Freddie Mac 2015 Annual Report Download - page 35

Management's Discussion and Analysis Our Business Segments | Single-Family Guarantee
Freddie Mac 2015 Form 10-K 33
income. When a borrower prepays a loan that we have securitized, the outstanding balance of the
security owned by investors is reduced by the amount of the prepayment. If the borrower becomes
delinquent, we continue to make the applicable payments to the investors in the mortgage-related
securities pursuant to our guarantee. When that occurs, we work to mitigate our losses through our loan
workout programs, which are discussed in more detail in "Risk Management." If we are unable to achieve
a successful loan workout, we pursue foreclosure of the underlying property.
We establish trusts for mortgage-related securities we issue pursuant to Master Trust Agreements and
serve as trustee for the trusts. We have the option, and in some instances the requirement, to purchase
specified loans, including certain delinquent loans, from the trusts at a purchase price equal to the current
UPB of the loan, less any outstanding advances of principal that have been previously distributed. For
information on an operational risk issue relating to the Master Trust Agreement, see "Risk Management -
Operational Risk."
The management and guarantee fee we charge on new acquisitions generally consists of a combination
of upfront delivery fees and a base monthly fee paid as a percentage of the UPB of the underlying loan.
We may also make upfront payments to buy up the monthly management and guarantee fee rate ("buy-
up fees"), or receive upfront payments to buy down the monthly management and guarantee fee rate
(“buy-down fees”). These fees are paid in conjunction with the formation of a PC to provide for a uniform
coupon rate for the mortgage pool underlying the PC. The payments made to buy up the management
and guarantee fee rate are not considered compensation for the credit risk assumed for purposes of our
financial statements. Consequently, these amounts are allocated to the Investments segment.
We enter into loan purchase agreements with many of our single-family customers that outline the terms
under which we agree to purchase loans from them over a period of time. For the majority of the loans we
purchase, the management and guarantee fees are not specified contractually. Instead, we bid for some
or all of the lender's loan volume on a monthly basis at a management and guarantee fee rate that we
specify. As a result, our loan purchase volumes from individual customers can fluctuate significantly.
We seek to issue guarantees with fee terms that are commensurate with the risks assumed and that will,
over the long-term, provide management and guarantee fee income that exceeds the credit-related and
administrative expenses on the underlying loans and provide a return on the capital that would be needed
to support the related credit risk. We do not have the ability to fully price for our credit risk at the loan level
as our base fee does not differentiate by LTV ratio, credit score, and certain other credit-related factors.
We must obtain FHFA’s approval to implement across-the-board increases in our management and
guarantee fees. To compensate us for higher levels of risk in some loan products, we charge upfront
delivery fees above our base fees, which are calculated based on credit risk factors such as the loan
product type, loan purpose, LTV ratio, and credit score. While we vary our guarantee and, in certain
cases, delivery fee pricing for different customers, loan products, and loan or borrower underwriting
characteristics based on our assessment of credit risk, the seller may elect to retain loans with better
credit characteristics. The sellers' decisions with respect to loan retention, or sale to us, could result in our
purchases having a more adverse credit profile.
In 2012, at FHFA's direction, we increased management and guarantee fees by 10 basis points. Under
the Temporary Payroll Tax Cut Continuation Act of 2011, the proceeds from this increase are being
remitted to Treasury on a quarterly basis to fund the payroll tax cut. We refer to this fee increase as the
legislated 10 basis point increase in management and guarantee fees.