Freddie Mac 2009 Annual Report Download - page 156

on adjustable-rate and balloon/reset mortgage loans on a relative basis, have been as high as, or higher than, fixed-rate loans
since these borrowers are also susceptible to declining housing and economic conditions and/or had other higher risk
characteristics.
The primary mortgage products within our single-family mortgage portfolio are conventional first lien, fixed-rate
mortgage loans. From 2004 to 2008, there was a rapid proliferation of mortgage product types designed to address a variety
of borrower and lender needs, including many variable, or adjustable, rate mortgage products and many with reduced income
and assets documentation requirements. While features of these products had been on the market for some time, their
prevalence in the market and in our total mortgage portfolio increased in 2006 and 2007, though it has decreased since that
time. Despite an increase in adjustable-rate and optional payment mortgages in the origination market during that period, our
total mortgage portfolio remained predominately single-family long-term fixed-rate products.
While we classified certain loans as subprime or Alt-A for purposes of the discussion below and elsewhere in this
Form 10-K, there is no universally accepted definition of subprime or Alt-A, and our classifications of such loans may differ
from those used by other companies. In addition, we do not rely primarily on these loan classifications to evaluate the credit
risk exposure relating to such loans in our single-family mortgage portfolio. Through our delegated underwriting process,
mortgage loans and the borrowers’ ability to repay the loans are evaluated using several critical risk characteristics, including
but not limited to the borrower’s credit score and credit history, the borrower’s monthly income relative to debt payments,
LTV ratio, type of mortgage product and occupancy type. For information on our exposure to option ARM and adjustable-
rate loans through our holdings of non-agency mortgage-related securities, see “CONSOLIDATED BALANCE SHEETS
ANALYSIS — Investments in Securities.”
Interest-Only Loans
Our single-family mortgage portfolio contained interest-only loans totaling $129.9 billion and $160.6 billion in unpaid
principal balance as of December 31, 2009 and 2008, respectively. We purchased $0.8 billion and $23.1 billion of these
loans during 2009 and 2008, respectively. These loans have an initial period during which the borrower pays interest-only
and at a specified date the monthly payment changes to begin reflecting repayment of principal until maturity. These types
of loans have experienced higher delinquency rates than other mortgage products. The average FICO score at origination
associated with interest-only loans in our single-family mortgage portfolio was 720 at both December 31, 2009 and 2008.
Option ARM Loans
Originations of option ARM loans in the market declined substantially since 2007. We did not purchase option ARM
mortgage loans in our single-family mortgage portfolio during 2009. At December 31, 2009, option ARM loans represented
approximately 1% of the unpaid principal balance of our single-family mortgage portfolio. These types of loans have
experienced significantly higher delinquency rates than other mortgage products since most of them have initial periods
during which the payment options are in place until a specified date on which the terms are recast. The amount of negative
amortization recorded for option ARM loans during 2009 and 2008 was $5.6 million and $141.9 million, respectively.
Adjustable-Rate Mortgage Loans
Table 59 presents information for single-family mortgage loans both on our consolidated balance sheet as well as those
underlying our PCs and Structured Securities, excluding Structured Transactions, at December 31, 2009 that contain
adjustable payment terms. The reported balances in the table are aggregated by adjustable-rate loan product type and
categorized by year of the next scheduled contractual reset date. At December 31, 2009, approximately 50% of the
adjustable-rate single-family mortgage loans underlying our PCs and Structured Securities have interest rates that are
scheduled to reset in 2010 or 2011. The timing of the actual reset dates may differ from those presented due to a number of
factors, including refinancing or exercising of other provisions within the terms of the mortgage.
Table 59 — Single-Family Scheduled Adjustable-Rate Resets by Year at December 31, 2009
(1)
2010 2011 2012 2013 2014 Thereafter Total
(in millions)
ARMs/amortizing . .............................. $29,004 $11,030 $ 5,472 $ 5,655 $ 3,940 $ 5,891 $ 60,992
ARMs/interest-only
(2)
............................. 16,825 21,385 23,579 14,668 6,846 15,138 98,441
Balloon/resets . . . . .............................. 3,048 1,577 500 129 12 — 5,266
Adjustable-rate loans
(3)
/balloons . . . . .................. $48,877 $33,992 $29,551 $20,452 $10,798 $21,029 $164,699
(1) Based on the unpaid principal balances of mortgage products that contain adjustable-rate interest provisions. These reported balances are based on the
unpaid principal balance of the underlying mortgage loans and do not reflect the publicly-available security balances we use to report the composition
of our PCs and Structured Securities. Excludes mortgage loans underlying Structured Transactions since the adjustable-rate reset information was not
available for these loans.
(2) Reflects the principal balance of interest-only loans that reset and begin amortization of principal in each of the years shown.
(3) Represents the portion of the unpaid principal balances that are scheduled to reset during the period specified above.
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