Freddie Mac 2009 Annual Report Download - page 155

Loan-to-Value Ratios
An important safeguard against credit losses on mortgage loans in our single-family mortgage portfolio is provided by
the borrowers’ equity in the underlying properties. As discussed above in “Single-Family Underwriting and Quality Control
Standards,” our charter requires that single-family mortgages with LTV ratios above 80% at the time of purchase be covered
by specified credit enhancements or participation interests. In addition, we employ other types of credit enhancements,
including pool insurance, indemnification agreements, collateral pledged by lenders and subordinated security structures.
As shown in the table above, the percentage of our single-family mortgage portfolio, based on unpaid principal balance
with estimated current LTV ratios greater than 100% was 18% and 13% at December 31, 2009 and 2008, respectively. As
estimated current LTV ratios increase, the borrower’s equity in the home decreases, which negatively affects the borrower’s
ability to refinance or to sell the property for an amount at or above the balance of the outstanding mortgage loan. If a
borrower has an estimated current LTV ratio greater than 100%, the borrower is “underwater” and is more likely to default
than other borrowers, regardless of the borrower’s financial condition. The delinquency rate for single-family loans with
estimated current LTV ratios greater than 100% was 14.80% and 8.08% as of December 31, 2009 and 2008, respectively. In
addition, as of December 31, 2009 and 2008, for the loans in our single-family mortgage portfolio with greater than 80%
estimated current LTV ratios, the borrowers had a weighted average credit score at origination of 719 and 714, respectively.
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 can be used to assess the
likelihood of a borrower’s ability to repay future obligations as expected. FICO scores 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.
Loan Purpose
Mortgage loan purpose indicates how the borrower intends to use the funds from a mortgage loan. In a purchase
transaction, the funds are used to acquire a property. In a cash-out refinance transaction, in addition to paying off existing
mortgage liens, the borrower obtains additional funds that may be used for other purposes, including paying off subordinate
mortgage liens and providing unrestricted cash proceeds to the borrower. In other refinance transactions, the funds are used
to pay off existing mortgage liens and may be used in limited amounts for certain specified purposes; such refinances are
generally referred to as “no cash-out” or “rate and term” refinances. The percentage of purchase mortgages in our single-
family portfolio acquisition volume declined in each of the last three years. Due to current economic conditions and the
prevalence of modification programs, we expect this trend will continue. Historically, cash-out refinancings have a higher
risk of default than mortgages originated in no cash-out or rate and term refinance transactions.
Property Type
Single-family mortgage loans are defined 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 residence tend to have a lower credit
risk than mortgages on investment properties or secondary residences.
Geographic Concentration
Local economic conditions can affect borrowers’ ability to repay loans and the value of the collateral underlying the
loans. Geographic dispersion provides diversification. Because our business involves purchasing mortgages from every
geographic region in the U.S., we maintain a geographically diverse single-family mortgage portfolio. While our single-
family mortgage portfolio’s geographic distribution was relatively stable from 2007 to 2009 and remains broadly diversified
across these regions, we were negatively impacted by overall home price declines in each region during the past few years.
See “NOTE 19: CONCENTRATION OF CREDIT AND OTHER RISKS” to our consolidated financial statements for more
information concerning the distribution of our single-family mortgage portfolio by geographic region.
Single-Family Mortgage Product Types
Product mix affects the credit risk profile of our total mortgage portfolio. In general, 15-year amortizing fixed-rate
mortgages exhibit the lowest default rate among the types of mortgage loans we securitize and purchase, due to the
accelerated rate of principal amortization on these mortgages and the credit profiles of borrowers who seek and qualify for
them. In a rising interest rate environment, balloon/reset and ARM borrowers typically default at a higher rate than fixed-rate
borrowers. However, during the last two years, when interest rates have generally declined, our delinquency and default rates
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