single-class and multiclass securities. Single-class securities involve the straight pass-through of all of the cash
flows of the underlying collateral to holders of the beneficial interests. Our principal multiclass securities qualify for tax
treatment as REMICs. Multiclass securities divide all of the cash flows of the underlying mortgage-related assets into two or
14 Freddie Mac