Freddie Mac 2008 Annual Report Download - page 14

Structured Securities
Our Structured Securities represent beneficial interests in pools of PCs and certain other types of mortgage-related
assets. We create Structured Securities primarily by using PCs or previously issued Structured Securities as the underlying
collateral. Similar to our PCs, we guarantee the payment of principal and interest to the holders of tranches of our Structured
Securities. We do not charge a management and guarantee fee for Structured Securities, other than Structured Transactions,
because the underlying collateral is already guaranteed. The following diagram illustrates an example of how we create a
Structured Security:
Structured Security
Security Dealer
PCs
Freddie Mac
(administrator)
TRUST
PCs
Security
Classes
Security
Classes
Transaction Fee
We issue single-class Structured Securities and multi-class Structured Securities. Because the collateral underlying
Structured Securities consists of other guaranteed mortgage-related securities, there are no concentrations of credit risk in any
of the classes of Structured Securities that are issued, and there are no economic residual interests in the underlying
securitization trust.
Single-class Structured Securities involve the straight pass through of all of the cash flows of the underlying collateral.
Multi-class Structured Securities divide all of the cash flows of the underlying mortgage-related assets into two or more
classes designed to meet the investment criteria and portfolio needs of different investors by creating classes of securities
with varying maturities, payment priorities and coupons, each of which represents a beneficial ownership interest in a
separate portion of the cash flows of the underlying collateral. Usually, the cash flows are divided to modify the relative
exposure of different classes to interest-rate risk, or to create various coupon structures. The simplest division of cash flows
is into principal-only and interest-only classes. Other securities we issue can involve the creation of sequential payment and
planned or targeted amortization classes. In a sequential payment class structure, one or more classes receive all or a
disproportionate percentage of the principal payments on the underlying mortgage assets for a period of time until that class
or classes is retired, following which the principal payments are directed to other classes. Planned or targeted amortization
classes involve the creation of classes that have relatively more predictable amortization schedules across different
prepayment scenarios, thus reducing prepayment risk, extension risk, or both.
Our principal multi-class Structured Securities qualify for tax treatment as Real Estate Mortgage Investment Conduits,
or REMICs. 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. For Structured
Securities that we issue to third parties in exchange for guaranteed mortgage-related securities, we receive a transaction fee.
This transaction fee is compensation for facilitating the transaction, as well as future administrative responsibilities. We also
sell Structured Securities to securities dealers in exchange for cash.
11 Freddie Mac