Freddie Mac 2005 Annual Report Download - page 20

system. See ""MD&A Ì RISK MANAGEMENT Ì Credit Risks Ì Mortgage Credit Risks Ì Mortgage Credit Risk
Management Strategies Ì Underwriting Requirements and Quality Control Standards'' for additional information.
Investment and Funding Activities
We purchase mortgage loans and mortgage-related securities and hold them in our Retained portfolio for investment
purposes. We invest in mortgage-related securities issued by GSEs or government agencies, referred to as agency securities.
We also invest in non-agency mortgage-related securities. Our portfolio purchases replenish the capital available for
mortgage lending. We face competition from other Ñnancial institutions that are aggressively buying mortgage-related
securities backed by both GSE and non-agency issuers.
We manage our Retained portfolio through a strategy of long-term capital deployment. We apply our expertise in
mortgage markets and mortgage assets to support attractive and timely asset selection while managing our interest-rate risk.
We issue short-, medium- and long-term debt securities, subordinated debt securities and equity securities to Ñnance
purchases of mortgages and mortgage-related securities and other business activities. Our debt funding program is designed
to oÅer liquid securities to the global capital markets in a transparent and predictable manner. By diversifying our investor
base and the types of debt securities we oÅer, we believe we enhance our ability to maintain continuous access to the debt
markets under a variety of conditions. We manage our debt funding costs by issuing debt of various maturities that is either
callable (i.e., redeemable at our option at one or more times before its scheduled maturity) or non-callable. Recently, our
funding costs compared to the London Interbank OÅered Rate, or LIBOR, have improved. Our funding mix also helps us
manage our interest-rate risk by closely matching the interest obligations on our debt with the expected cash inÖows from
our mortgage-related investments. To further manage interest-rate risks, we use a variety of derivatives. We also use
Structured Securities, described below, to restructure cash Öows from mortgage-related securities, retaining a portion of
these restructured cash Öows. See ""MD&A Ì RISK MANAGEMENT Ì Interest-Rate Risk and Other Market Risks''
for more information.
Because of our GSE status and the special attributes granted to us under our charter, noted above in ""Our Charter and
Mission,'' our debt securities and those of other GSE issuers trade in the so-called ""agency sector'' of the debt markets. This
highly liquid market segment exhibits its own yield curve reÖecting our ability to borrow at lower rates than many other
corporate debt issuers. As a result, we mainly compete for funds in the debt issuance markets with Fannie Mae and the
Federal Home Loan Banks, who issue debt securities of comparable quality and ratings. The demand for, and liquidity of,
our debt securities, and those of other GSEs, also beneÑt from their status as permitted investments for banks, investment
companies and other Ñnancial institutions under their regulatory framework. Other investors also Ñnance portfolio
investments in mortgage assets. Competition for funding with these entities can vary with economic, Ñnancial market and
regulatory environments.
For additional information about our debt securities, see ""MD&A Ì LIQUIDITY AND CAPITAL RE-
SOURCES Ì Liquidity Ì Debt Securities.''
Credit Guarantee Activities
We guarantee the payment of principal and interest on mortgage-related securities in exchange for a fee, which we refer
to as a guarantee fee. The types of mortgage-related securities we guarantee include the following:
‚ mortgage Participation CertiÑcates, or PCs, we issue;
‚ single-class and multi-class Structured Securities we issue; and
‚ securities related to tax-exempt multifamily housing revenue bonds.
We have recently increased our share of the GSE securitization market by improving our customer service, diversifying
our customer base, tailoring securities to a broader group of global investors, expanding the types of mortgages that we
guarantee and introducing program enhancements, new forms of Structured Securities, such as the Reference REMICSM
securities, and through other initiatives.
We support our credit guarantee business volume by adjusting our guarantee fee or other transaction fees. For example,
if the price performance of, and demand for, our PCs is not comparable to Fannie Mae's securities on future mortgage
deliveries by sellers, we may use market-adjusted pricing where we provide guarantee fee or other transaction fee price
adjustments to partially oÅset weaknesses in prevailing security prices. We believe these price-adjustment features increase
the competitiveness of our credit guarantee business. The use of such market-adjusted pricing could have a material adverse
eÅect on the proÑtability of our new credit guarantee business over its life.
Guarantees of PCs. We issue single-class mortgage-related securities that represent undivided interests in pools of
mortgages we have purchased. We refer to these mortgage-related securities as PCs. We guarantee the payment of principal
and interest on all of our PCs. We issue most of our PCs in transactions in which our customers sell us mortgage loans in
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