Freddie Mac 2014 Annual Report Download - page 20

15 Freddie Mac
Risk Transfer - STACR® (Debt Issuance)
In a STACR debt note transaction, we create a reference pool consisting of recently acquired single-family mortgage
loans. We then create a hypothetical securitization structure with notional credit risk positions, or tranches (e.g., first loss,
mezzanine, and senior positions). The notional amounts of all positions are reduced based on scheduled principal payments that
occur in the reference pool. Unscheduled principal payments that occur in the reference pool are allocated to the senior position
only, unless certain specified events have occurred, in which case unscheduled principal payments are also allocated to the
mezzanine and/or first loss positions.
We issue STACR debt notes (which relate to the mezzanine loss position) to investors. We are obligated to make
payments of principal and interest on the STACR debt notes. The principal balance of the STACR debt notes is reduced (based
on a fixed severity schedule) when certain specified credit events (such as a loan becoming 180 days delinquent) occur on the
loans in the reference pool. Principal reductions for the specified credit events will initially occur on the first loss position
(which is retained by us) until it is fully reduced before the STACR debt notes begin participating in reductions to their
principal balances relating to those events. The interest rate on STACR debt is generally higher than on our other unsecured
debt securities due to the potential for reductions to its principal balance. In 2014 and 2013, we only issued STACR debt notes
related to mezzanine loss positions with credit event reductions based on fixed severity schedules. In 2015, we began issuing
STACR debt notes that will transfer some of the credit risk related to the first loss positions in addition to the mezzanine loss
position, and expect to complete transactions that provide reductions for credit events based on actual losses rather than fixed
amounts.
In an ACIS transaction, we purchase one or more insurance policies (typically underwritten by a panel of insurers and
reinsurers) that obligate the counterparties to reimburse us for specified credit events (on a fixed severity schedule) that occur
on our non-issued mezzanine loss position of a STACR debt transaction. Under each insurance policy, we pay monthly
premiums that are determined based on the outstanding balance of the STACR debt reference pool. We receive compensation
from the insurance policy up to an aggregate limit when specified credit events (such as a loan becoming 180 days delinquent)
occur. In 2015, we expect to enter into such contracts for reimbursement of our actual credit losses rather than fixed or
scheduled amounts.
Our use of certain types of credit enhancements to reduce our exposure to mortgage credit risk generally increases our
exposure to institutional credit risk. See “MD&A — RISK MANAGEMENT — Credit Risk Overview — Institutional Credit
Risk Profile” for information about our counterparties that provide credit enhancement on loans in our single-family credit
guarantee portfolio, including our mortgage loan insurers.
Single-Family Loan Workouts and the MHA Program
Loan workout activities are a key component of our loss mitigation strategy for managing and resolving troubled assets
and lowering credit losses. Our loan workouts include:
• Forbearance agreements, where reduced or no payments are required during a defined period, generally less than one
year. These agreements provide additional time for the borrower to return to compliance with the original terms of the
Table of Contents