Freddie Mac 2010 Annual Report Download - page 126

underlying these securities deteriorated significantly beginning in 2008 and continued to deteriorate in 2010. For more
information on our exposure to subprime mortgage loans through our investments in non-agency mortgage-related securities
see “CONSOLIDATED BALANCE SHEETS ANALYSIS — Investments in Securities.”
Alt-A Loans
Although there is no universally accepted definition of Alt-A, many mortgage market participants classify single-family
loans with credit characteristics that range between their prime and subprime categories as Alt-A because these loans have a
combination of characteristics of each category, may be underwritten with lower or alternative income or asset
documentation requirements compared to a full documentation mortgage loan, or both. The UPB of Alt-A loans in our
single-family credit guarantee portfolio declined to $116.1 billion as of December 31, 2010 from $147.9 billion as of
December 31, 2009. The UPB of our Alt-A loans declined in 2010 primarily due to refinancing into other mortgage
products, foreclosure transfers, and other liquidation events. As of December 31, 2010, for Alt-A loans in our single-family
credit guarantee portfolio, the average FICO credit score at origination was 719. Although Alt-A mortgage loans comprised
approximately 6% of our single-family credit guarantee portfolio as of December 31, 2010, these loans represented
approximately 37% of our credit losses during 2010.
We implemented several changes in our underwriting and eligibility criteria in 2008 and 2009 to reduce our acquisition
of certain loans with higher-risk characteristics, including Alt-A loans. As a result, we did not purchase any new single-
family Alt-A mortgage loans in our single-family credit guarantee portfolio during the year ended December 31, 2010,
compared to $0.5 billion of Alt-A purchases for the year ended December 31, 2009. However, during the second quarter of
2010, we partially terminated certain other guarantee commitments, which included $1.5 billion of UPB of Alt-A mortgage
loans, in order to permit these loans to be securitized within a new PC issuance. There was no change to our Alt-A exposure
on these mortgages as a result of these transactions. Although we discontinued new purchases of mortgage loans with lower
documentation standards for assets or income beginning March 1, 2009 (or later, as our customers’ contracts permitted), we
continued to purchase certain amounts of these mortgages in cases where the loan was either a part of our relief refinance
mortgage initiative or in another refinance mortgage initiative and the pre-existing mortgage (including Alt-A loans) was
originated under less than full documentation standards. However, in the event we purchase a refinance mortgage in one of
these programs and the original loan had been previously identified as Alt-A, such refinance loan may no longer be
categorized or reported as an Alt-A mortgage in this Form 10-K and our other financial reports because the new refinance
loan replacing the original loan would not be identified by the servicer as an Alt-A loan. As a result, our reported Alt-A
balances may be lower than would otherwise be the case had such refinancing not occurred. From the time the product
became available in 2009 to December 31, 2010, we purchased approximately $10.2 billion of relief refinance mortgages that
were previously categorized as Alt-A loans in our portfolio, including $7.0 billion during the year ended December 31, 2010.
We also hold investments in non-agency mortgage-related securities backed by single-family Alt-A loans. At
December 31, 2010 and 2009, we held investments of $18.8 billion and $21.4 billion, respectively, of non-agency mortgage-
related securities backed by Alt-A and other mortgage loans and 22% and 31%, respectively, of these securities were
investment grade. The credit performance of loans underlying these securities deteriorated significantly beginning in 2008
and continued to deteriorate in 2010. We categorize our investments in non-agency mortgage-related securities as Alt-A if
the securities were identified as such based on information provided to us when we entered into these transactions. For more
information on our exposure to Alt-A mortgage loans through our investments in non-agency mortgage-related securities see
“CONSOLIDATED BALANCE SHEETS ANALYSIS — Investments in Securities.”
Higher-Risk Loans in the Single-Family Credit Guarantee Portfolio
Table 44 presents information about certain categories of single-family mortgage loans within our single-family credit
guarantee portfolio that we believe have certain higher-risk characteristics. These loans include categories based on product
type and borrower characteristics present at origination. The table includes a presentation of each higher risk category in
isolation. A single loan may fall within more than one category (for example, an interest-only loan may also have an original
LTV ratio greater than 90%). Mortgage loans with higher LTV ratios have a higher risk of default, especially during housing
and economic downturns, such as the one the U.S. has experienced over the past few years.
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