Freddie Mac 2011 Annual Report Download - page 18

mortgage market liquidity when we create PCs through mortgage securitizations. These PCs can be sold to investors or
held by us or our customers:
Cash
Mortgage
Homeowners Our Customers:
Originate Loans with
Homeowners
Sell or Exchange
Mortgages for PCs or Cash
Invest in PCs or Sell PCs
to Investors
Investors
Freddie Mac:
Buys Mortgages
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
The U.S. residential mortgage market consists of a primary mortgage market that links homebuyers and lenders and a
secondary mortgage market that links lenders and investors. We participate in the secondary mortgage market by
purchasing mortgage loans and mortgage-related securities for investment and by issuing guaranteed mortgage-related
securities. In the Single-family Guarantee segment, we purchase and securitize “single-family mortgages,” which are
mortgages that are secured by one- to four-family properties.
In general, the securitization and Freddie Mac guarantee process works as follows: (a) a lender originates a mortgage
loan to a borrower purchasing a home or refinancing an existing mortgage loan; (b) we purchase the loan from the lender
and place it with other mortgages into a security that is sold to investors (this process is referred to as “pooling”); (c) the
lender may then use the proceeds from the sale of the loan or security to originate another mortgage loan; (d) we provide
a credit guarantee, for a fee (generally a portion of the interest collected on the mortgage loan), to those who invest in the
security; (e) the borrower’s monthly payment of mortgage principal and interest (net of a servicing fee and our
management and guarantee fee) is passed through to the investors in the security; and (f) if the borrower stops making
monthly payments — because a family member loses a job, for example — we step in and, pursuant to our guarantee,
make the applicable payments to investors in the security. In the event a borrower defaults on the mortgage, our servicer
works with the borrower to find a solution to help them stay in the home, or sell the property and avoid foreclosure,
through our many different workout options. If this is not possible, we ultimately foreclose and sell the home.
The terms of single-family mortgages that we purchase or guarantee allow borrowers to prepay these loans, thereby
allowing borrowers to refinance their loans when mortgage rates decline. Because of the nature of long-term, fixed-rate
mortgages, borrowers with these mortgages are protected against rising interest rates, but are able to take advantage of
declining rates through refinancing. When a borrower prepays a mortgage that we have securitized, the outstanding
balance of the security owned by investors is reduced by the amount of the prepayment. Unscheduled reductions in loan
principal, regardless of whether they are voluntary or involuntary (e.g. foreclosure), result in prepayments of security
balances. Consequently, the owners of our guaranteed securities are subject to prepayment risk on the related mortgage
13 Freddie Mac