Freddie Mac 2015 Annual Report Download - page 57

Management's Discussion and Analysis Our Business Segments | Multifamily
Freddie Mac 2015 Form 10-K 55
• K Certificates - Our primary business model is to purchase multifamily loans for aggregation and
securitization through the issuance of multifamily K Certificates, which allows us to transfer the vast
majority of the expected credit losses of the loans to third-party investors. As shown in the diagram
below, in a typical K Certificate transaction, we sell multifamily loans to a non-Freddie Mac
securitization trust that issues senior and subordinated securities, and simultaneously purchase and
place the senior securities into a Freddie Mac securitization trust that issues guaranteed K
Certificates. In substantially all of these transactions, we guarantee only the senior securities issued
by the Freddie Mac securitization trust and do not issue or guarantee the subordinated securities
issued by the non-Freddie Mac securitization trust. As a result, the vast majority of the expected credit
risk is sold to the third-party investors in the subordinated securities, thereby reducing our credit risk
exposure. We receive a management and guarantee fee in exchange for guaranteeing the K
Certificates. Profitability on our K Certificates is evaluated in terms of management and guarantee fee
income and gains on the sales of loans. We attempt to maximize our returns by optimizing the
combination of gains we earn when we sell the loans for securitization and the management and
guarantee fees we will earn over time.
We may purchase or retain a portion of the K Certificates or the unguaranteed subordinated
securities, and, from time to time, we may undertake other activities to support the liquidity of K
Certificates. For more information, see “Risk Factors - Other 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 our K
Certificates.”
• Other securitization products - We purchase small balance multifamily loans and sell them to a
third-party securitization trust in transactions that are similar to our K Certificate transactions and that
transfer a portion of the credit risk of the loans to third-party investors. From time to time, we also
issue other types of securitization products, including PCs backed by multifamily loans and pass