Freddie Mac 2005 Annual Report Download - page 91

The credit risk sensitivity results at December 31, 2005 and 2004 are shown in Table 45. Credit risk sensitivity results at
the end of each quarter in 2005 and the fourth quarter of 2004 are presented in ""RISK MANAGEMENT AND
DISCLOSURE COMMITMENTS.''
Table 45 Ì Credit Risk Sensitivity Ì Estimated Increase in Net Present Value, or NPV, of 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, 2005 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $873 6.5bps $564 4.2bps
December 31, 2004 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $794 6.5bps $463 3.8bps
(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 single-family 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
Our primary institutional credit risk exposure, other than counterparty credit risk exposure relating to derivatives, arises
from agreements with the following entities: mortgage loan insurers; mortgage seller/servicers; 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. See ""Interest-Rate Risk and Other Market Risks Ì Derivative-Related Risks Ì Derivative Counterparty Credit
Risk'' for information concerning counterparty credit risk exposure relating to derivatives.
Mortgage Loan Insurers. We bear institutional credit risk relating to the potential insolvency or non-performance of
mortgage insurers that insure mortgages we purchase or guarantee. We manage this risk by establishing eligibility standards
for mortgage insurers and by regularly monitoring our exposure to individual mortgage insurers. We also monitor the
mortgage insurers' credit ratings, as provided by nationally recognized credit rating agencies and we periodically review the
methods used by the credit rating agencies. We also perform periodic on-site reviews of mortgage insurers to conÑrm
compliance with our eligibility requirements and to evaluate their management and control practices. In addition, state
insurance authorities regulate mortgage insurers. Substantially all mortgage insurers providing primary mortgage insurance
and pool insurance coverage on single-family mortgages we purchased during 2005 were rated ""AA'' or better by S&P. At
December 31, 2005, there were seven mortgage insurers (the largest being Mortgage Guarantee Insurance Corporation)
that each provided more than seven percent of our Total mortgage insurance coverage (including primary mortgage
insurance and pool insurance) and together accounted for approximately 99 percent of our overall coverage.
Mortgage Seller/Servicers. We are exposed to institutional credit risk arising from the insolvency of or non-
performance by our mortgage seller/servicers, including performance of their repurchase obligations arising from the
representations and warranties made to us for loans they underwrote and sold to us. The servicing fee charged by mortgage
servicers varies by mortgage product. We generally 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,
on an exception basis, we allow a lower or no minimum servicing amount. The credit risk associated with servicing fees
relates to whether we could transfer the servicing to an alternate servicer without a loss in the event the current servicer is
unable to fulÑll its responsibilities.
In order to manage the credit risk associated with our mortgage seller/servicers, we require them to meet minimum
Ñnancial capacity standards, insurance and other eligibility requirements. We institute remedial actions against
seller/servicers that fail to comply with our standards. These actions may include transferring mortgage servicing to other
qualiÑed servicers or terminating our relationship with the seller/servicer. We conduct periodic operational reviews of our
single-family mortgage seller/servicers to help us better understand their control environment and its impact on the quality
of loans sold to us. We use this information to determine the terms of business we conduct with a particular seller/servicer.
We manage the credit risk associated with our multifamily seller/servicers by establishing eligibility requirements for
participation in our multifamily programs. These seller/servicers must also meet our standards for originating and servicing
multifamily loans. We conduct regular quality control reviews of our multifamily mortgage seller/servicers to determine
whether they remain in compliance with our standards.
Non-Freddie Mac Mortgage-Related Securities. Investments for our Retained portfolio expose us to institutional
credit risk on non-Freddie Mac mortgage-related securities to the extent that servicers, issuers, guarantors, or third parties
75 Freddie Mac