Freddie Mac 2005 Annual Report Download - page 92

providing credit enhancements become insolvent or do not perform. See ""Table 17 Ì Characteristics of Mortgage Loans
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 due to the high credit quality of Fannie Mae and Ginnie Mae. 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 credit rating agencies). At December 31, 2005, we held approximately $45 billion of agency
securities, representing approximately 3 percent of our Total mortgage portfolio.
Non-agency mortgage-related securities expose us to 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-related securities rely primarily
on subordinated tranches to provide credit loss protection and therefore expose us to 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 risks related to the bond insurer's ability to satisfy claims. At
December 31, 2005, substantially all of the bond insurers providing coverage for non-agency mortgage-related securities held
by us were rated AAA or equivalent by at least one nationally recognized credit rating agency. At December 31, 2005, we
held approximately $243 billion of non-agency mortgage-related securities. Of this amount, 97.8 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 creditworthiness of the issuers and servicers
of these securities and the bond insurers that guarantee them. To assess the creditworthiness of these entities, we may
perform additional analysis, including on-site visits, veriÑcation of loan documentation, review of underwriting or servicing
processes and similar due diligence measures. In addition, we regularly evaluate our investments to determine if any
impairment in fair value requires an impairment loss recognition in earnings, warrants divestiture or requires a combination
of both.
Mortgage Investors and Originators. We are exposed to pre-settlement risk through the purchase, sale and Ñnancing
of mortgage loans and mortgage-related securities with mortgage investors and originators. The probability of such a default
is generally remote over the short time horizon between the trade and settlement date. We manage this risk by evaluating
the creditworthiness of our counterparties and monitoring and managing our exposures. In some instances, we may require
these counterparties to post collateral.
Cash and Investments Portfolio. Institutional credit risk also arises from the potential insolvency or non-performance
of issuers or guarantors of investments held in our Cash and investments portfolio. Instruments in this portfolio are
investment grade at the time of purchase and primarily short-term in nature, thereby substantially mitigating institutional
credit risk in this portfolio. We regularly evaluate these investments to determine if any impairment in fair value requires an
impairment loss recognition in earnings, warrants divestiture or requires a combination of both.
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