Freddie Mac 2006 Annual Report Download - page 83

these home price changes on the underlying loan-to-value ratio of mortgages in our portfolio. While home prices rose
signiÑcantly over the previous 10 years, this growth has slowed signiÑcantly in 2006 and home prices have declined in some
parts of the United States. Home price appreciation over the past several years has increased the values of properties
underlying the mortgages in our portfolio. We monitor regional geographic markets for changes in these trends, particularly
with respect to new loans originated in regional markets that have had signiÑcant home price appreciation, and we may seek
to reinsure a portion of this risk should we determine that the possibility of such changes warrants action. Historical
experience has shown that defaults are less likely to occur on mortgages with lower estimated current loan-to-value ratios. In
the event of a default, lower loan-to-value ratios generally 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 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, 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. At December 31, 2006, 2005 and 2004, the weighted average credit score for the Total mortgage portfolio
(based on the credit score at origination) remained high at 725, 725 and 723, respectively, indicating borrowers with strong
credit quality.
Loan Purpose. Mortgage loan purpose indicates how the borrower intends to use the funds from a mortgage loan. The
three general categories are: purchase, cash-out reÑnance and other reÑnance. In a purchase transaction, funds are used to
acquire a property. In a cash-out reÑnance transaction, in addition to paying oÅ an existing Ñrst mortgage lien, the borrower
obtains additional funds that may be used for other purposes, including paying oÅ subordinate mortgage liens and providing
unrestricted cash proceeds to the borrower. In other reÑnance transactions, the funds are used to pay oÅ an existing Ñrst
mortgage lien and may be used in limited amounts for certain speciÑed purposes; such reÑnances are generally referred to as
""no cash-out'' or ""rate and term'' reÑnances. Other reÑnance transactions also include reÑnance mortgages for which the
delivery data provided was not suÇcient for us to determine whether the mortgage was a cash-out or a no cash-out reÑnance
transaction. The portion of our single-family mortgage purchases that were reÑnance-related declined in 2006 as interest
rates increased during the year. Given similar loan characteristics (e.g., loan-to-value ratios), purchase transactions have the
lowest likelihood of default followed by no cash-out reÑnances and then cash-out reÑnances. As a practical matter, however,
no cash-out reÑnances tend to have lower loan-to-value ratios, borrowers with higher credit scores and better overall
performance than purchase transactions.
Property Type. Single-family mortgage loans are deÑned as mortgages secured by housing with up to four living units.
Mortgages on one-unit properties tend to have lower credit risk than mortgages on multiple-unit properties.
Occupancy Type. Borrowers may purchase a home as a primary residence, second/vacation home or investment
property that is typically a rental property. Mortgage loans on properties occupied by the borrower as a primary or secondary
residence tend to have a lower credit risk than mortgages on investment properties.
Geographic Concentration. Because our business involves purchasing mortgages from every geographic region in the
U.S., we maintain a geographically diverse mortgage portfolio. This diversiÑcation generally mitigates credit risks arising
from changing local economic conditions. Our Total mortgage portfolio's geographic distribution was relatively stable from
2004 to 2006, and remains broadly diversiÑed across these regions. See ""NOTE 17: CONCENTRATION OF CREDIT
AND OTHER RISKS'' to our consolidated Ñnancial statements for more information concerning the distribution of our
Total mortgage portfolio by geographic region.
Loss Mitigation Activities. Loss mitigation activities are a key component of our strategy for managing and resolving
troubled assets and lowering credit losses. Our single-family loss mitigation strategy emphasizes early intervention in
delinquent mortgages and providing alternatives to foreclosure. Other single-family loss mitigation activities include
providing our single-family servicers with default management tools designed to help them manage non-performing loans
more eÅectively and support fulÑllment of our mission by assisting borrowers in retaining home ownership. Foreclosure
alternatives are intended to reduce the number of delinquent mortgages that proceed to foreclosure and, ultimately, mitigate
our total credit losses by eliminating a portion of the costs related to foreclosed properties and avoiding the credit loss in
REO. Repayment plans, the most common type of foreclosure alternative, mitigate our credit losses because they assist
borrowers in returning to compliance with the original terms of their mortgages. Forbearance agreements, the second most
common type of foreclosure alternative, provide a temporary suspension of the foreclosure process to allow additional time
for the borrower to return to compliance with the original terms of the borrower's mortgage or to implement another
foreclosure alternative. Loan modiÑcations, the third most common type of foreclosure alternative, involve changing the
terms of a mortgage, such as the loan term. The total number of loans with foreclosure alternatives was approximately
59,100, 60,000 and 48,300 for the years ended December 31, 2006, 2005 and 2004, respectively. In 2005, the total number of
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