Freddie Mac 2010 Annual Report Download - page 123

Loan-to-Value Ratios
An important safeguard against credit losses on mortgage loans in our single-family credit guarantee portfolio is
provided by the borrowers’ equity in the underlying properties. As discussed in “BUSINESS — Our Business,” our charter
requires that single-family mortgages with LTV ratios above 80% at the time of purchase be covered by specified credit
enhancements or participation interests. In addition, we employ other types of credit enhancements, including pool insurance,
indemnification agreements, collateral pledged by lenders and subordinated security structures.
As shown in Table 42, the percentage of borrowers in our single-family credit guarantee portfolio, based on UPB, with
estimated current LTV ratios greater than 100% was 18% as of both December 31, 2010 and December 31, 2009. As
estimated current LTV ratios increase, the borrower’s equity in the home decreases, which negatively affects the borrower’s
ability to refinance or 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. The serious delinquency rate for single-family loans with estimated current LTV ratios greater than
100% was 14.9% and 14.8% as of December 31, 2010 and December 31 2009, respectively. In addition, as of December 31,
2010 and 2009, for the loans in our single-family credit guarantee portfolio with greater than 80% estimated current LTV
ratios, the borrowers had a weighted average credit score at origination of 721 and 719, respectively.
Credit Score
Credit scores are a useful measure for assessing the credit quality of a borrower. Credit scores are numbers reported by
credit repositories, based on statistical models, that summarize an individual’s credit record. FICO scores are the most
commonly used credit scores today. FICO scores are ranked on a scale of approximately 300 to 850 points. Statistically,
borrowers with higher credit scores are more likely to repay or have the ability to refinance than those with lower scores.
Loan Purpose
Mortgage loan purpose indicates how the borrower intends to use the funds from a mortgage loan. In a purchase
transaction, the funds are used to acquire a property. In a cash-out refinance transaction, in addition to paying off existing
mortgage liens, the borrower obtains additional funds that may be used for other purposes, including paying off subordinate
mortgage liens and providing unrestricted cash proceeds to the borrower. In other refinance transactions, the funds are used
to pay off existing mortgage liens and may be used in limited amounts for certain specified purposes; such refinances are
generally referred to as “no cash-out” or “rate and term” refinances. The percentage of purchase transactions in our single-
family loan acquisition volume declined significantly in 2009 and remained at low levels during 2010. Due to continued
lower interest rates, we expect refinance activity to remain high in 2011, though it will likely decline from 2010 levels.
Historically, cash-out refinancings have a higher risk of default than mortgages originated in no cash-out, or rate and term,
refinance transactions.
Property Type
Townhomes and detached single-family houses are the predominant type of single-family property. Condominiums are a
property type that historically experiences greater volatility in home prices than detached single-family residences.
Condominium loans in our single-family credit guarantee portfolio have a higher composition of first-time homebuyers and
homebuyers whose purpose is for investment, or a second home. In practice, investors and second home borrowers often seek
to finance the condominium purchase with loans having a higher original LTV ratio than other borrowers. Approximately
41% of the condominium loans within our single-family credit guarantee portfolio are in California, Florida, and Illinois,
which are among the states that have been most adversely affected by the economic recession and housing downturn.
Condominium loans comprised 15% and 13% of our credit losses during the years ended December 31, 2010 and 2009,
respectively, while these loans comprised 8% of our single-family credit guarantee portfolio at both dates.
Occupancy Type
Borrowers may purchase a home as a primary residence, second/vacation home or investment property that is typically a
rental property. Mortgage loans on properties occupied by the borrower as a primary residence tend to have a lower credit
risk than mortgages on investment properties or secondary residences.
Geographic Concentration
Local economic conditions can affect borrowers’ ability to repay loans and the value of the collateral underlying the
loans. Because our business involves purchasing mortgages from every geographic region in the U.S., we maintain a
geographically diverse single-family credit guarantee portfolio. While our single-family credit guarantee portfolio’s
geographic distribution was relatively stable in recent years and remains broadly diversified across these regions, we were
negatively impacted by overall home price declines in each region since 2006. Our credit losses continue to be greatest in
those states that experienced significant decreases in property values since 2006, such as California, Florida, Nevada and
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