Freddie Mac 2009 Annual Report Download - page 315

Although we do not categorize single-family mortgage loans we purchase or guarantee as prime or subprime, we
recognize that there are a number of mortgage loan types with certain characteristics that indicate a higher degree of credit
risk. For example, since the U.S. mortgage market has experienced declining home prices and home sales for an extended
period, there are mortgage loans with higher LTV ratios that have a higher risk of default, especially during housing and
economic downturns, such as the one the U.S. has experienced for the past few years. In addition, a borrower’s credit score
is a useful measure for assessing the credit quality of the borrower. Statistically, borrowers with higher credit scores are more
likely to repay or have the ability to refinance than those with lower scores. The industry has viewed those borrowers with
credit scores below 620 based on the FICO scale as having a higher risk of default.
Presented below is a summary of the credit performance of certain single-family mortgage loans held by us as well as
those underlying our PCs, Structured Securities and other mortgage-related financial guarantees.
Table 19.3 — Credit Performance of Certain Higher Risk Single-Family Loans in the Single-Family Mortgage
Portfolio
(1)
2009 2008 2009 2008
Percentage of
Portfolio
(1)
Delinquency
Rate
(2)
As of December 31,
Alt-A ........................................................................ 8% 10% 12.3% 5.6%
Option ARM loans . . . . ........................................................... 1% 1% 17.9% 8.7%
Interest-only loans . . . . ........................................................... 7% 9% 17.6% 7.6%
Original LTV greater than 90%
(3)
loans . . ............................................... 8% 8% 9.1% 4.8%
Lower FICO scores (less than 620) .................................................... 4% 4% 14.9% 7.8%
(1) Based on the unpaid principal balance of the single family loans held by us on our consolidated balance sheets and those underlying our PCs,
Structured Securities and other mortgage-related guarantees. Excludes certain Structured Transactions, that portion of Structured Securities that is
backed by Ginnie Mae Certificates and other guarantees of HFA bonds.
(2) Based on the number of mortgages 90 days or more delinquent or in foreclosures. Mortgage loans whose contractual terms have been modified under
agreement with the borrower are not counted as delinquent, if the borrower is less than 90 days past due under the modified terms. Delinquencies on
mortgage loans underlying certain Structured Securities, long-term standby commitments and Structured Transactions may be reported on a different
schedule due to variations in industry practice.
(3) Based on our first lien exposure on the property. Includes the credit-enhanced portion of the loan and excludes any secondary financing by third parties.
During 2009 and 2008, a significant percentage of our charge-offs and REO acquisition activity was associated with
these loan groups. The percentages in the table above are not exclusive. In other words, loans that are included in the
interest-only loan percentage may also be included in the Alt-A documentation loan percentage. Loans with a combination
of these attributes will have an even higher risk of default than those with isolated characteristics.
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.
We also own investments in non-agency mortgage-related securities that are backed by subprime, option ARM and
Alt-A loans. We classified securities as subprime, option ARM or Alt-A if the securities were labeled as subprime, option
ARM or Alt-A when sold to us. See “NOTE 6: INVESTMENTS IN SECURITIES” for further information on these
categories and other concentrations in our investments in securities.
Mortgage Lenders, or Seller/Servicers
A significant portion of our single-family mortgage purchase volume is generated from several large mortgage lenders,
or seller/servicers, with whom we have entered into mortgage purchase volume commitments that provide for these
customers to deliver us a specified dollar amount or minimum percentage of their total sales of conforming loans. Our top
10 single-family seller/servicers provided approximately 74% of our single-family purchase volume during the twelve
months ended December 31, 2009. Wells Fargo Bank, N.A. and Bank of America, N.A. accounted for 27% and 11% of our
single-family mortgage purchase volume and were the only single-family seller/servicers that comprised 10% or more of our
purchase volume during the twelve months ended December 31, 2009. Our top seller/servicers are among the largest
mortgage loan originators in the U.S. in the single-family market. We are exposed to the risk that we could lose purchase
volume to the extent these arrangements are terminated without replacement from other lenders.
We are exposed to institutional credit risk arising from the potential insolvency or non-performance by our seller/
servicers, including non-performance of their repurchase obligations arising from the breaches of representations and
warranties made to us for loans that they underwrote and sold to us. Our seller/servicers also service single-family loans that
we hold and that back our PCs, which includes having an active role in our loss mitigation efforts. We also have exposure to
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