Freddie Mac 2009 Annual Report Download - page 74

Our servicers have a key role in the success of our loss mitigation activities. The significant increases in delinquent loan
volume and the deteriorating conditions of the mortgage market during 2008 and 2009 placed a strain on the loss mitigation
resources of many of our mortgage servicers. To the extent servicers do not complete loan modifications with eligible
borrowers or are unable to process the increasing volume of foreclosures, our credit losses could increase.
Investments in Non-Agency Mortgage-Related Securities
Our investments in non-agency mortgage-related securities also were affected by the weak credit conditions in 2009.
The table below illustrates the increases in delinquency rates for loans that back our subprime first lien, option ARM and
Alt-A securities and associated gross unrealized losses, pre-tax. Unrealized losses on non-agency mortgage-related securities
at December 31, 2009 were impacted by poor underlying collateral performance, decreased liquidity and larger risk
premiums in the non-agency mortgage market. Given our forecast that national home prices are likely to decline over the
near term, the performance of the loans backing these securities could continue to deteriorate. For additional information on
the unpaid principal balances and average credit enhancements of our investments in non-agency mortgage-related securities
backed by subprime first lien, option ARM and Alt-A loans see “CONSOLIDATED BALANCE SHEETS ANALYSIS —
Table 29 — Non-Agency Mortgage-Related Securities Backed by Subprime, Option ARM and Alt-A Loans.”
Table 9 — Credit Statistics, Non-Agency Mortgage-Related Securities Backed by Subprime, Option ARM and Alt-A
Loans
12/31/2009 09/30/2009 06/30/2009 03/31/2009 12/31/2008
As of
(dollars in millions)
Delinquency rates:
(1)
Non-agency mortgage-related securities backed by:
Subprime first lien . ........................................ 49% 46% 44% 42% 38%
Option ARM . . . . . ........................................ 45 42 40 36 30
Alt-A
(2)
................................................. 26 24 22 20 17
Cumulative collateral loss:
(3)
Non-agency mortgage-related securities backed by:
Subprime first lien . ........................................ 13% 12% 10% 7% 6%
Option ARM . . . . . ........................................ 76421
Alt-A
(2)
................................................. 43321
Gross unrealized losses, pre-tax
(4)(5)
................................. $33,124 $38,039 $41,157 $27,475 $30,671
Total other-than-temporary impairment of available-for-sale securities for the three
months ended
(5)
............................................. $ 1,115 $ 3,235 $10,380 $ 6,956 $ 6,794
Portion of other-than-temporary impairment recognized in AOCI for the three
months ended
(5)
............................................. 534 2,105 8,223 — —
Net impairment of available-for-sale securities recognized in earnings for the
three months ended
(5)
....................................... $ 581 $ 1,130 $ 2,157 $ 6,956 $ 6,794
(1) Based on the number of loans that are 60 days or more past due as reported by servicers.
(2) Excludes non-agency mortgage-related securities backed by other loans primarily comprised of securities backed by home equity lines of credit.
(3) Based on the actual losses incurred on the collateral underlying these securities. Actual losses incurred on the securities that we hold are significantly
less than the losses on the underlying collateral as presented in this table, as a majority of the securities we hold include significant credit
enhancements, particularly through subordination.
(4) Gross unrealized losses, pre-tax, represent the aggregate of the amount by which amortized cost exceeds fair value measured at the individual lot level.
(5) Upon the adoption of an amendment to the accounting standards for investments in debt and equity securities on April 1, 2009, the amount of credit
losses and other-than-temporary impairment related to securities where we have the intent to sell or where it is more likely than not that we will be
required to sell is recognized in our consolidated statements of operations within the line captioned net impairment on available-for-sale securities
recognized in earnings. The amount of other-than-temporary impairment related to all other factors is recognized in AOCI. See “NOTE 1: SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES — Recently Adopted Accounting Standards — Change in the Impairment Model for Debt Securities” to
our consolidated financial statements. Includes non-agency mortgage-related securities backed by other loans primarily comprised of securities backed
by home equity lines of credit.
We held unpaid principal balances of $100.7 billion of non-agency mortgage-related securities backed by subprime,
option ARM, Alt-A and other loans as of December 31, 2009, compared to $119.5 billion as of December 31, 2008. This
decrease is due to the receipt of monthly remittances of principal repayments from both the recoveries of liquidated loans
and, to a lesser extent, voluntary prepayments on the underlying collateral representing a partial return of our investment in
these securities. We recorded net impairment of available-for-sale securities recognized in earnings on non-agency mortgage-
related securities backed by subprime, option ARM, Alt-A and other loans of approximately $10.8 billion during 2009. See
“NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES — Recently Adopted Accounting Standards —
Change in the Impairment Model for Debt Securities” to our consolidated financial statements for information on how other-
than-temporary impairments are recorded on our financial statements commencing in the second quarter of 2009.
Pre-tax unrealized losses on securities backed by subprime, option ARM, Alt-A and other loans reflected in AOCI were
$33.1 billion at December 31, 2009. These unrealized losses include: (1) $15.3 billion, pre-tax ($9.9 billion, net of tax), of
other-than-temporary impairment losses reclassified from retained earnings to AOCI as a result of the second quarter 2009
adoption of an amendment to the accounting standards for investments in debt and equity securities; and (2) increases in fair
71 Freddie Mac