Freddie Mac 2012 Annual Report Download - page 33

changes in the interest-rate characteristics of our mortgage-related assets; and (d) hedge foreign-currency exposure. For more
information regarding our use of derivatives, see “QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT
MARKET RISK” and “NOTE 10: DERIVATIVES.” For information regarding our liquidity management, see “MD&A —
LIQUIDITY AND CAPITAL RESOURCES.”
PC Support Activities
Our PCs are an integral part of our mortgage purchase program. Our Single-family Guarantee segment purchases many
of our mortgages by issuing PCs in exchange for those mortgage loans in guarantor swap transactions. We also issue PCs
backed by mortgage loans that we purchased for cash. The relative price performance of our PCs and comparable Fannie
Mae securities can directly affect the volume and/or profitability of our new single-family guarantee business.
From time to time, we undertake actions in an effort to support the liquidity and the relative price performance of our
PCs to comparable Fannie Mae securities through a variety of activities. These activities can include the purchase and sale of
Freddie Mac mortgage-related securities, purchases of loans, and dollar roll transactions, as well as 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 (i.e., liquidity) for these securities, helping to support
the price performance of our PCs. Depending upon market conditions, including the relative prices, supply and demand for
our PCs 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 PCs. In the first half of 2012, we curtailed mortgage-related investments portfolio purchase and retention
activities that were undertaken primarily in an effort to support the liquidity and price performance of our PCs. However, due
to a decline in our single-family competitive position compared to other market participants (primarily Fannie Mae and
Ginnie Mae) in the first half of 2012, we resumed certain of the activities noted above during the second half of 2012 in an
effort to support the price performance of our PCs while minimizing market disruption. For more information about our
efforts to support the liquidity and relative price performance for PCs, see “Single-Family Credit Guarantee Segment —
Securitization Activities.”
We incur costs in connection with our efforts to support the liquidity and price performance of our PCs, including
engaging in transactions that yield less than 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 PCs. For more information, see
“RISK FACTORS — Competitive and Market Risks — A significant decline in the price performance of or demand for our
PCs could have an adverse effect on the volume and/or 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 historically we were primarily a buy and hold investor in
multifamily mortgage assets (both loans held for investment and investment securities, primarily CMBS), since 2009 our
primary business model is to purchase held-for-sale multifamily loans for aggregation and then securitization through
multifamily K Certificates, which are considered Other Guarantee Transactions. In substantially all of these transactions we
guarantee only the most senior tranches of the securities. As a result, a significant portion of our expected credit risk
associated with these loans is sold in subordinated tranches to third party investors. With this model, we utilize securitization
to substantially reduce our credit risk while providing liquidity to the multifamily market. See “Single-Family Guarantee
Segment —Securitization Activities —Other Guarantee Transactions” for a diagram that illustrates these transactions.
To a lesser extent, we provide guarantees of the payment of principal and interest on tax-exempt multifamily pass-
through certificates backed by multifamily housing revenue bonds. These housing revenue bonds are collateralized by
mortgage loans on low- and moderate-income multifamily housing developments. In addition, we guarantee the payment of
principal and interest on tax-exempt multifamily housing revenue bonds secured by low- and moderate-income multifamily
mortgage loans.
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.
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