Freddie Mac 2011 Annual Report Download - page 20

exchange for PCs. We refer to these transactions as guarantor swaps. The following diagram illustrates a guarantor swap
transaction:
Guarantor Swap
Mortgage Lender
Mortgage loans
PC
Freddie Mac
(administrator)
TRUST
Mortgage
loans PC
Freddie Mac
(guarantor)
Guarantee
Fee
Cash (Buy-ups)
Cash (Buy-downs, delivery fees)
We also issue PCs in exchange for cash. The following diagram illustrates an exchange for cash in a “cash auction”
of PCs:
Cash Auction of PCs
Mortgage Lender Securities Dealers
and Investors
Mortgage loan PC
Cash Cash
Cash (Delivery fees)
CASH PURCHASE
Freddie Mac
(administrator)
CASH AUCTION OF PC
TRUST
Mortgage
loans PC
Freddie Mac
(guarantor)
Guarantee
Fee
Institutional and other fixed-income investors, including pension funds, insurance companies, securities dealers,
money managers, commercial banks and foreign central banks, purchase our PCs. Treasury and the Federal Reserve have
also purchased mortgage-related securities issued by us, Fannie Mae and Ginnie Mae under their purchase programs. The
most recent of these programs ended in March 2010. During 2011, the Federal Reserve took several actions designed to
support an economic recovery and maintain historically low interest rates, including resumption of purchases of agency
securities, which impacted and will continue to impact the demand for and value of our PCs in the market.
PCs differ from U.S. Treasury securities and other fixed-income investments in two ways. First, single-family PCs
can be prepaid at any time. Homeowners have the right to prepay their mortgage at any time (known as the prepayment
option), and homeowner mortgage prepayments are passed through to the PC holder. Consequently, our securities
implicitly have a call option that significantly reduces the average life of the security from the contractual loan maturity.
As a result, our PCs generally provide a higher nominal yield than certain other fixed-income products. Second, unlike
U.S. Treasury securities, PCs are not backed by the full faith and credit of the United States.
In addition, in our Single-family Guarantee segment we historically sought to support the liquidity of the market for
our PCs and the relative price performance of our PCs to comparable Fannie Mae securities through a variety of activities,
including the resecuritization of PCs into REMICs and Other Structured Securities. Other strategies may include:
(a) encouraging sellers to pool mortgages that they deliver to us into PC pools with a larger and more diverse population
15 Freddie Mac