Freddie Mac 2009 Annual Report Download - page 166

met before we are entitled to recover under the policy. Pool insurance proceeds are generally received five to six months
after disposition of the underlying property.
Other forms of credit enhancements on our single-family mortgage portfolio include government insurance or
guarantees, collateral (including cash or high-quality marketable securities) pledged by a lender, excess interest and
subordinated security structures. At December 31, 2009 and 2008, respectively, the maximum amount of losses we could
recover under other forms of credit enhancements in connection with loans underlying our issued PCs and Structured
Securities, excluding the loans that are underlying Structured Transactions in Table 63 below, was $0.8 billion and
$0.5 billion.
The table below provides information on credit enhancements and credit performance for our single-family Structured
Transactions.
Table 63 — Credit Enhancement and Credit Performance of Single-Family Structured Transactions
(1)
Structured Transaction Type 2009 2008
Average Credit
Enhancement
Coverage
(2)
Delinquency
Rate
(3)
2009 2008
Unpaid Principal
Balance at
December 31,
Year Ended
December 31,
Credit Losses
(4)
(in millions) (in millions)
Pass-through
(5)
...................................... $19,314 $18,335 —% 4.54% $316 $77
Overcollateralization
(6)
................................ 4,527 5,250 17.31% 24.09% 2 3
Total Single-Family Structured Transactions . . . ............... $23,841 $23,585 3.29% 9.44% $318 $80
(1) Credit enhancement percentages for each category are calculated based on information from third-party financial data providers and exclude certain
loan-level credit enhancements, such as private mortgage insurance, that may also afford additional protection to us. In addition, we have excluded
unpaid principal balances of $3.1 billion related to single-family Structured Transactions backed by HFA bonds for which delinquency data on
underlying loans is not available.
(2) Average credit enhancement represents a weighted average coverage percentage, is based on unpaid principal balances and includes overcollateralization
and subordination at December 31, 2009.
(3) Based on the number of loans that are past due 90 days or more, or in the process of foreclosure at December 31, 2009.
(4) Represents the total of our guaranteed payments that has exceeded the remittances of the underlying collateral and includes amounts charged-off during
the period. Charge-offs are the amount of contractual principal balance that has been discharged in order to satisfy the mortgage and extinguish our
guarantee.
(5) Includes $9.6 billion and $10.8 billion of option ARM mortgages that back these securities at December 31, 2009 and 2008, respectively, and the
delinquency rate on these loans was 17.93% and 9.0%, respectively.
(6) Includes $1.6 billion and $1.9 billion at December 31, 2009 and 2008, respectively, that are securitized FHA/VA loans.
The delinquency rates and credit losses associated with single-family Structured Transactions, excluding those backed
by HFA bonds, increased significantly during 2009 compared to prior years. We increased our loan loss reserve associated
with these guarantees from approximately $0.5 billion as of December 31, 2008 to approximately $1.8 billion as of
December 31, 2009. Our credit losses on Structured Transactions during 2009 are principally related to option ARM loans
underlying several of these transactions. The majority of the option ARM loans underlying our pass-through Structured
Transactions were purchased from Washington Mutual Bank and are subject to our agreement with JPMorgan Chase, which
acquired Washington Mutual Bank in September 2008. We are continuing to work with the servicers of the loans underlying
our Structured Transactions on their loss mitigation efforts. See “Institutional Credit Risk — Mortgage Seller/Servicers” for
further information.
We also use credit enhancements to mitigate risk of loss on certain multifamily mortgages and revenue bonds.
Typically, we require credit enhancements on loans in situations where we delegated the underwriting process for the loan to
the seller/servicer, which provides first loss coverage on the mortgage loan. In addition to other circumstances, we may also
require credit enhancements during construction or rehabilitation in cases where we commit to purchase or guarantee a
permanent loan upon completion and in cases where occupancy has not yet reached a level that produces the operating
income that was the basis for underwriting the mortgage. The total of multifamily mortgage loans on our consolidated
balance sheets and underlying our PCs and Structured Securities for which we have credit enhancement coverage was
$11.5 billion and $10.6 billion as of December 31, 2009 and December 31, 2008, respectively, and we had maximum
potential coverage of $3.1 billion and $3.4 billion, respectively.
Other Credit Risk Management Activities
To compensate us for unusual levels of risk in some mortgage products, we may charge upfront delivery fees above a
base management and guarantee fee, which are calculated based on credit risk factors such as the mortgage product type,
loan purpose, LTV ratio and other loan or borrower characteristics. In addition, we occasionally use credit derivatives in
situations where we believe they will benefit our credit risk management strategy. These arrangements are intended to reduce
our credit-related expenses, thereby improving our overall returns.
We implemented certain increases in delivery fees, which are paid at the time of securitization as well as higher or new
upfront fees for certain mortgages deemed to be higher risk based on combinations of product type, property type, loan
163 Freddie Mac