Freddie Mac 2004 Annual Report Download - page 134

and 2003 from 72 percent for the year ended December 31, 2002. Mortgage loans with higher loan-to-value
ratios (and therefore lower levels of borrower equity) at the time of purchase are also protected by credit
enhancements, since our charter requires that loans with loan-to-value ratios above 80 percent at the time of
purchase be covered by mortgage insurance or certain other credit protections.
The likelihood of single-family mortgage default depends not only on the initial credit quality of the loan,
but also on events that occur after origination. Accordingly, we monitor changes in house prices across the
country and the impact of these house price changes on the underlying loan-to-value ratio of mortgages in our
portfolio.
Figure 1 Ì Annual House Price Appreciation
2
4
6
8
10
12
2004200320022001200019991998199719961995
Growth Rate
(Percent)
As shown in Figure 1, house prices have risen signiÑcantly over the last ten years, and have grown very
dramatically over the last three years. This house price appreciation has positively inÖuenced the values of
properties underlying the mortgages in our portfolio. The weighted average estimated current loan-to-value
ratio of our single-family non-credit-enhanced portfolio decreased to 57 percent for the year ended
December 31, 2004 from 61 percent for each of the years ended December 31, 2003 and 2002. The decrease is
primarily the result of unusually strong house price appreciation. Despite these positive national trends, we
remain vigilant in identifying possible weaknesses in regional geographic markets, particularly with respect to
new loans originated in an environment of strong house prices, and may seek to reinsure a portion of this risk
should we determine that the possibility of such weaknesses warrants action. Historical experience has shown
that defaults are less likely to occur on mortgages with lower estimated current loan-to-value ratios.
Furthermore, in the event of a default, higher levels of borrower equity in a property reduce the total amount
of loss, thereby mitigating credit losses.
Credit Score. Credit scores are a useful measure for assessing the credit quality of a borrower. Credit
scores are numbers reported by the credit repositories, based on statistical models, that summarize an
individual's credit record and predict the likelihood that a borrower will repay future obligations as expected.
FICO» scores, or FICO, developed by Fair, Isaac and Co., Inc., are the most commonly used credit scores
today.
FICO scores are ranked on a scale of approximately 300 to 850 points. Statistically, consumers with
higher credit scores are more likely to repay their debts as expected than those with lower scores. The
weighted average credit score for the Total mortgage portfolio (based on the credit score at origination)
remained high at 723 at both December 31, 2004 and 2003 and a slight increase from 718 at December 31,
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