Freddie Mac 2005 Annual Report Download - page 162

Table 17.1 Ì Concentration of Credit Risk
December 31,
2005 2004
Amount(1) Percentage Amount(1)(2) Percentage
(dollars in millions)
By Region(3)
Northeast ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 340,960 24% $ 306,281 24%
West ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 326,952 23 296,390 23
North central ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 304,378 22 280,618 22
Southeast ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 247,494 18 223,921 18
SouthwestÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 175,200 13 160,249 13
$1,394,984 100% $1,267,459 100%
By State
California ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 182,178 13% $ 171,209 14%
Florida ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 86,988 6 75,879 6
IllinoisÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 72,986 5 65,750 5
New York ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 71,998 5 65,344 5
All Others ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 980,834 71 889,277 70
$1,394,984 100% $1,267,459 100%
(1) Calculated as Total mortgage portfolio less Structured Securities backed by Ginnie Mae CertiÑcates as well as agency and non-agency mortgage-
related securities held in the Retained portfolio.
(2) Beginning in 2005, Puerto Rico and Virgin Islands were reclassiÑed from Northeast to Southeast. The 2004 results were changed to conform with 2005
presentation.
(3) Region Designation: West (AK, AZ, CA, GU, HI, ID, MT, NV, OR, UT, WA); Northeast (CT, DE, DC, MA, ME, MD, NH, NJ, NY, PA, RI,
VT, VA, WV); North central (IL, IN, IA, MI, MN, ND, OH, SD, WI); Southeast (AL, FL, GA, KY, MS, NC, PR, SC, TN, VI); Southwest (AR,
CO, KS, LA, MO, NE, NM, OK, TX, WY).
Mortgage Lenders
A signiÑcant portion of our single-family mortgage purchase volume is generated from several key mortgage lenders that
have entered into special business arrangements with us. These individually negotiated arrangements generally involve a
lender's commitment to sell a high proportion of its conforming mortgage origination volume to us. During 2005, three
mortgage lenders each accounted for 10 percent or more of our mortgage purchase volume and in the aggregate they
accounted for approximately 47 percent of this volume. These three lenders are among the largest mortgage loan originators
in the United States. We are exposed to the risk that we could lose purchase volume to the extent these arrangements are
terminated or modiÑed without replacement from other lenders.
Derivative Portfolio
On an ongoing basis, we review the credit fundamentals of all of our derivative counterparties to conÑrm that they
continue to meet our internal standards. We assign internal ratings, credit, capital and trading limits to each counterparty
based on quantitative and qualitative analysis, which we update and monitor on a regular basis. We conduct additional
reviews when market conditions dictate or events aÅecting an individual counterparty occur.
Derivative Counterparties. Our use of derivatives exposes us to counterparty credit risk, which arises from the
possibility that the derivative counterparty will not be able to meet its contractual obligations. Exchange-traded derivatives,
such as futures contracts, do not measurably increase our counterparty credit risk because changes in the value of open
exchange-traded contracts are settled daily through a Ñnancial clearinghouse established by each exchange. Over-the-
counter, or OTC, derivatives, however, expose us to counterparty credit risk because transactions are executed and settled
between us and the counterparty. Our use of OTC interest-rate swaps, option-based derivatives and foreign-currency swaps
is subject to rigorous internal credit and legal reviews. Our derivative counterparties carry external credit ratings among the
highest available from major rating agencies. All of these counterparties are major Ñnancial institutions and are experienced
participants in the OTC derivatives market.
Master Netting and Collateral Agreements. We use master netting and collateral agreements to reduce our credit risk
exposure to our active OTC derivative counterparties for interest-rate swaps, option-based derivatives and foreign-currency
swaps. Master netting agreements provide for the netting of amounts receivable and payable from an individual
counterparty, which reduces our exposure to a single counterparty in the event of default. On a daily basis, the market value
of each counterparty's derivatives outstanding is calculated to determine the amount of our net credit exposure, which is
equal to derivatives in a net gain position by counterparty after giving consideration to collateral posted. Our collateral
agreements require most counterparties to post collateral for the amount of our net exposure to them above the applicable
threshold. Bilateral collateral agreements are in place for the majority of our counterparties. Collateral posting thresholds
are tied to a counterparty's credit rating. Derivative exposures and collateral amounts are monitored on a daily basis using
both internal pricing models and dealer price quotes. Collateral is typically transferred within one business day based on the
146 Freddie Mac