Freddie Mac 2011 Annual Report Download - page 19

loans, which is principally that the investor will receive an unscheduled return of the principal, and therefore may not earn
the rate of return originally expected on the investment.
We guarantee these mortgage-related securities in exchange for compensation, which consists primarily of a
combination of management and guarantee fees paid on a monthly basis as a percentage of the UPB of the underlying
loans and initial upfront payments referred to as delivery fees. We may also make upfront payments to buy-up the
monthly management and guarantee fee rate, or receive upfront payments to buy-down the monthly management and
guarantee fee rate. These fees are paid in conjunction with the formation of a PC to provide for a uniform coupon rate for
the mortgage pool underlying the issued PC.
We enter into mortgage purchase volume commitments with many of our single-family customers in order to have a
supply of loans for our guarantee business. These commitments provide for the lenders to deliver to us a certain volume
of mortgages during a specified period of time. Some commitments may also provide for the lender to deliver to us a
minimum percentage of their total sales of conforming loans. The purchase and securitization of mortgage loans from
customers under these contracts have pricing schedules for our management and guarantee fees that are negotiated at the
outset of the contract with initial terms that may range from one month to one year. We call these transactions “flow”
activity and they represent the majority of our purchase volumes. The remainder of our purchases and securitizations of
mortgage loans occurs in “bulk” transactions for which purchase prices and management and guarantee fees are
negotiated on an individual transaction basis. Mortgage purchase volumes from individual customers can fluctuate
significantly. If a mortgage lender fails to meet its contractual commitment, we have a variety of contractual remedies,
which may include the right to assess certain fees. Our mortgage purchase contracts contain no penalty or liquidated
damages clauses based on our inability to take delivery of presented mortgage loans. However, if we were to fail to meet
our contractual commitment, we could be deemed to be in breach of our contract and could be liable for damages in a
lawsuit.
We seek to issue guarantees on our PCs with fee terms that we believe will, over the long-term, provide management
and guarantee fee income that exceeds our anticipated credit-related and administrative expenses on the underlying loans.
Historically, we have varied our guarantee and delivery fee pricing for different customers, mortgage products, and
mortgage or borrower underwriting characteristics based on our assessment of credit risk and loss mitigation related to
single-family loans. However, on December 23, 2011, President Obama signed into law the Temporary Payroll Tax Cut
Continuation Act of 2011. Among its provisions, this new law directs FHFA to require Freddie Mac and Fannie Mae to
increase guarantee fees by no less than 10 basis points above the average guarantee fees charged in 2011 on single-family
mortgage-backed securities. Under the law, the proceeds from this increase will be remitted to Treasury to fund the
payroll tax cut, rather than retained by the companies. See “Regulation and Supervision — Legislative and Regulatory
Developments” for further information on the impact of this new law. For more information on fees, see “MD&A — RISK
MANAGEMENT — Credit Risk — Mortgage Credit Risk — Single-Family Mortgage Credit Risk — Other Credit Risk
Management Activities.”
For information on how we account for our securitization activities, see “NOTE 1: SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES.”
Securitization Activities
The types of mortgage-related securities we issue and guarantee include the following:
• PCs;
• REMICs and Other Structured Securities; and
• Other Guarantee Transactions.
PCs
Our PCs are single-class pass-through securities that represent undivided beneficial interests in trusts that hold pools
of mortgages we have purchased. Holding single-family loans in the form of PCs rather than as unsecuritized loans gives
us greater flexibility in managing the composition of our mortgage portfolio, as it is generally easier to purchase and sell
PCs than unsecuritized mortgage loans, and allows more cost effective interest-rate risk management. For our fixed-rate
PCs, we guarantee the timely payment of principal and interest. For our single-family ARM PCs, we guarantee the timely
payment of the weighted average coupon interest rate for the underlying mortgage loans. We also guarantee the full and
final payment of principal for ARM PCs; however, we do not guarantee the timely payment of principal on ARM PCs.
We issue most of our single-family PCs in transactions in which our customers provide us with mortgage loans in
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