Freddie Mac 2006 Annual Report Download - page 91

servicers varies by mortgage product. We generally require our single-family servicers to retain a minimum percentage fee
for mortgages serviced on our behalf, typically 0.25 percent of the unpaid principal balance of the mortgage loans. However,
on an exception basis, we allow a lower or no minimum servicing amount. The credit risk associated with servicing fees
relates to whether we could transfer the applicable servicing rights to a successor servicer and recover amounts owed to us by
the defaulting servicer in the event the current servicer is unable to fulÑll its responsibilities.
In order to manage the credit risk associated with our mortgage seller/servicers, we require them to meet minimum
Ñnancial capacity standards, insurance and other eligibility requirements. We do not believe we have any signiÑcant exposure
to seller/servicers identiÑed as primarily subprime lenders that are not currently in compliance with our Ñnancial
monitoring standards. We institute remedial actions against seller/servicers that fail to comply with our standards. These
actions may include transferring mortgage servicing to other qualiÑed servicers or terminating our relationship with the
seller/servicer. We conduct periodic operational reviews of our single-family mortgage seller/servicers to help us better
understand their control environment and its impact on the quality of loans sold to us. We use this information to determine
the terms of business we conduct with a particular seller/servicer.
We manage the credit risk associated with our multifamily seller/servicers by establishing eligibility requirements for
participation in our multifamily programs. These seller/servicers must also meet our standards for originating and servicing
multifamily loans. We conduct regular quality control reviews of our multifamily mortgage seller/servicers to determine
whether they remain in compliance with our standards.
Non-Freddie Mac Mortgage-Related Securities. Investments for our Retained portfolio expose us to institutional
credit risk on non-Freddie Mac mortgage-related securities to the extent that servicers, issuers, guarantors, or third parties
providing credit enhancements become insolvent or do not perform. See ""CONSOLIDATED BALANCE SHEETS
ANALYSIS Ì Table 19 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-related
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 nationally recognized statistical rating organizations, but are viewed as
having a level of credit quality at least equivalent to non-agency mortgage-related securities rated AAA (based on the S&P
rating scale or an equivalent rating from other nationally recognized statistical rating organizations). At December 31, 2006,
we held approximately $45 billion of agency securities, representing approximately 2 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, 2006, a signiÑcant portion 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 statistical rating organization. At
December 31, 2006, we held approximately $238 billion of non-agency mortgage-related securities. Of this amount,
96.2 percent was 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. See ""RISK FACTORS Ì Legal and Regulatory Risks'' for more information.
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
79 Freddie Mac