Freddie Mac 2009 Annual Report Download - page 162

Multifamily Underwriting Requirements and Quality Control Standards
For our purchase or guarantee of multifamily mortgage loans, we rely significantly on pre-purchase underwriting, which
includes third-party appraisals and cash flow analysis. The underwriting standards we provide to our seller/servicers focus on
loan quality measurement based, in part, on the LTV and debt service coverage ratios at origination. The DSCR is one
indicator of future credit performance. The DSCR estimates a multifamily borrower’s ability to service its mortgage
obligation using the secured property’s cash flow, after deducting non-mortgage expenses from income. The higher the
DSCR, the more likely a multifamily borrower will be able to continue servicing its mortgage obligation. Our standards for
conventional loans have maximum original LTV and minimum debt service coverage ratios that vary based on the loan
characteristics, such as loan type (new acquisition or refinancing), loan term (intermediate or longer-term), and loan features,
such as interest-only or fixed-rate interest provisions. Since the beginning of 2009, our multifamily loans are generally
underwritten with requirements for a maximum original LTV ratio of 80% and debt service coverage ratio of greater than
1.25. In certain circumstances, our standards for multifamily loans allow for certain types of loans to have an original LTV
ratio over 80% and/or a minimum debt service coverage ratio of less than 1.25, typically where this will serve our mission
and contribute to achieving our affordable housing goals. In cases where we commit to purchase or guarantee a permanent
loan upon completion of construction or rehabilitation, we generally require additional credit enhancements, since
underwriting for these loans typically requires estimates of future cash flows for calculating the debt coverage ratio that is
expected after construction or rehabilitation is completed. We allowed delegated underwriting of multifamily loans in limited
circumstances for approved lenders that deliver loans meeting targeted affordable housing goals criteria. These loans were
subject to our underwriting review (for exceptions to our criteria) prior to closing and we required loss sharing or credit
enhancement. In the fourth quarter of 2009, we announced that we will discontinue such delegated underwriting, except for
mortgages already in approved lenders’ pipelines. As of December 31, 2009 the amount of such loans in our multifamily
loan portfolio was not significant.
Multifamily Mortgage Portfolio Diversification, Characteristics and Product Types
Portfolio diversification is an important aspect of our strategy to manage mortgage credit risk. We monitor a variety of
mortgage loan characteristics which may affect the default experience on our overall mortgage portfolio, such as the LTV
ratio, DSCR, geographic concentrations and loan duration. We also monitor the performance and risk concentrations of our
multifamily loans and the underlying properties throughout the life of the loan.
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