Freddie Mac 2011 Annual Report Download - page 23

support this program and these guarantees remain outstanding. The securities issued by us pursuant to the NIBP were
purchased by Treasury. See “NOTE 2: CONSERVATORSHIP AND RELATED MATTERS — Housing Finance Agency
Initiative” for further information.
For information about the amount of mortgage-related securities we have issued, see “Table 35 — Freddie Mac
Mortgage-Related Securities.” For information about the relative performance of mortgages underlying these securities,
refer to our “MD&A — RISK MANAGEMENT — Credit Risk” section.
Single-Family PC Trust Documents
We establish trusts for all of our issued PCs pursuant to our PC master trust agreement. In accordance with the terms
of our PC trust documents, we have the option, and in some instances the requirement, to remove specified mortgage
loans from the trust. To remove these loans, we pay the trust an amount equal to the current UPB of the mortgage, less
any outstanding advances of principal that have been distributed to PC holders. Our payments to the trust are distributed
to the PC holders at the next scheduled payment date. From time to time, we reevaluate our practice of removing
delinquent loans from PCs and alter it if circumstances warrant. Our practice is to remove mortgages that are 120 days or
more delinquent from pools underlying our PCs when:
• the mortgages have been modified;
• foreclosure sales occur;
• the mortgages are delinquent for 24 months; or
• the cost of guarantee payments to PC holders, including advances of interest at the PC coupon rate, exceeds the
expected cost of holding the nonperforming loans.
In February 2010, we began the practice of removing substantially all 120 days or more delinquent single-family
mortgage loans from our issued PCs. This change in practice was made based on a determination that the cost of
guarantee payments to the security holders will exceed the cost of holding unsecuritized non-performing loans on our
consolidated balance sheets. The cost of holding unsecuritized non-performing loans on our consolidated balance sheets
was significantly affected by our January 1, 2010 adoption of amendments to certain accounting guidance and changing
economics pursuant to which the recognized cost of removing most delinquent loans from PC trusts was less than the
recognized cost of continued guarantee payments to security holders. See “NOTE 1: SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES — Recently Adopted Accounting Guidance” for additional information.
In accordance with the terms of our PC trust documents, we are required to remove a mortgage loan (or, in some
cases, substitute a comparable mortgage loan) from a PC trust in the following situations:
• if a court of competent jurisdiction or a federal government agency, duly authorized to oversee or regulate our
mortgage purchase business, determines that our purchase of the mortgage was unauthorized and a cure is not
practicable without unreasonable effort or expense, or if such a court or government agency requires us to
repurchase the mortgage;
• if a borrower exercises its option to convert the interest rate from an adjustable-rate to a fixed-rate on a convertible
ARM; and
• in the case of balloon-reset loans, shortly before the mortgage reaches it’s scheduled balloon-reset date.
The To Be Announced Market
Because our fixed-rate single-family PCs are considered to be homogeneous, and are issued in high volume and are
highly liquid, they generally trade on a “generic” basis by PC coupon rate, also referred to as trading in the TBA market.
A TBA trade in Freddie Mac securities represents a contract for the purchase or sale of PCs to be delivered at a future
date; however, the specific PCs that will be delivered to fulfill the trade obligation, and thus the specific characteristics of
the mortgages underlying those PCs, are not known (i.e., “announced”) at the time of the trade, but only shortly before
the trade is settled. The use of the TBA market increases the liquidity of mortgage investments and improves the
distribution of investment capital available for residential mortgage financing, thereby helping us to accomplish our
statutory mission. The Securities Industry and Financial Markets Association publishes guidelines pertaining to the types
of mortgages that are eligible for TBA trades. Certain of our PC securities are not eligible for TBA trades, including those
backed by: (a) relief refinance mortgages with LTV ratios greater than 105%; and (b) previously modified mortgage loans
where the borrower has missed one or more monthly payments in a twelve month period.
18 Freddie Mac