Freddie Mac 2004 Annual Report Download - page 145

sensitivity analysis assesses the assumed increase in the present value of expected single-family mortgage
portfolio losses over ten years as the result of an estimated instantaneous Ñve percent decline in house prices
nationwide, followed by a return to more normal growth in house prices based on historical experience. An
internally developed Monte Carlo simulation-based model is used to generate our credit risk sensitivity
analyses. The Monte Carlo model uses an interest rate simulation program to generate numerous interest rate
paths that, in conjunction with a prepayment model, are used to estimate mortgage cash Öows along each path.
We use this same model to calculate the expected default cost component of the Guarantee obligation for
Participation CertiÑcates and to estimate expected future default costs of mortgage loans and mortgage-
related securities. In the credit rate sensitivity analysis, we adjust the house-price assumption used in the base
case to estimate the level and sensitivity of potential credit costs resulting from a sudden decline in house
prices. See ""NOTE 2: TRANSFERS OF SECURITIZED INTERESTS IN MORTGAGE-RELATED
ASSETS'' to the consolidated Ñnancial statements for more information.
The credit risk sensitivity results at December 31, 2004 and 2003 are shown in Table 72. Credit risk
sensitivity results as of the end of each quarter in 2004 and the Ñrst quarter of 2005 are presented in
""VOLUNTARY COMMITMENTS.''
Table 72 Ì Credit Risk Sensitivity Ì Estimated Net Present Value (NPV) of Increase in Credit Losses(1)
Before Receipt of Credit After Receipt of Credit
Enhancements(2) Enhancements(3)
NPV NPV Ratio(4) NPV NPV Ratio(4)
(dollars in millions, except ratios)
At:
December 31, 2004 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $794 6.5bps $463 3.8bps
December 31, 2003 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $926 7.9bps $533 4.6bps
(1) Based on single-family Total mortgage portfolio, excluding non-Freddie Mac mortgage-related securities and that portion of
Structured Securities that is backed by Ginnie Mae CertiÑcates.
(2) Assumes that none of the credit enhancements currently covering our mortgages has any mitigating impact on our credit losses.
(3) Assumes we collect amounts due from credit enhancement providers after giving eÅect to certain assumptions about counterparty
default rates.
(4) Calculated as the ratio of net present value of increase in credit losses to the single-family Total mortgage portfolio, excluding non-
Freddie Mac mortgage-related securities and that portion of Structured Securities that is backed by Ginnie Mae CertiÑcates.
Institutional Credit Risk
We are subject to credit risk from institutional counterparties to the extent they do not fulÑll their
obligations to us under the terms of speciÑc contracts or agreements. Our primary institutional credit risk
exposure, other than counterparty credit risk exposure relating to derivatives (which is discussed in ""Interest-
Rate Risk and Other Market Risks Ì Derivative-Related Risks Ì Derivative Counterparty Credit Risk''),
arises from agreements with the following entities:
‚ mortgage seller/servicers;
‚ mortgage loan insurers;
‚ issuers, guarantors or third party providers of credit enhancements on non-Freddie Mac mortgage-
related securities held in our Retained portfolio;
‚ mortgage investors and originators; and
‚ issuers, guarantors and insurers of investments held in our Cash and investments portfolio.
Mortgage Seller/Servicers. We are exposed to institutional credit risk arising from the insolvency of
mortgage seller/servicers that remit to us monthly principal and interest payments on mortgages, provide
credit enhancements such as recourse or collateral and represent and warrant that mortgages were originated
in compliance with our standards. The servicing fee charged by mortgage servicers varies by mortgage product.
We require our single-family servicers to retain a minimum percentage fee for mortgages serviced on our
behalf, typically 0.25 percent of the unpaid principal balance of the mortgage loans. However, we do on an
exception basis allow lower minimum servicing amounts. The credit risk associated with servicing fees relates
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