Freddie Mac 2005 Annual Report Download - page 82

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increase in purchases, these products represent a small percentage of the unpaid principal balance of our Total mortgage
portfolio. At December 31, 2005 and 2004, interest-only and option ARMs collectively represented approximately 3 percent
and less than 1 percent, respectively, of the unpaid principal balance of the Total mortgage portfolio. We will continue to
monitor the growth of these products in our portfolio and, if appropriate, may seek credit enhancements to further manage
the incremental risk.
We also hold securities issued by third parties where the underlying collateral may include interest-only and Option
ARM mortgage products. We generally mitigate credit risk inherent in these securities through a guarantee from the third
party issuer or the underlying structure of the security. For additional information about the credit quality and credit risk
management of non-Freddie Mac securities we hold see ""Institutional Credit Risk Ì Non-Freddie Mac Mortgage-Related
Securities'' and ""MD&A Ì CONSOLIDATED BALANCE SHEETS ANALYSIS Ì Retained Portfolio.''
The subprime segment of the mortgage market primarily serves borrowers with lower quality credit payment histories.
Our participation in this market helps reduce barriers to homeownership for these borrowers by increasing the availability of
mortgage credit and reducing the costs of homeownership. We participate in the subprime market segment primarily in two
ways. First, our Retained portfolio makes investments in non-Freddie Mac mortgage-related securities that were originated
in this market segment. Substantially all of these securities were rated ""AAA'' by one or more rating agencies at the time of
purchase. Second, we guarantee securities backed by subprime mortgages, which comprise a portion of the ""alternative
collateral deals'' we purchase. These securities have previously been credit enhanced and at the time of our purchase most
were ""shadow rated'' at least ""BBB'' (based on the S&P rating scale) by at least one nationally recognized credit rating
agency which assessed the credit risks of the securities without regard to the beneÑts of our guarantee. At December 31,
2005 and 2004, we guaranteed $2.3 billion and $4.5 billion of securities backed by subprime mortgages which constituted
less than one percent of our Total mortgage portfolio, respectively. In addition to the non-Freddie Mac mortgage-related
securities discussed above, we make investments through our Retained portfolio in some of the Structured Securities we
issue with underlying collateral that is subprime.
The distribution of the single-family loans underlying our Total mortgage portfolio by original and estimated current
loan-to-value ratio, credit scores, loan purpose, property type and occupancy type is shown in Table 37.
66 Freddie Mac