Freddie Mac 2004 Annual Report Download - page 146

to whether we could transfer the servicing to an alternate servicer without a loss in the event the current
servicer is unable to fulÑll its responsibilities.
To protect us against these risks, we require seller/servicers to meet minimum Ñnancial capacity
standards, insurance and other eligibility requirements. We institute remedial actions against mortgage
seller/servicers that fail to comply with our standards. These actions may include transferring mortgage
servicing to other qualiÑed servicers or terminating our relationship with the mortgage seller/servicer.
We manage the credit quality of our multifamily seller/servicers by establishing institutional eligibility
requirements for participation in our multifamily programs. These seller/servicers must also meet our
standards for originating and servicing multifamily loans. We conduct regular quality control reviews of our
multifamily mortgage seller/servicers to determine whether they remain in compliance with our standards.
Mortgage Loan Insurers. We bear institutional credit risk relating to the non-performance of mortgage
insurers that insure purchased or guaranteed mortgages (see ""Mortgage Credit Risk Ì Mortgage Credit Risk
Management Strategies Ì Credit Enhancements'' for more information). We manage this risk by establishing
eligibility standards for mortgage insurers and by regularly monitoring our exposure to individual mortgage
insurers. We also monitor the mortgage insurers' credit ratings, as provided by nationally recognized credit
rating agencies. In addition, we periodically review the methods used by the credit rating agencies. We also
perform periodic on-site reviews of mortgage insurers to conÑrm compliance with our eligibility requirements
and to evaluate their management and control practices. In addition, state insurance authorities regulate
mortgage insurers. Substantially all mortgage insurers providing primary mortgage insurance and pool
insurance coverage on single-family mortgages purchased during 2004 were rated ""AA'' or better by S&P. At
December 31, 2004, there were seven mortgage insurers (the largest being Mortgage Guarantee Insurance
Corporation) that each provided more than Ñve percent of our Total mortgage insurance coverage (including
primary mortgage insurance and pool insurance) and together accounted for approximately 99 percent of our
overall coverage.
Non-Freddie Mac Mortgage-Related Securities. Investments for our Retained portfolio expose us to
institutional credit risk on non-Freddie Mac mortgage-related securities to the extent that issuers, guarantors,
or third parties providing credit enhancements, become insolvent. See ""Table 33 Ì Credit Characteristics of
Mortgages and Mortgage-Related Securities in the Retained Portfolio'' for more information concerning our
Retained portfolio.
Our non-Freddie Mac mortgage-related securities portfolio consists of both agency and non-agency
mortgage securities. Agency mortgage-related securities, which are securities issued or guaranteed by Fannie
Mae or Ginnie Mae, present minimal institutional credit risk exposure to us due to the high credit quality of
the issuers and guarantors. Agency mortgage-related securities are generally not separately rated by credit
rating agencies, but are viewed as having a level of credit quality at least equivalent to non-agency mortgage
securities rated AAA (based on the S&P rating scale or an equivalent rating from other nationally recognized
rating agencies). At December 31, 2004, we held approximately $60 billion of agency securities, representing
approximately four percent of our Total mortgage portfolio (see ""Table 8 Ì Freddie Mac's Total Mortgage
Portfolio Based on Unpaid Principal Balances'' for more information about our Total mortgage portfolio).
Non-agency mortgage securities may expose us to some institutional credit risk, if the nature of the credit
enhancement relies on a third party to cover potential losses. However, most of our non-agency mortgage
securities rely primarily on subordinated tranches to provide credit loss protection and therefore expose us to
very limited counterparty risk. In those instances where we desire further protection, we may choose to
mitigate our exposure with bond insurance or by purchasing additional subordination. Bond insurance exposes
us to the claims paying ability of the bond insurer. Substantially all of the bond insurers providing coverage for
non-agency mortgage securities held by us were rated AAA or equivalent by at least one nationally recognized
credit rating agency. At December 31, 2004, we held approximately $175 billion of non-agency mortgage-
related securities. Of this amount, 97 percent were rated AAA or equivalent.
We manage institutional credit risk on non-Freddie Mac mortgage-related securities by only purchasing
securities that meet our investment guidelines and performing ongoing analysis to evaluate the creditworthi-
ness of the issuers and servicers of these securities and the bond insurers that guarantee them. To assess the
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