Freddie Mac 2006 Annual Report Download - page 17

securitization product development and improvements to liquidity, transparency and predictability, we attract a broad array
of investors. Our eÅorts to improve the supply of, and demand for, our products are critical to their liquidity and support our
mission.
The securitization market is extremely competitive and we have reduced our guarantee fees on new business in order to
maintain our market share. At the same time, the expected future credit costs associated with our new credit guarantee
business have increased. We make trade-oÅs in our pricing in order to support liquidity in various segments of the residential
mortgage market, to support the liquidity and price performance of our PCs and to acquire business in pursuit of our
aÅordable housing goals and subgoals. In addition, we seek to maintain our share of the total residential mortgage
securitization market and our share of the GSE securitization market by improving customer service, and expanding our
customer base, the types of mortgages we guarantee and the products we oÅer.
Because the price performance of, and demand for, our PCs have generally been less than Fannie Mae's securities, we
may use market-adjusted pricing for our guarantees through which we provide guarantee fee or other transaction fee price
adjustments to partially oÅset weaknesses in prevailing security prices. We believe these price-adjustments increase the
competitiveness of our credit guarantee business. The use of such market-adjusted pricing reduces 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 to the holders of our PCs. We issue most of our PCs in transactions in which our customers sell us mortgage
loans in exchange for PCs. Other PC investors may include pension funds, insurance companies, securities dealers, money
managers, foreign central banks and other Ñxed-income investors. Investors may choose to hold these PCs in their portfolios
or sell them to others. Our guarantee increases the marketability of our PCs, providing additional liquidity to the mortgage
market.
Guarantees of Structured Securities. We also issue securities representing beneÑcial interests in pools of PCs and
certain other types of mortgage-related assets. We refer to these mortgage-related securities as Structured Securities. We
guarantee the payment of principal and interest on most of the Structured Securities we issue. By issuing Structured
Securities, we seek to provide liquidity to alternative segments of the mortgage market. We issue many of our Structured
Securities in transactions in which securities dealers or investors sell us the mortgage-related assets underlying the
Structured Securities in exchange for the Structured Securities. We also sell Structured Securities to securities dealers or
investors in exchange for cash.
We issue single-class Structured Securities and multi-class Structured Securities. Single-class Structured Securities
pass through the cash Öows on the underlying mortgage-related assets. Multi-class Structured Securities divide the cash
Öows of the underlying mortgage-related assets into two or more classes that meet the investment criteria and portfolio needs
of diÅerent investors. Our principal multi-class Structured Securities qualify for tax treatment as Real Estate Mortgage
Investment Conduits, or REMICs. For purposes of this Information Statement, multi-class Structured Securities include
Structured Securities backed by non-agency mortgage-related securities.
Guarantees Related to Tax-Exempt Multifamily Housing Revenue Bonds. We guarantee the payment of principal and
interest on tax-exempt multifamily housing revenue bonds that support pass-through certiÑcates issued by third parties.
These housing revenue bonds are collateralized by mortgage loans on low- and moderate-income multifamily housing
projects. In addition, we guarantee the payment of principal and interest related to low- and moderate-income multifamily
mortgage loans underlying tax-exempt multifamily housing revenue bonds.
PC and Structured Securities Support Activities. We support the liquidity and depth of the market for PCs through a
variety of activities, including educating dealers and investors about the merits of trading and investing in PCs, enhancing
disclosure related to the collateral underlying our securities and introducing new mortgage-related securities products and
initiatives. We support the price performance of our PCs through a variety of strategies, including the issuance of Structured
Securities and the purchase and sale by our Retained portfolio of PCs and other agency securities, including Fannie Mae
securities. While some purchases of PCs may result in expected returns that are substantially below our normal thresholds,
this strategy is not expected to have a material eÅect on our long-term economic returns. Depending upon market conditions,
including the relative prices, supply of and demand for PCs and comparable Fannie Mae securities, as well as other factors,
such as the voluntary limit on the growth of our Retained portfolio, there may be substantial variability in any period in the
total amount of securities we purchase or sell for our Retained portfolio in accordance with this strategy. We may increase,
reduce or discontinue these or other related activities at any time, which could aÅect the liquidity and depth of the market
for PCs.
The To Be Announced Market. In connection with our credit guarantee activities, we issue PCs that represent pools of
mortgages with similar characteristics. Because these PCs are homogeneous and are issued in high volume, they are highly
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