Freddie Mac 2012 Annual Report Download - page 236

housing bonds issued by HFAs. Treasury purchased all of the pass-through securities issued by Freddie Mac and
Fannie Mae. This initiative provides financing for HFAs to issue new housing bonds.
Treasury will bear the initial losses of principal up to 35% of total principal for these two initiatives combined, and
thereafter Freddie Mac and Fannie Mae each will be responsible only for losses of principal on the securities that it issues to
the extent that such losses are in excess of 35% of all losses under both initiatives. Treasury will bear all losses of unpaid
interest. Under both initiatives, we and Fannie Mae were paid fees at the time bonds were securitized and are also paid
ongoing fees for as long as the bonds remain outstanding.
The third initiative under the HFA initiative is described below:
• Multifamily Credit Enhancement Initiative. Using existing housing bond credit enhancement products, Freddie Mac
is providing a guarantee of new housing bonds issued by HFAs, which Treasury purchased from the HFAs. Treasury
will not be responsible for a share of any losses incurred by us in this initiative.
Related Parties as a Result of Conservatorship
As a result of our issuance to Treasury of the warrant to purchase shares of our common stock equal to 79.9% of the
total number of shares of our common stock outstanding, on a fully diluted basis, we are deemed a related party to the U.S.
government. Except for the transactions with Treasury discussed above in “Business Objectives,” “Government Support for
our Business” and “Housing Finance Agency Initiative” as well as in “NOTE 8: DEBT SECURITIES AND
SUBORDINATED BORROWINGS,” and “NOTE 11: STOCKHOLDERS’ EQUITY (DEFICIT),” no transactions outside of
normal business activities have occurred between us and the U.S. government (or any of its related parties) during the years
ended December 31, 2012, 2011 and 2010. In addition, we are deemed related parties with Fannie Mae as both we and
Fannie Mae have the same relationships with FHFA and Treasury. All transactions between us and Fannie Mae have
occurred in the normal course of business.
NOTE 3: VARIABLE INTEREST ENTITIES
We use securitization trusts in our securities issuance process, and are required to evaluate the trusts for consolidation
on an ongoing basis. See “NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES — Consolidation and
Equity Method of Accounting” for further information regarding the consolidation of certain VIEs.
Based on our evaluation of whether we hold a controlling financial interest in these VIEs, we determined that we are the
primary beneficiary of trusts that issue our single-family PCs and certain Other Guarantee Transactions. Therefore, we
consolidate on our balance sheet the assets and liabilities of these trusts. In addition to our PC trusts, we are involved with
numerous other entities that meet the definition of a VIE, as discussed below.
VIEs for which We are the Primary Beneficiary
See “NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES — Securitization Activities through
Issuances of Freddie Mac Mortgage-Related Securities” for information on the nature of single-family PC trusts, REMICs
and Other Structured Securities, and Other Guarantee Transactions.
Single-family PC Trusts
Our single-family PC trusts issue pass-through securities that represent undivided beneficial interests in pools of
mortgages held by these trusts. PCs are designed so that we bear the credit risk inherent in the loans underlying the PCs
through our guarantee of principal and interest payments on the PCs. The PC holders bear the interest rate or prepayment risk
on the mortgage loans and the risk that we will not perform on our obligation as guarantor. For purposes of our consolidation
assessments, our evaluation of power and economic exposure with regard to PC trusts focuses on credit risk because the
credit performance of the underlying mortgage loans was identified as the activity that most significantly impacts the
economic performance of these entities. We have the power to impact the activities related to this risk in our role as
guarantor and master servicer.
Specifically, in our role as master servicer, we establish requirements for how mortgage loans are serviced and what
steps are to be taken to mitigate credit losses (e.g., modification, foreclosure). Additionally, in our capacity as guarantor, we
have the ability to remove defaulted mortgage loans out of the PC trust to help mitigate credit losses. See “NOTE 5:
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