Freddie Mac 2010 Annual Report Download - page 129

We estimate that approximately 8% of loans in our multifamily mortgage portfolio had a current LTV ratio of greater
than 100% as of December 31, 2010, and the estimated current average DSCR for these loans as of that date was 1.1, based
on the latest available income information for these properties and our assessments of market conditions. Our estimates of
the current LTV ratios for multifamily loans are based on values we receive from a third-party service provider as well as
our internal estimates of property value, for which we may use changes in tax assessments, market vacancy rates, rent
growth and comparable property sales in local areas as well as third-party appraisals for a portion of the portfolio. We
periodically perform our own valuations or obtain third-party appraisals in cases where a significant deterioration in a
borrower’s financial condition has occurred, the borrower has applied for refinancing, or in certain other circumstances where
we deem it appropriate to reassess the property value.
Because multifamily loans generally have a balloon payment and typically have a shorter contractual term than single-
family mortgages, the maturity date for a multifamily loan is also an important loan characteristic. Borrowers may be less
able to refinance their obligations during periods of rising interest rates, which could lead to default if the borrower is unable
to find affordable refinancing. Loan size at origination does not generally indicate the degree of a loan’s risk, but it does
indicate our potential exposure to default.
While we believe the underwriting practices we employ for our multifamily loan portfolio are prudent, the ongoing
weak economic conditions in the U.S. negatively impacted many multifamily residential properties. Our delinquency rates
have remained relatively low compared to other industry participants, which we believe to be, in part, the result of our
underwriting standards versus those used by others in the industry. We monitor the financial performance of our multifamily
borrowers and during 2010 we observed stabilization in measures such as the DSCR and estimated current LTV ratios for
many of our properties. To the extent multifamily loans reach maturity and a borrower with deterioration in cash flows and
property market value requires refinancing of the property, we will work with the borrower to obtain principal repayment to
reduce the refinanced balance to conform to our underwriting standards. However, should a distressed borrower not have the
financial capacity to do so, we may either experience higher default rates and credit losses, or need to provide continued
financing ourselves at below-market rates through a TDR. This refinancing risk for multifamily loans is greater for those
loans with balloon provisions where the remaining UPB is due upon maturity. Of the $108.7 billion in UPB of our
multifamily mortgage portfolio as of December 31, 2010, approximately 2% and 4% will reach their maturity during 2011
and 2012, respectively.
Portfolio Management Activities
The portfolio information below relates to our single-family credit guarantee and multifamily mortgage portfolios, which
exclude our holdings of non-Freddie Mac mortgage-related securities. See “CONSOLIDATED BALANCE SHEETS
ANALYSIS — Investments in Securities — Mortgage-Related Securities” for credit enhancement and other information about
our investments in non-Freddie Mac mortgage-related securities.
Credit Enhancements
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, for some mortgage loans, we elect to share the default
risk by transferring a portion of that risk to various third parties through a variety of other credit enhancements.
At December 31, 2010 and 2009, our credit-enhanced mortgages represented 15% and 16%, respectively, of our single-
family credit guarantee portfolio and multifamily mortgage portfolio, on a combined basis, excluding those backing Ginnie
Mae Certificates and HFA bonds guaranteed by us under the HFA initiative. Freddie Mac securities backed by Ginnie Mae
Certificates and HFA bonds guaranteed by us under the HFA initiative are excluded because we consider the incremental
credit risk to which we are exposed to be insignificant.
We recognized recoveries of $3.4 billion and $2.1 billion in 2010 and 2009, respectively, under our primary and pool
mortgage insurance policies and other credit enhancements as discussed below related to our single-family credit guarantee
portfolio. In 2010 and 2009, there was a significant decline in our credit enhancement coverage for new purchases compared
to 2008, primarily as a result of the high refinance activity during these years. Refinance loans typically have lower LTV
ratios, which fall below the 80% charter threshold noted above. In addition, we have been purchasing significant amounts of
relief refinance mortgages. These mortgages allow for the refinance of existing loans guaranteed by us under terms such that
we may not have mortgage insurance for some or all of the UPB of the mortgage in excess of 80% of the value of the
property for certain of these loans.
Our ability and desire to expand or reduce the portion of our total mortgage portfolio covered by credit enhancements
will depend on our evaluation of the credit quality of new business purchase opportunities, the risk profile of our portfolio
and the future availability of effective credit enhancements at prices that permit an attractive return. While the use of credit
enhancements reduces our exposure to mortgage credit risk, it increases our exposure to institutional credit risk. As
guarantor, we remain responsible for the payment of principal and interest if mortgage insurance or other credit
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