Freddie Mac 2014 Annual Report Download - page 14

9Freddie Mac
PCs
Our PCs are single-class pass-through securities that represent undivided beneficial interests in trusts that hold pools of
mortgages. For the fixed-rate PCs we currently issue, we guarantee the timely payment of principal and interest. For our ARM
PCs, we guarantee the timely payment of the weighted average coupon interest rate for the underlying mortgage loans. We also
guarantee the full and final payment of principal, but not the timely payment of principal, on ARM PCs.
We guarantee our PCs in exchange for compensation, which consists primarily of a combination of management and
guarantee fees paid on a monthly basis as a percentage of the UPB of the underlying loans (referred to as base fees), and initial
upfront payments (referred to as delivery fees). We may also make upfront payments to buy-up the monthly management and
guarantee fee rate ("buy-up"), or receive upfront payments to buy-down the monthly management and guarantee fee rate. These
upfront payments are paid in conjunction with the formation of a PC to provide for a uniform coupon rate for the mortgage
pool underlying the PC.
We issue most of our PCs in transactions in which our customers provide us with mortgage loans in exchange for PCs. We
refer to these transactions as guarantor swaps. The following diagram illustrates a guarantor swap transaction.
Guarantor Swap
We also issue PCs in transactions in which we purchase mortgage loans for cash and securitize them for retention in our
mortgage-related investments portfolio or to sell them to third parties. We may sell these PCs in a “cash auction," as illustrated
in the following diagram.
Cash Purchase Process and Securitization of PCs
From time to time we undertake a variety of actions in an effort to support the liquidity and price performance of our PCs
relative to comparable Fannie Mae securities. These actions may include: (a) resecuritizing PCs into REMICs and Other
Structured Securities; (b) encouraging sellers to pool mortgages that they deliver to us into PC pools with a larger and more
diverse population of mortgages; (c) influencing the volume and characteristics of mortgages delivered to us by tailoring our
loan eligibility guidelines and by other means; and (d) engaging in portfolio purchase and sale activities. See “Investments
Segment — Market Presence and PC Support Activities” and “RISK FACTORS — Competitive and Market Risks — A
significant decline in the price performance of or demand for our PCs could have an adverse effect on the volume and/or
profitability of our new single-family guarantee business. The profitability of our multifamily business could be adversely
affected by a significant decrease in demand for K Certificates.” for additional information about our efforts to support the
liquidity and relative price performance of our PCs.
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