Freddie Mac 2009 Annual Report Download - page 251

Non-Agency Mortgage-Related Securities Backed by Subprime, Option ARM, Alt-A and Other Loans
We believe the unrealized losses on our non-agency mortgage-related securities are a result of poor underlying collateral
performance and limited liquidity and large risk premiums. With the exception of the other-than-temporarily impaired
securities discussed below, we have not identified any securities that were likely of incurring a contractual principal or
interest loss at December 31, 2009. As such, and based on our conclusion that we do not intend to sell these securities and it
is not more likely than not that we will be required to sell such securities before a recovery of the unrealized losses, we have
concluded that the impairment of these securities is temporary. We consider securities to be other-than-temporarily impaired
when future losses are deemed likely.
Our review of the securities backed by subprime loans, option ARM, Alt-A and other loans includes loan level default
modeling and analyses of the individual securities based on underlying collateral performance, including the collectibility of
amounts that would be recovered from primary monoline insurers. In the case of monoline insurers, we also consider factors
such as the availability of capital, generation of new business, pending regulatory action, ratings, security prices and credit
default swap levels traded on the insurers. We consider loan level information including estimated current LTV ratios, FICO
credit scores, and other loan level characteristics. We also consider the differences between the loan level characteristics of
the performing and non-performing loan populations.
Table 6.3 presents the modeled default rates and severities, without regard to subordination, that are used to determine
whether our senior interests in certain non-agency mortgage-related securities will experience a cash shortfall. Our
proprietary default model requires assumptions about future home prices, as defaults and severities are modeled at the loan
level and then aggregated. The model uses projections of future home prices at the state level. Assumptions of voluntary
prepayments derived from our proprietary prepayment models are also an input; however, given the current low level of
voluntary prepayments, they do not significantly affect the present value of expected losses.
Table 6.3 — Significant Modeled Attributes for Certain Non-Agency Mortgage-Related Securities
Subprime first lien Option ARM Fixed Rate Variable Rate Hybrid Rate
Alt-A
(1)
December 31, 2009
(dollars in millions)
Vintage Year
2004 & Prior:
Unpaid principal balance . ............................ $ 1,623 $ 143 $1,178 $ 672 $2,660
Weighted average collateral defaults
(2)
.................... 40% 43% 8% 49% 31%
Weighted average collateral severities
(3)
................... 51% 43% 36% 46% 35%
2005:
Unpaid principal balance . ............................ $ 9,919 $ 3,513 $1,482 $1,066 $4,893
Weighted average collateral defaults
(2)
.................... 59% 63% 26% 63% 44%
Weighted average collateral severities
(3)
................... 60% 53% 44% 50% 43%
2006:
Unpaid principal balance . ............................ $24,215 $ 8,673 $ 700 $1,482 $1,502
Weighted average collateral defaults
(2)
.................... 69% 72% 38% 68% 49%
Weighted average collateral severities
(3)
................... 64% 60% 51% 58% 48%
2007 & Later:
Unpaid principal balance . ............................ $25,262 $ 5,358 $ 187 $1,724 $ 452
Weighted average collateral defaults
(2)
.................... 66% 66% 58% 66% 61%
Weighted average collateral severities
(3)
................... 64% 60% 58% 57% 56%
Total:
Unpaid principal balance . ............................ $61,019 $17,687 $3,547 $4,944 $9,507
Weighted average collateral defaults
(2)
.................... 65% 68% 24% 64% 42%
Weighted average collateral severities
(3)
................... 63% 58% 44% 54% 42%
(1) Excludes non-agency mortgage-related securities backed by other loans, which are primarily comprised of securities backed by home equity lines of
credit.
(2) The expected cumulative default rate expressed as a percentage of the current collateral unpaid principal balance.
(3) The expected average loss given default calculated as the ratio of cumulative loss over cumulative default rate for each security.
In evaluating our non-agency mortgage-related securities backed by subprime, option ARM, Alt-A and other loans for
other-than-temporary impairment, we noted and specifically considered that the percentage of securities that were AAA-rated
and the percentage that were investment grade had decreased since acquisition. Although some ratings have declined, the
ratings themselves have not been determinative that a loss is likely. While we consider credit ratings in our analysis, we
believe that our detailed security-by-security analyses provide a more consistent view of the ultimate collectibility of
contractual amounts due to us. As such, we have impaired securities with current ratings ranging from CCC to AAA and
have determined that other securities within the same ratings were not other-than-temporarily impaired. However, we
carefully consider individual ratings, especially those below investment grade, including changes since December 31, 2009.
248 Freddie Mac