Freddie Mac 2010 Annual Report Download - page 124

Arizona. See “NOTE 19: CONCENTRATION OF CREDIT AND OTHER RISKS” for more information concerning the
distribution of our single-family credit guarantee portfolio by geographic region.
Attribute Combinations
Certain combinations of loan characteristics often can also indicate a higher degree of credit risk. For example, single-
family mortgages with both high LTV ratios and borrowers who have lower credit scores typically experience higher rates of
serious delinquency and default. We estimate that there were $11.8 billion and $12.7 billion at December 31, 2010 and
December 31, 2009, respectively, of loans in our single-family credit guarantee portfolio with both original LTV ratios
greater than 90% and FICO scores less than 620 at the time of loan origination. Certain mortgage product types, such as
interest-only or option ARM loans, that have additional higher risk characteristics, such as lower credit scores or higher LTV
ratios, will also have a higher risk of default than those same products without these characteristics. In addition, some
borrowers may use second liens at the time of purchase to reduce the LTV ratio on first lien mortgages, or may obtain
second lien mortgages subsequently. A borrower who obtains a second lien mortgage, either at the time of origination or
subsequently, is more susceptible to declines in home prices, which would reduce the equity in their home to a lower level
than if there were no second lien and increase the risk of delinquency on the first lien. The practice of simultaneously
obtaining first and second lien mortgages declined in 2009 and 2010, as compared to prior years. We obtain second lien
information on loans we purchase only if the second lien mortgage was established at or before the time of origination of the
first lien, and therefore we do not know about a second lien mortgage if the borrower obtains it after origination. As of both
December 31, 2010 and 2009, approximately 14% of loans in our single-family credit guarantee portfolio had second lien
financing at the time of origination of the first lien and we estimate that these loans comprised 19% and 21%, respectively,
of our seriously delinquent loans, based on UPB.
Single-Family Mortgage Product Types
Product mix affects the credit risk profile of our total mortgage portfolio. In general, 15-year amortizing fixed-rate
mortgages exhibit the lowest default rate among the types of mortgage loans we securitize and purchase, due to the
accelerated rate of principal amortization on these mortgages and the credit profiles of borrowers who seek and qualify for
them. In a rising interest rate environment, balloon/reset and ARM borrowers typically default at a higher rate than fixed-rate
borrowers. However, during the last two years, when interest rates have generally declined, our delinquency and default rates
on adjustable-rate and balloon/reset mortgage loans on a relative basis have been as high as, or higher than, fixed-rate loans
since these borrowers are also susceptible to declining housing and economic conditions and/or had other higher-risk
characteristics.
The primary mortgage products in our single-family credit guarantee portfolio are first lien, fixed-rate mortgage loans.
During 2009 and 2010, a higher proportion of our single-family mortgage purchases were fixed-rate loans as compared to
earlier periods, due to continued low interest rates for conforming mortgages, which increased refinancing activity by
borrowers that desire fixed-rate products. Our non-HAMP loan modifications generally result in new terms that include fixed
interest rates after modification. Increased non-HAMP modification volume in recent periods therefore also contributed to the
increase in the amount of fixed-rate single-family loans in our single-family credit guarantee portfolio. Our HAMP
modifications generally result in reduced payments for a minimum of five years, after which time payments gradually
increase to a rate consistent with the market rate at the time of modification.
The following paragraphs provide information on the interest-only, option ARM, and adjustable-rate mortgage loans in
our single-family credit guarantee portfolio. Interest-only and option ARM loans have experienced significantly higher
serious delinquency rates than other mortgage products.
Interest-Only Loans
Interest-only loans have an initial period during which the borrower pays only interest, and at a specified date the
monthly payment changes to begin reflecting repayment of principal until maturity. At December 31, 2010 and
December 31, 2009, interest-only loans represented approximately 5% and 7%, respectively, of the UPB of our single-family
credit guarantee portfolio. The UPB of interest-only loans declined during 2010 primarily due to refinancing into other
mortgage products, modifications of seriously delinquent loans to amortizing terms, and foreclosure events. We purchased
$0.9 billion and $0.8 billion of these loans during the years ended December 31, 2010 and 2009, respectively. As of
September 1, 2010, we no longer purchase interest-only loans.
Option ARM Loans
Most option ARM loans have initial periods during which the borrower has payment options until a specified date,
when the terms are recast. At both December 31, 2010 and 2009, option ARM loans represented approximately 1% of the
UPB of our single-family credit guarantee portfolio. We did not purchase option ARM loans in our single-family credit
121 Freddie Mac