Freddie Mac 2005 Annual Report Download - page 36

MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
EXECUTIVE SUMMARY
Our Business
Freddie Mac is one of the leading institutions Ñnancing residential mortgage loans in the United States. We purchase
residential mortgages and mortgage-related securities in the secondary market and use them to issue our own mortgage-
related securities. We also purchase residential mortgages and mortgage-related securities in the secondary market to hold
for investment purposes in our Retained portfolio. We Ñnance our purchases primarily by issuing a variety of debt
instruments in the capital markets.
In general, our purchases of mortgage loans are driven by the growth in total residential mortgage debt outstanding, the
requirements of our charter, the aÅordable housing goals and subgoals set for us by HUD, the attractiveness of the returns
available to us from securitization and portfolio investment activities and our level of customer service. In 2005, our share
of the total residential mortgage debt market improved as we increased our single-family mortgage purchases and our
purchases of non-agency mortgage-related securities for our Retained portfolio. Our share of the portion of the mortgage
securitization market attributable to the GSEs increased from about 41 percent in 2004 to about 45 percent in 2005. Our
market share will vary from period to period. We continue to seek lasting improvements in our overall market share and our
GSE market share over time by improving customer service, diversifying our customer base and expanding the types of
mortgages we guarantee and products we oÅer.
Our Mission
Our mission is to provide liquidity, stability and aÅordability in the secondary market for residential mortgages. Our
activities contribute to the availability of aÅordable mortgage products in the U.S. We view the purchase of mortgage loans
beneÑting low- and moderate-income families and neighborhoods as an integral part of our mission and business, and we
are committed to fulÑlling the needs of these borrowers and markets. We are also subject to aÅordable housing goals set by
HUD. We have reported to HUD that we achieved each of the aÅordable housing goals and subgoals for 2005, although
HUD will make the Ñnal determination.
Responding to events such as the devastation on the Gulf Coast is at the core of our mission. In the immediate
aftermath of Hurricane Katrina, we provided temporary mortgage payment relief, expedited the release of insurance
proceeds, and modiÑed our policies to accommodate our sellers and servicers, and ultimately the homeowners and renters,
aÅected by the hurricanes. We committed to infuse up to $300 million of liquidity into the aÅected Gulf area and took
humanitarian steps Ì committing more than $10 million to hurricane relief eÅorts and providing temporary housing
assistance to approximately 1,100 families. We are also using our Retained portfolio to buy up to $1 billion in mortgage
revenue bonds, enabling state housing finance authorities to make low-cost mortgages and home repair loans for up to 10,000
low- and moderate-income families.
Fair Value Management
We believe fair value measures provide an important view of our business economics and risks because fair value takes a
consistent approach to the representation of substantially all Ñnancial assets and liabilities, rather than an approach that
combines historical cost and fair value measurements, as is the case with our GAAP-based consolidated Ñnancial
statements. Fair value is deÑned as the amount at which an asset or liability could be exchanged between willing parties,
other than in a forced or liquidation sale. We use estimates of fair value on a routine basis to make decisions about our
business activities. In addition, we use fair value derived performance measures to establish corporate objectives and as a
factor in determining management compensation. Our consolidated fair value balance sheets are an important component of
our risk management processes, as we use estimates of the changes in fair value to calculate our Portfolio Market Value
Sensitivity, or PMVS, and duration gap measures. For information about how we estimate the fair value of Ñnancial
instruments, see ""NOTE 16: FAIR VALUE DISCLOSURES'' to our consolidated Ñnancial statements.
We promote long-term growth in the fair value of net assets primarily by seeking investment portfolio opportunities that
oÅer attractive net mortgage-to-debt option-adjusted spreads and credit guarantee opportunities that oÅer attractive spreads
relative to anticipated credit risks. We actively manage risks to long-term fair value growth inherent in these portfolios. Our
long-term expectation is to generate returns, before capital transactions, over time on the average fair value of net assets
attributable to common stockholders in the low- to mid-teens.
Capital Management
Our objective in managing capital is to preserve our safety and soundness, while maintaining suÇcient capital to take
advantage of new business opportunities and support our mission at attractive long-term returns. If available, we consider
20 Freddie Mac