Freddie Mac 2015 Annual Report Download - page 39

Management's Discussion and Analysis Our Business Segments | Single-Family Guarantee
Freddie Mac 2015 Form 10-K 37
Credit Risk Transfer Transactions
Most of our credit risk transfer transactions are designed to transfer a portion of the credit risk on groups
of previously acquired loans to third-party investors. These transactions are intended to attract private
capital from new types of investors that have not historically invested in single-family mortgage credit risk.
The following strategic considerations were incorporated into the design of our credit risk transfer
transactions:
• Repeatable and scalable execution with a broad appeal to diversified investors;
• Execution at a cost that is economically sensible;
• Minimal effect on the TBA market;
• Minimize changes required of, and effects on, sellers and servicers by having Freddie Mac serve as
the credit manager for investors; and
• Avoid or seek to mitigate the risk that our losses are not reimbursed timely and in full.
The value of these transactions to us is dependent on various economic scenarios, and we will primarily
benefit from these transactions if we experience significant loan defaults. These new credit risk transfer
transactions include:
• STACR debt notes - In this transaction, we create a reference pool of loans from our Core single-
family book and an associated securitization structure with notional credit risk positions (e.g., first
loss, mezzanine, and senior positions). The notional amounts of the credit risk positions are reduced
when certain specified credit events occur on the loans in the reference pool. The notional amounts of
the credit risk positions may also be reduced based on scheduled and unscheduled principal
payments that occur on the loans in the reference pool.
In STACR debt note transactions, losses may be allocated to the notional balances based on
calculated losses using a predefined formula or based on the actual losses on the loans in the
reference pool. For loans that are covered by credit risk transfer transactions based on calculated
losses, we may write down STACR debt notes or receive reimbursement of losses when the loans
experience a credit event, which predominantly includes a loan becoming 180 days delinquent. For
loans that are covered by credit risk transfer transactions based on actual losses, we may write down
STACR debt notes or receive reimbursement of losses once an actual loss event (e.g., third-party
foreclosure sale, short sale or REO disposition) occurs.
We issue STACR debt notes related to certain of the notional credit risk positions to third-party
investors and retain the remaining credit risk. We make payments of principal and interest on the
issued notes, but are not required to repay principal to the extent that the notional credit risk position
is reduced as a result of a specified credit event. The interest rate on STACR debt notes is generally
higher than on our other unsecured debt securities due to the potential for reductions to their principal
balance. The following diagram illustrates a typical STACR debt note transaction: