Freddie Mac 2008 Annual Report Download - page 13

We also issue PCs in exchange for cash. The following diagram illustrates an exchange for cash in a “cash auction” of
PCs:
Cash Auction of PCs
Mortgage Lender Securities Dealers
and Investors
Mortgage loan PC
Cash Cash
Cash (Delivery fees)
CASH PURCHASE
Freddie Mac
(administrator)
CASH AUCTION OF PC
TRUST
Mortgage
loans PC
Freddie Mac
(guarantor)
Guarantee
Fee
Institutional and other investors purchase our PCs, including pension funds, insurance companies, securities dealers,
money managers, commercial banks, foreign central banks and other fixed-income investors. Treasury and the Federal
Reserve also recently began to purchase mortgage-related securities issued by us, Fannie Mae and Ginnie Mae. PCs differ
from U.S. Treasury securities and other fixed-income investments in two ways. First, they can be prepaid at any time because
homeowners can pay off the underlying mortgages at any time prior to a loan’s maturity. Because homeowners have the right
to prepay their mortgage, the securities implicitly have a call option that significantly reduces the average life of the security
as compared to the contractual loan maturity. Consequently, mortgage-related securities such as our PCs generally provide a
higher nominal yield than certain other fixed-income products. Second, PCs are not backed by the full faith and credit of the
United States, as are U.S. Treasury securities. We guarantee the payment of interest and principal on all our PCs, as
discussed above. As discussed in “Conservatorship and Related Developments,” Treasury and the Federal Reserve have taken
certain actions designed to support us and our business.
10 Freddie Mac