Freddie Mac 2004 Annual Report Download - page 127

Duration Gap Results. We disclose the average daily, quarterly and annual duration gap in our Monthly
Volume Summary report. Table 58 provides estimated average duration gap results for December 2004 and
2003.
Table 58 Ì Duration Gap
Average for the Month of December, Duration Gap
(in months)
2004 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (1)
2003 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 0
Credit Risks
Our Total mortgage portfolio is subject to credit risks. See ""Table 8 Ì Freddie Mac's Total Mortgage
Portfolio Based on Unpaid Principal Balances'' for more information on the composition of our Total
mortgage portfolio. We are subject primarily to two types of credit risk Ì mortgage credit risk and
institutional credit risk. Mortgage credit risk is the risk that a borrower will fail to make timely payments on a
mortgage owned or guaranteed by us. Institutional credit risk is the risk that a counterparty that has entered
into a business contract or arrangement with us will fail to meet its obligations. A portion of the revenue that
Freddie Mac earns from management and guarantee fees is designed to compensate the Ñrm for taking on
credit risk.
Oversight of Credit Risks
The purpose of the Credit Risk Oversight group is to provide independent oversight of the corporate-wide
credit risk management functions, including asset selection, portfolio management, loss mitigation, and
institutional counterparty risk. In particular, Credit Risk Oversight is responsible for providing senior
management with regular, independent evaluations of whether credit risks are eÅectively identiÑed, measured,
managed, and controlled. The Models and Methods Oversight group, a part of the Enterprise Risk Oversight
function, is responsible for independently assessing the design and adequacy of all key credit risk models.
Mortgage Credit Risk
Defaults by mortgage borrowers result in losses if we are unable to collect amounts due through the sale
of the underlying properties, restructuring the mortgage loans or by using other loss mitigation strategies. The
discussion below describes our mortgage credit risk management strategies and summarizes our credit
performance.
Mortgage Credit Risk Management Strategies. Our strategies for managing mortgage credit risk focus
on Ñve primary areas:
‚ underwriting requirements and quality control standards;
‚ credit enhancements;
‚ portfolio diversiÑcation;
‚ loss mitigation activities; and
‚ other risk management activities.
Underwriting Requirements and Quality Control Standards. All mortgages that we purchase have an
inherent risk of default. Through our underwriting and quality control processes, we seek to understand the
underlying risk in a given mortgage we securitize or purchase for our Retained portfolio to ensure that we
adequately price for the risk we assume. Our current business model relies on a process of delegated
underwriting for the single-family mortgages we purchase or securitize. That is, we provide originators with a
series of guidelines to follow in the underwriting of a mortgage and they represent and warrant to us that the
mortgages sold to us meet these guidelines. We subsequently review a sample of these loans and if we
determine that any loan is not in compliance with our underwriting standards, we may require the seller/
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