Freddie Mac 2009 Annual Report Download - page 42

unemployment rates during 2009. See “MD&A — CONSOLIDATED BALANCE SHEETS ANALYSIS — Mortgage
Loans — Credit Performance of Certain Higher Risk Single-Family Mortgage Loans on our Consolidated Balance Sheets”
for information on our classification of loans and mortgage-related securities as Alt-A.
For a significant percentage of the mortgages we purchase, we have agreed to permit our seller/servicers to underwrite
the loans using alternative automated underwriting systems. These alternative systems may use different standards than our
own, including, in some cases, lower standards with respect to borrower credit characteristics. Those differences may
increase our credit risk and may result in increases in credit losses.
Beginning in 2008, the conforming loan limits were significantly increased for mortgages originated in certain “high
cost” areas (the initial increases applied to loans originated after July 1, 2007). Due to our relative lack of experience with
these larger loans, purchases pursuant to the high cost conforming loan limits may also expose us to greater credit risks.
We are exposed to increased credit risk related to the subprime, Alt-A and option ARM loans that back our non-agency
mortgage-related securities investments.
Our investments in non-agency mortgage-related securities have included securities that are backed by subprime, Alt-A
and option ARM loans. In the past several years, mortgage loan delinquencies and credit losses in the U.S. mortgage market
have substantially increased, particularly in the subprime, Alt-A and option ARM sectors of the residential mortgage market.
In addition, home prices declined significantly, after extended periods during which home prices appreciated. If delinquency
and loss rates on subprime, Alt-A and option ARM loans continue to increase, or there is a further decline in home prices,
we could experience additional GAAP losses due to other-than-temporary impairments on our investments in these non-
agency mortgage-related securities. In addition, the fair value of these investments has declined and may decline further due
to additional ratings downgrades or market events. Any credit enhancements covering these securities, including
subordination, may not prevent us from incurring losses. During 2009, we experienced a rapid depletion of credit
enhancements on certain of the securities backed by subprime first lien, option ARM and Alt-A loans due to poor
performance in the underlying collateral. See “MD&A — CONSOLIDATED BALANCE SHEETS ANALYSIS —
Investments in Securities” for information about the credit ratings for these securities and the extent to which these securities
have been downgraded.
The credit losses we experience in future periods as a result of the housing and economic crisis are likely to be larger,
perhaps substantially larger, than our current loan loss reserves.
Our loan loss reserves, as reflected on our consolidated balance sheets, do not reflect our estimate of the future credit
losses inherent in our single-family and multifamily mortgage loans, including those underlying our financial guarantees.
Rather, pursuant to GAAP, our reserves only reflect probable losses we believe we have already incurred as of the balance
sheet date. Because of the housing and economic crisis, there is significant uncertainty regarding the full extent of future
credit losses. The credit losses we experience in future periods will adversely affect our business, results of operations,
financial condition, liquidity and net worth.
Further declines in U.S. home prices or other adverse changes in the U.S. housing market could negatively impact our
business and increase our losses.
Throughout 2009, the U.S. housing market continued to experience adverse trends, including continued price
depreciation, and rising delinquency and default rates. These conditions, coupled with high unemployment, led to significant
increases in our loan delinquencies and credit losses and higher provisioning for loan losses, all of which have adversely
affected our financial condition and results of operations. We expect that national home prices will continue to decrease in
2010, which could result in a continued increase in delinquencies or defaults and a level of credit-related losses higher than
our expectations when our guarantees were issued. For more information, see “MD&A — RISK MANAGEMENT — Credit
Risks.” Government programs designed to strengthen the U.S. housing market, such as the MHA Program, may fail to
achieve expected results, and new programs could be instituted that cause our credit losses to increase.
Our business volumes are closely tied to the rate of growth in total outstanding U.S. residential mortgage debt and the
size of the U.S. residential mortgage market. The rate of growth in total residential mortgage debt was (1.3)% in 2009
compared to (0.4)% in 2008. If total outstanding U.S. residential mortgage debt were to continue to decline, there could be
fewer mortgage loans available for us to purchase, and we could face more competition to purchase a smaller number of
loans.
Due to a weakening employment market in the U.S. and other factors, apartment market fundamentals continued to
deteriorate in 2009, as reflected by increased property vacancy rates and declining average monthly rent levels. Given the
significant weakness currently being experienced in the U.S. economy, it is likely that apartment fundamentals will continue
to deteriorate during 2010, which could increase delinquencies and cause us to incur additional credit losses relating to our
multifamily activities.
39 Freddie Mac