Freddie Mac 2012 Annual Report Download - page 32

management services to the Single-family Guarantee and Multifamily segments. In the Investments segment, we are not
currently a substantial buyer or seller of mortgage assets.
Our Customers
Our customers for our debt securities predominantly include insurance companies, money managers, central banks,
depository institutions, and pension funds. Within the Investments segment, we buy securities and single-family mortgage
loans through various market sources. We purchase a significant portion of these loans from a variety of lenders, as discussed
in “Single-Family Guarantee Segment — Our Customers.”
Our Competition
Historically, our principal competitors have been Fannie Mae and other financial institutions that invest in mortgage-
related securities and mortgage loans, such as commercial and investment banks, dealers, thrift institutions, REITs, and
insurance companies. The conservatorship, including direction provided to us by our Conservator and the restrictions on our
activities under the Purchase Agreement, has affected and will continue to affect our ability to compete in the business of
investing in mortgage-related securities and mortgage loans.
We compete for debt funding with Fannie Mae, the FHLBs and other institutions. Competition for debt funding from
these entities can vary with changes in economic, financial market and regulatory environments.
Assets
Historically, we have primarily been a buy-and-hold investor in mortgage-related securities and single-family
performing mortgage loans. We purchase these assets to improve profitability, support our customers, and support the
liquidity and price performance of our PCs. We may sell assets to reduce risk, provide liquidity, and improve our returns.
However, due to limitations under the Purchase Agreement and those imposed by FHFA, our ability to acquire and sell
mortgage assets is significantly constrained. For more information, see “Conservatorship and Related Matters — Limits on
Investment Activity and Our Mortgage-Related Investments Portfolio” and “MD&A — CONSOLIDATED RESULTS OF
OPERATIONS — Segment Earnings — Segment Earnings-Results — Investments.”
We may enter into a variety of transactions to improve investment returns, including: (a) dollar roll transactions;
(b) purchases of agency securities (including agency REMICs); and (c) purchases of performing single-family mortgage
loans. In addition, we may create REMICs from existing agency securities and sell tranches that are in demand by investors
to reduce our asset balance, while conserving value for the taxpayer. We estimate our expected investment returns using an
OAS approach, which is an estimate of the yield spread between a given financial instrument and a benchmark (LIBOR,
agency or Treasury) yield curve. In this approach, we consider potential variability in the instrument’s cash flows resulting
from any options embedded in the instrument, such as the prepayment option. Additionally, in this segment we hold
reperforming and modified single-family mortgage loans related to our single-family business. For our liquidity needs, we
maintain a portfolio comprised primarily of cash and cash equivalents, non-mortgage-related securities (primarily Treasury
securities), and securities purchased under agreements to resell.
Debt Financing
We fund our investment activities by issuing short-term and long-term debt. The conservatorship, and the resulting
support we receive from Treasury, has enabled us to access debt funding on terms sufficient for our needs. While we believe
that the support provided by Treasury pursuant to the Purchase Agreement currently enables us to maintain our access to the
debt markets and to have adequate liquidity to conduct our normal business activities, the costs of our debt funding could
vary for a number of reasons, including the uncertainty about the future of the GSEs. Additionally, the Purchase Agreement
limits the amount of indebtedness we can incur.
For more information, see “Conservatorship and Related Matters” and “MD&A — LIQUIDITY AND CAPITAL
RESOURCES — Liquidity.”
Risk Management
Our Investments segment has responsibility for managing our interest rate risk and certain liquidity risks. Derivatives
are an important part of our risk management strategy. We use derivatives primarily to: (a) hedge forecasted issuances of
debt; (b) synthetically create callable and non-callable funding; (c) adjust or rebalance our funding mix in response to
27 Freddie Mac