Freddie Mac 2010 Annual Report Download - page 18

more classes designed to meet the investment criteria and portfolio needs of different investors by creating classes of
securities with varying maturities, payment priorities and coupons, each of which represents a beneficial ownership interest
in a separate portion of the cash flows of the underlying collateral. Usually, the cash flows are divided to modify the relative
exposure of different classes to interest-rate risk, or to create various coupon structures. The simplest division of cash flows
is into principal-only and interest-only classes. Other securities we issue can involve the creation of sequential payment and
planned or targeted amortization classes. In a sequential payment class structure, one or more classes receive all or a
disproportionate percentage of the principal payments on the underlying mortgage assets for a period of time until that class
or classes is retired, following which the principal payments are directed to other classes. Planned or targeted amortization
classes involve the creation of classes that have relatively more predictable amortization schedules across different
prepayment scenarios, thus reducing prepayment risk, extension risk, or both.
Our REMICs and Other Structured Securities represent beneficial interests in pools of PCs and/or certain other types of
mortgage-related assets. We create these securities primarily by using PCs or previously issued REMICs and Other
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 REMICs and Other Structured Securities. We do not charge a management and guarantee fee
for these securities if the underlying collateral is already guaranteed by us since no additional credit risk is introduced.
Because the collateral underlying nearly all of our single-family REMICs and Other Structured Securities consists of other
mortgage-related securities that we guarantee, there are no concentrations of credit risk in any of the classes of these
securities that are issued, and there are no economic residual interests in the related securitization trust. The following
diagram provides a general example of how we create REMICs and Other Structured Securities.
REMICs and Other Structured Securities
Security Dealer
PCs
Freddie Mac
(administrator)
TRUST
PCs
Security
Classes
Security
Classes
Transaction Fee
We issue many of our REMICs and Other Structured Securities in transactions in which securities dealers or investors
sell us mortgage-related assets or we use our own mortgage-related assets (e.g., PCs and REMICs and Other Structured
Securities) in exchange for the REMICs and Other Structured Securities. Since the creation of REMICs and Other Structured
Securities allows for setting differing terms for specific classes of investors, our issuance of these securities can expand the
range of investors in our mortgage-related securities to include those seeking specific security attributes. For REMICs and
Other Structured Securities that we issue to third parties, we typically receive a transaction, or resecuritization, fee. This
transaction fee is compensation for facilitating the transaction, as well as future administrative responsibilities.
15 Freddie Mac