Freddie Mac 2011 Annual Report Download - page 21

of mortgages; (b) influencing the volume and characteristics of mortgages delivered to us by tailoring our loan eligibility
guidelines and other means; and (c) engaging in portfolio purchase and retention activities. Beginning in 2012, under
guidance from FHFA we expect to curtail mortgage-related investments portfolio purchase and retention activities that are
undertaken for the primary purpose of supporting the price performance of our PCs, which may result in a significant
decline in the market share of our single-family guarantee business, lower comprehensive income, and a more rapid
decline in the size of our total mortgage portfolio. See “Investments Segment — PC Support Activities” and “RISK
FACTORS — Competitive and Market Risks — Any decline in the price performance of or demand for our PCs could
have an adverse effect on the volume and profitability of our new single-family guarantee business” for additional
information about our support of market liquidity for PCs.
REMICs and Other Structured Securities
We issue single-class and multiclass securities. Single-class securities involve the straight pass-through of all of the
cash flows of the underlying collateral to holders of the beneficial interests. Our primary multiclass securities qualify for
tax treatment as REMICs. Multiclass securities divide all of the cash flows of the underlying mortgage-related assets into
two or more classes designed to meet the investment criteria and portfolio needs of different investors by creating classes
of securities with varying maturities, payment priorities and coupons, each of which represents a beneficial ownership
interest in a separate portion of the cash flows of the underlying collateral. Usually, the cash flows are divided to modify
the relative exposure of different classes to interest-rate risk, or to create various coupon structures. The simplest division
of cash flows is into principal-only and interest-only classes. Other securities we issue can involve the creation of
sequential payment and planned or targeted amortization classes. In a sequential payment class structure, one or more
classes receive all or a disproportionate percentage of the principal payments on the underlying mortgage assets for a
period of time until that class or classes are retired, following which the principal payments are directed to other classes.
Planned or targeted amortization classes involve the creation of classes that have relatively more predictable amortization
schedules across different prepayment scenarios, thus reducing prepayment risk, extension risk, or both.
Our REMICs and Other Structured Securities represent beneficial interests in pools of PCs and/or certain other types
of mortgage-related assets. We create these securities primarily by using PCs or previously issued REMICs and Other
Structured Securities as the underlying collateral. Similar to our PCs, we guarantee the payment of principal and interest
to the holders of tranches of our REMICs and Other Structured Securities. We do not charge a management and guarantee
fee for these securities if the underlying collateral is already guaranteed by us since no additional credit risk is introduced.
Because the collateral underlying nearly all of our single-family REMICs and Other Structured Securities consists of other
mortgage-related securities that we guarantee, there are no concentrations of credit risk in any of the classes of these
securities that are issued, and there are no economic residual interests in the related securitization trust. The following
diagram provides a general example of how we create REMICs and Other Structured Securities.
REMICs and Other Structured Securities
Security Dealer
PCs
Freddie Mac
(administrator)
TRUST
PCs
Security
Classes
Security
Classes
Transaction Fee
We issue many of our REMICs and Other Structured Securities in transactions in which securities dealers or
investors sell us mortgage-related assets or we use our own mortgage-related assets (e.g., PCs and REMICs and Other
Structured Securities) in exchange for the REMICs and Other Structured Securities. The creation of REMICs and Other
Structured Securities allows for setting differing terms for specific classes of investors, and our issuance of these securities
can expand the range of investors in our mortgage-related securities to include those seeking specific security attributes.
For REMICs and Other Structured Securities that we issue to third parties, we typically receive a transaction, or
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