Freddie Mac 2009 Annual Report Download - page 102

intend to sell these securities and it is not more likely than not that we will be required to sell such securities before recovery
of the unrealized losses.
Segment Earnings for our Multifamily segment decreased 3%, to $589 million, for 2008 compared to $610 million for
2007, primarily due to an increase in provision for credit losses, which was partially offset by higher LIHTC partnership tax
benefits. We also recognized higher management and guarantee fee income during 2008 due to higher average balances of
our multifamily guarantee portfolio, as compared to 2007. Loan purchases for the multifamily loan and guarantee portfolios
on a combined basis were $24 billion for 2008, an 11% increase compared to 2007. Non-interest loss declined to
$338 million in 2008 from $386 million in 2007, due to an increase in management and guarantee income and, to a lesser
extent, an increase in bond application fees during 2008 compared to 2007.
The multifamily mortgage market differs from the residential single-family market in several respects. The likelihood
that a multifamily borrower will make scheduled payments on its mortgage is a function of a property’s cash flow, which is
determined by the ability of the property to generate income sufficient to make those payments, and is affected by rent
levels, vacancy rates and the borrower’s operating expenses. The multifamily market is affected by the balance between the
supply of, and demand for, rental housing (both multifamily and single-family), which in turn is affected by unemployment
rates, the number of new units added to the rental housing supply, rates of household formation and the relative cost of
owner-occupied housing alternatives. Due to a weakening employment market in the U.S. and other factors, apartment
market fundamentals continued to deteriorate in 2009, as reflected by increased vacancy rates and declining rent levels. This
led to a decrease in property-level net operating income and DSCR. Additionally, apartment values dropped in 2009, which
led to an increase in current LTV ratios. Given the significant weakness currently being experienced in the U.S. economy, it
is likely that apartment fundamentals in the U.S. will continue to deteriorate during 2010, which could increase delinquencies
and cause us to incur additional credit losses. Multifamily capital market conditions also deteriorated in 2009, with a
significant decline in available credit and stricter underwriting requirements by investors.
We were very active in the multifamily market in 2009 and 2008, through our purchase or guarantee of new loans
totaling approximately $17 billion and $24 billion, respectively. Our continued high level of activity during 2009 relative to
the multifamily market, reflects our priority to provide support for the U.S. mortgage market during this period of
uncertainty. We expect lower purchase and guarantee activity in 2010, as we expect loan volumes in the multifamily market
to remain low or decline from 2009 levels.
Our Multifamily segment provision for credit losses increased to $573 million in 2009 from $229 million in 2008. The
increase in 2009 is mainly a result of the economic recession, higher rates of unemployment and further deterioration in
multifamily market fundamentals such as higher property vacancy rates and declines in the average monthly apartment rental
rates, which adversely affected our multifamily borrowers. In determining our loan loss reserve estimate, we utilize available
economic data related to commercial real estate as well as assumptions of loss severity and cure rates. The cure rate is the
percent of delinquent loans that return to a current payment status. For those loans we identify as having deteriorating
underlying characteristics such as estimated current LTV ratio and DSCRs, we evaluate each individual property, using
estimates of property value to determine if a specific reserve is needed for the loan. Although we use the most recently
available results of our multifamily borrowers to assess a property’s value, there is a lag in reporting as they prepare their
results in the normal course of business.
The delinquency rate for loans in the multifamily loan portfolio and multifamily guarantee portfolio, on a combined
basis, was 0.15% and 0.01% as of December 31, 2009 and 2008, respectively. Our multifamily delinquent loans as of
December 31 2009 are principally loans on properties located in Georgia and Texas. The majority of multifamily loans
included in our delinquency rates are credit-enhanced for which we believe the credit enhancement will mitigate our
expected losses on those loans. The multifamily delinquency rate of credit-enhanced loans as of December 31, 2009 and
2008, was 1.02% and 0.12%, respectively, while the delinquency rate for non-credit-enhanced loans was 0.04% and —%,
respectively. See “Table 8 — Credit Statistics, Multifamily Loan and Guarantee Portfolios” for quarterly data on delinquency
rates and non-performing loans. Market fundamentals for multifamily properties experienced the greatest deterioration during
2009 in Florida, Georgia, Texas and California. Refinance risk, which is the risk that a multifamily borrower with a maturing
balloon mortgage will not be able to refinance and will instead default, is high given the state of the economy, lack of
liquidity, deteriorating property cash flows, and declining property market values. If multifamily market fundamentals remain
under pressure, then we expect our multifamily credit losses and delinquencies could continue to increase during 2010.
Prior to 2008, we invested as a limited partner in LIHTC partnerships formed for the purpose of providing equity
funding for affordable multifamily rental properties. Other-than-temporary impairments that reflect expected or realized
credit-related losses on investment securities or a change in expected earnings to be generated from our LIHTC investments
are realized in earnings immediately in both our GAAP results and Segment Earnings. Any additional impairment is not
recognized for Segment Earnings. We recognized a $3.4 billion write-down of our LIHTC investments during the fourth
99 Freddie Mac