Freddie Mac 2010 Annual Report Download - page 131

Additionally, Other Guarantee Transactions issued by our Multifamily segment include subordinated classes, that we do
not guarantee, that provide for credit loss protection to the senior classes that we guarantee. Subordinated classes are
allocated credit losses prior to the senior classes. At December 31, 2010 and 2009, the UPB of Multifamily Other Guarantee
Transactions with subordination coverage was $8.2 billion and $2.6 billion, respectively, and the subordination coverage on
these securities was $1.0 billion and $0.3 billion, respectively.
Other Credit Risk Management Activities
To compensate us for higher levels of risk in some mortgage products, we may charge upfront delivery fees above a
base management and guarantee fee, which are calculated based on credit risk factors such as the mortgage product type,
loan purpose, LTV ratio and other loan or borrower characteristics. In 2009, we implemented certain increases in delivery
fees for certain mortgages deemed to be higher risk based on combinations of product type, property type, loan purpose,
LTV ratio and/or borrower credit scores. We announced additional delivery fee increases in the fourth quarter of 2010 that
become effective March 1, 2011 (or later, as outstanding contracts permit) for loans with higher LTV ratios.
We have also entered into credit derivatives on specified mortgage-related assets that in most cases are intended to limit
our exposure to credit default losses. The fair value of these credit derivatives was not significant at December 31, 2010, or
2009. See “NOTE 12: DERIVATIVES” for further discussion.
MHA Program
The MHA Program is designed to help in the housing recovery, promote liquidity and housing affordability, expand
foreclosure prevention efforts and set market standards. Participation in the MHA Program is an integral part of our mission
of providing stability to the housing market. Through our participation in this program, we help borrowers maintain home
ownership. Some of the key initiatives of this program are:
Home Affordable Modification Program. HAMP commits U.S. government, Freddie Mac and Fannie Mae funds to
help eligible homeowners avoid foreclosures and keep their homes through mortgage modifications, where possible. Under
this program, we offer loan modifications to financially struggling homeowners with mortgages on their primary residences
that reduce the monthly principal and interest payments on their mortgages. HAMP applies both to delinquent borrowers and
to those current borrowers at risk of imminent default. Other features of HAMP include the following:
• HAMP uses specified requirements for borrower eligibility. The program seeks to provide a uniform, consistent
regime that all participating servicers must use in modifying loans held or guaranteed by all types of investors:
Freddie Mac, Fannie Mae, banks and trusts backing non-agency mortgage-related securities.
• Under HAMP, the goal is to reduce the borrowers’ monthly mortgage payments to 31% of gross monthly income,
which may be achieved through a combination of methods, including interest rate reductions, term extensions and
principal forbearance. Although HAMP contemplates that some servicers will also make use of principal reduction to
achieve reduced payments for borrowers, we only used forbearance in 2009 and 2010 and did not use principal
reduction in modifying our loans.
• Under HAMP, each modification must be preceded by a standardized NPV test to evaluate whether the NPV of the
income that the mortgage holder will receive after the modification will equal or exceed the NPV of the income that
the holder would have received had there been no modification. HAMP does not require a modification if the NPV of
the income that the mortgage holder will receive after modification is less than the NPV of the income the holder
would have received had there been no modification; however, Freddie Mac will permit such a modification in certain
circumstances. Our practice in this regard is intended to increase the number of modifications under the program;
however, it may cause us to incur higher losses than would otherwise be recognized under HAMP.
• HAMP requires that each borrower complete a trial period during which the borrower will make monthly payments
based on the estimated amount of the modification payments. Trial periods are required for at least three months.
After the final trial-period payment is received by our servicer and the borrower has provided necessary
documentation, the borrower and servicer will enter into the modification.
• Servicers will be paid a $1,000 incentive fee when they originally modify a loan and an additional $500 incentive fee
if the loan was current when it entered the trial period (i.e., where default was imminent but had not yet occurred). In
addition, servicers will receive up to $1,000 for any modification that reduces a borrower’s monthly payment by 6%
or more, in each of the first three years after the modification, as long as the modified loan remains current.
• Borrowers whose loans are modified through HAMP will accrue monthly incentive payments that will be applied
annually to reduce up to $1,000 of their principal, per year, for five years, as long as they are making timely
payments under the modified loan terms.
• HAMP applies to loans originated on or before January 1, 2009, and borrowers’ requests for such modifications will
be considered until December 31, 2012.
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