Freddie Mac 2008 Annual Report Download - page 8

The following diagram illustrates how we create PCs through mortgage securitizations that can be sold to investors or
held by us to provide liquidity to the mortgage market:
Cash
Mortgage
Homeowners Our Customers:
Originate Loans with
Homeowners
Sell or Exchange
Mortgages for PCs or Cash
Invest in PCs or Sell
to Investors
Investors
Freddie Mac:
Guarantees PCs
Retains Investments
in PCs and Mortgages
Sells PCs to
Investors
Cash
PC
PC or Cash
Mortgage
PC
Mortgage
PC Trusts
Mortgage Securitizations
Cash
PC
We guarantee the payment of principal and interest of PCs created in this process in exchange for a combination of
monthly management and guarantee fees and initial upfront cash payments referred to as delivery fees. Our guarantee
increases the marketability of the PCs, providing liquidity to the mortgage market. Various other participants also play
significant roles in the residential mortgage market. Mortgage brokers advise prospective borrowers about mortgage products
and lending rates, and they connect borrowers with lenders. Mortgage servicers administer mortgage loans by collecting
payments of principal and interest from borrowers as well as amounts related to property taxes and insurance. They remit the
principal and interest payments to us, less a servicing fee, and we pass these payments through to mortgage investors, less a
fee we charge to provide our guarantee (i.e., the management and guarantee fee). In addition, private mortgage insurance
companies and other financial institutions sometimes provide third-party insurance for mortgage loans or pools of loans. Our
charter generally requires third-party insurance or other credit protections on some loans that we purchase. Most mortgage
insurers increased premiums and tightened underwriting standards during 2008. These actions may impair our ability to
purchase loans made to borrowers who do not make a down payment at least equal to 20% of the value of the property at
the time of loan origination.
Our charter generally prohibits us from purchasing first-lien conventional (not guaranteed or insured by any agency or
instrumentality of the U.S. government) single-family mortgages if the outstanding principal balance at the time of purchase
exceeds 80% of the value of the property securing the mortgage unless we have one of the following credit protections:
• mortgage insurance from a mortgage insurer that we determine is qualified on the portion of the outstanding principal
balance above 80%;
• a seller’s agreement to repurchase or replace (for periods and under conditions as we may determine) any mortgage
that has defaulted; or
• retention by the seller of at least a 10% participation interest in the mortgages.
In addition, on February 18, 2009, the Obama Administration announced the HASP, which includes an initiative
pursuant to which FHFA allowed mortgages currently owned or guaranteed by us to be refinanced without obtaining
additional credit enhancement in excess of that already in place for that loan. For more information, see “Conservatorship
and Related Developments — Homeownership Affordability and Stability Plan.”
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