Freddie Mac 2011 Annual Report Download - page 27

mortgages from our seller/servicers, and thus the volume and profitability of new single-family business, can be directly
affected by the relative price performance of our PCs and comparable Fannie Mae securities.
Historically, we 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 conducted by our Investments segment, including
the purchase and sale of Freddie Mac and other agency mortgage-related securities (e.g., dollar roll transactions), as well
as through the issuance of REMICs and Other Structured Securities. Our purchases and sales of mortgage-related
securities and our issuances of REMICs and Other Structured Securities influence the relative supply and demand for
these securities, helping to support the price performance of our PCs. Depending upon market conditions, including the
relative prices, supply of and demand for our mortgage-related securities and comparable Fannie Mae securities, as well
as other factors, there may be substantial variability in any period in the total amount of securities we purchase or sell,
and in the success of our efforts to support the liquidity and price performance of our mortgage-related securities.
Historically, we incurred costs to support the liquidity and price performance of our securities, including engaging in
transactions below our target rate of return. We may increase, reduce or discontinue these or other related activities at any
time, which could affect the liquidity and price performance of our mortgage-related securities. 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. For more information, see “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.”
Multifamily Segment
The Multifamily segment reflects results from our investment (both purchases and sales), securitization, and
guarantee activities in multifamily mortgage loans and securities. Although we hold multifamily mortgage loans and non-
agency CMBS that we purchased for investment, our purchases of such multifamily mortgage loans for investment have
declined significantly since 2010, and our purchases of CMBS have declined significantly since 2008. The only CMBS
that we have purchased since 2008 have been senior, mezzanine, and interest-only tranches related to certain of our
securitization transactions, and these purchases have not been significant. Currently, our primary business strategy is to
purchase multifamily mortgage loans for aggregation and then securitization. We guarantee the senior tranches of these
securitizations in Other Guarantee Transactions. Our Multifamily segment also issues Other Structured Securities, but does
not issue REMIC securities. Our Multifamily segment also enters into other guarantee commitments for multifamily HFA
bonds and housing revenue bonds held by third parties. Historically, we issued multifamily PCs, but this activity has been
insignificant in recent years.
The multifamily property market is affected by local and regional economic factors, such as employment rates,
construction cycles, and relative affordability of single-family home prices, all of which influence the supply and demand
for multifamily properties and pricing for apartment rentals. Our multifamily loan volume is largely sourced through
established institutional channels where we are generally providing post-construction financing to larger apartment project
operators with established performance records.
Our lending decisions are largely based on the assessment of the property’s ability to provide rents that will generate
sufficient operating cash flows to support payment of debt service obligations as measured by the expected DSCR and the
loan amount relative to the value of the property as measured by the LTV ratio. Multifamily mortgages generally are
without recourse to the borrower (i.e., the borrower is not personally liable for any deficiency remaining after foreclosure
and sale of the property), except in the event of fraud or certain other specified types of default. Therefore, repayment of
the mortgage depends on the ability of the underlying property to generate cash flows sufficient to cover the related debt
obligations. That in turn depends on conditions in the local rental market, local and regional economic conditions, the
physical condition of the property, the quality of property management, and the level of operating expenses.
Prior to 2010, our Multifamily segment also reflected results from our investments in LIHTC partnerships formed for
the purpose of providing equity funding for affordable multifamily rental properties. In these investments, we provided
equity contributions to partnerships designed to sponsor the development and ongoing operations for low- and moderate-
income multifamily apartments. We planned to realize a return on our investment through reductions in income tax
expense that result from federal income tax credits and the deductibility of operating losses generated by the partnerships.
However, we no longer make investments in such partnerships because we do not expect to be able to use the underlying
federal income tax credits or the operating losses generated from the partnerships as a reduction to our taxable income
22 Freddie Mac