Freddie Mac 2011 Annual Report Download - page 17

mortgage market. In most instances, we use the mortgage securitization process to package the purchased mortgage loans
into guaranteed mortgage-related securities. We guarantee the payment of principal and interest on the mortgage-related
security in exchange for management and guarantee fees.
Our Customers
Our customers are predominantly lenders in the primary mortgage market that originate mortgages for homeowners.
These lenders include mortgage banking companies, commercial banks, savings banks, community banks, credit unions,
HFAs, and savings and loan associations.
We acquire a significant portion of our mortgages from several large lenders. These lenders are among the largest
mortgage loan originators in the U.S. Since 2007, the mortgage industry has consolidated significantly and a smaller
number of large lenders originate most single-family mortgages. As a result, mortgage origination volume during 2011
was concentrated in a smaller number of institutions. During 2011, two mortgage lenders (Wells Fargo Bank, N.A. and
JPMorgan Chase Bank, N.A.) each accounted for more than 10% of our single-family mortgage purchase volume and
collectively accounted for approximately 40% of our single-family mortgage purchase volume. Our top ten lenders
accounted for approximately 82% of our single-family mortgage purchase volume during 2011.
Our customers also service loans in our single-family credit guarantee portfolio. A significant portion of our single-
family mortgage loans are serviced by several of our large customers. Because we do not have our own servicing
operation, if our servicers lack appropriate process controls, experience a failure in their controls, or experience an
operating disruption in their ability to service mortgage loans, our business and financial results could be adversely
affected. For information about our relationships with our customers, see “MD&A — RISK MANAGEMENT — Credit
Risk — Institutional Credit Risk — Single-Family Mortgage Seller/Servicers.”
Our Competition
Historically, our principal competitors have been Fannie Mae, Ginnie Mae and FHA/VA, and other financial
institutions that retain or securitize mortgages, such as commercial and investment banks, dealers, and thrift institutions.
Since 2008, most of our competitors, other than Fannie Mae, Ginnie Mae, and FHA/VA, have ceased their activities in the
residential mortgage securitization business or severely curtailed these activities relative to their previous levels. We
compete on the basis of price, products, the structure of our securities, and service. Competition to acquire single-family
mortgages can also be significantly affected by changes in our credit standards.
Ginnie Mae, which became a more significant competitor beginning in 2009, guarantees the timely payment of
principal and interest on mortgage-related securities backed by federally insured or guaranteed loans, primarily those
insured by FHA or guaranteed by VA. Ginnie Mae maintained a significant market share in 2011 and 2010, in large part
due to favorable pricing of loans insured by FHA, the increase in the FHA loan limit and the availability, through FHA,
of a mortgage product for borrowers seeking greater than 80% financing who could not otherwise qualify for a
conventional mortgage.
The conservatorship, including direction provided to us by our Conservator, and the restrictions on our activities
under the Purchase Agreement may affect our ability to compete in the business of securitizing mortgages. On multiple
occasions, FHFA has directed us and Fannie Mae to confer and suggest to FHFA possible uniform approaches to
particular business and accounting issues and problems. In most such cases, FHFA subsequently directed us and Fannie
Mae to adopt a specific uniform approach. It is possible that in some areas FHFA could require us and Fannie Mae to
take a uniform approach that, because of differences in our respective businesses, could place Freddie Mac at a
competitive disadvantage to Fannie Mae. For more information, see “RISK FACTORS — Conservatorship and Related
Matters — FHFA directives that we and Fannie Mae adopt uniform approaches in some areas could have an adverse
impact on our business or on our competitive position with respect to Fannie Mae.”
Overview of the Mortgage Securitization Process
Mortgage securitization is a process by which we purchase mortgage loans that lenders originate, and pool these
loans into mortgage securities that are sold in global capital markets. The following diagram illustrates how we support
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