Freddie Mac 2006 Annual Report Download - page 16

standards that diÅer from our systems or guidelines. See ""MD&A Ì RISK MANAGEMENT Ì Credit Risks Ì Mortgage
Credit Risk Ì Underwriting Requirements and Quality Control Standards'' for additional information regarding our
underwriting standards.
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 buy mortgage-related securities issued by the
GSEs 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 identify attractive asset purchase opportunities while managing our interest-rate
risk. Our asset selection process may contemplate restructuring activities to improve our investment returns and fair value
results. We may purchase mortgage loans and mortgage-related securities with less attractive investment returns as part of
our eÅorts to achieve our aÅordable housing goals and subgoals.
In response to a request by the OÇce of Federal Housing Enterprise Oversight, or OFHEO, we announced on August 1,
2006 that we would voluntarily limit the growth of our Retained portfolio to no more than 2.0 percent annually (and
0.5 percent quarterly on a cumulative basis), based on its carrying value as contained in our minimum capital report to
OFHEO Ñled on July 28, 2006, which was $710.3 billion. We expect to keep the limit, which was eÅective as of July 1, 2006,
in place until we return to producing and publicly releasing quarterly Ñnancial statements prepared in conformity with
U.S. generally accepted accounting principles, or GAAP. Changes in the carrying value of our Retained portfolio are
aÅected by several factors, including purchases, sales, prepayments on mortgage-related investments and changes in fair
value primarily related to changes in interest rates. As market interest rates change, we may adjust our purchase and/or sale
decisions in order to remain within the limit.
We issue short-, medium- and long-term debt securities, subordinated debt securities and preferred stock 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. 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, 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, which issue debt
securities of comparable quality and ratings. However, we also compete for funding with other debt issuers. The demand
for, and liquidity of, our debt securities, and those of other GSEs, beneÑt from their status as permitted investments for
banks, investment companies and other Ñnancial institutions under their statutory and regulatory framework. Competition
for funding 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:
‚ PCs we issue;
‚ single-class and multi-class Structured Securities we issue; and
‚ securities related to tax-exempt multifamily housing revenue bonds.
We enhance our ability to attract a representative mix of mortgage debt outstanding by diversifying our seller base,
expanding new product capabilities and improving customer service. Through investor and dealer outreach programs,
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