Freddie Mac 2009 Annual Report Download - page 108

Higher Risk Components of Our Investments in Mortgage-Related Securities
As discussed below, we have exposure to subprime, Alt-A, interest-only and option ARM loans as part of our
investments in mortgage-related securities as follows:
•PCs and Structured Securities: We hold significant dollar amounts of PCs and Structured Securities as part of our
investments in securities. A portion of the single-family mortgage loans underlying our PCs and Structured Securities
are Alt-A and interest-only loans, and there are subprime and option ARM loans underlying some of our Structured
Transactions. For more information on certain higher risk categories of single-family loans underlying our PCs and
Structured Securities, see “RISK MANAGEMENT — Credit Risks — Mortgage Credit Risk.”
•Single-family non-agency mortgage-related securities: We hold non-agency mortgage-related securities backed by
subprime, option ARM, and Alt-A and other loans.
Non-Agency Mortgage-Related Securities Backed by Subprime, Option ARM and Alt-A Loans
During 2009, we did not buy or sell any non-agency mortgage-related securities backed by subprime, option ARM or
Alt-A loans. As discussed below, we recognized significant impairment on our holdings of such securities in 2009. See
“Table 30 — Net Impairment on Available-For-Sale Mortgage-Related Securities Recognized in Earnings” for more
information. We believe that the declines in fair values for these securities are attributable to poor underlying collateral
performance and limited liquidity and large risk premiums in the mortgage market.
We classify our non-agency mortgage-related securities as subprime, option ARM or Alt-A if the securities were labeled
as such when sold to us. Table 29 presents information about our holdings of these securities.
Table 29 — Non-Agency Mortgage-Related Securities Backed by Subprime, Option ARM and Alt-A Loans
(1)
Unpaid
Principal
Balance
Collateral
Delinquency
Rate
(2)
Average
Credit
Enhancement
(3)
Unpaid
Principal
Balance
Collateral
Delinquency
Rate
(2)
Average
Credit
Enhancement
(3)
December 31, 2009 December 31, 2008
(dollars in millions)
Mortgage loans:
Single-family:
Subprime first lien . ......................... $61,019 49% 29% $74,070 38% 34%
Option ARM .............................. 17,687 45 16 19,606 30 22
Alt-A
(4)
.................................. 17,998 26 11 21,015 17 14
December 31, 2009 September 30, 2009 June 30, 2009 March 31, 2009
Three Months Ended
(in millions)
Principal repayments:
(5)
Subprime — first and second liens . ......................... $2,821 $3,178 $3,421 $3,855
Option ARM . . ...................................... 527 533 474 386
Alt-A and other ...................................... 813 915 997 903
(1) See “Ratings of Available-For-Sale Non-Agency Mortgage-Related Securities” for additional information about these securities.
(2) Determined based on loans that are 60 days or more past due that underlie the securities and on information obtained from a third-party data provider.
(3) Reflects the average current credit enhancement on all such securities we hold provided by subordination of other securities held by third parties.
Excluding securities with monoline bond insurance.
(4) Excludes non-agency mortgage-related securities backed by other loans, which are primarily comprised of securities backed by home equity lines of
credit.
(5) In addition to the contractual interest payments, we receive monthly remittances of principal repayments from both voluntary prepayments on the
underlying collateral of these securities and the recoveries of liquidated loans, representing a partial return of our investment in these securities.
We have significant credit enhancements on the majority of the non-agency mortgage-related securities backed by
subprime first lien, option ARM and Alt-A loans we hold, particularly through subordination. These credit enhancements are
one of the primary reasons we expect our actual losses, through principal or interest shortfalls, to be less than the fair value
declines of these securities. However, during 2009, we experienced a rapid depletion of credit enhancements on certain of the
securities backed by subprime first lien, option ARM and Alt-A loans due to poor performance of the underlying collateral.
Unrealized Losses on Available-for-Sale Mortgage-Related Securities
At December 31, 2009, our gross unrealized losses, pre-tax, on available-for-sale mortgage-related securities were
$42.7 billion, compared to $50.9 billion at December 31, 2008. This decrease in unrealized losses is net of the impact of
$15.3 billion, pre-tax ($9.9 billion, net of tax) of other-than-temporary impairment losses recorded as a result of the adoption
of an amendment to the accounting standards for investments in debt and equity securities adopted on April 1, 2009. This
cumulative adjustment reclassified the non-credit component of previously recognized other-than-temporary impairments
from retained earnings (i.e., previously expensed) to AOCI.
We believe that unrealized losses on non-agency mortgage-related securities at December 31, 2009 were attributable to
poor underlying collateral performance, limited liquidity and large risk premiums in the non-agency mortgage market. All
securities in an unrealized loss position are evaluated to determine if the impairment is other-than-temporary. See “NOTE 6:
105 Freddie Mac