Freddie Mac 2010 Annual Report Download - page 221

such as the availability of capital, generation of new business, pending regulatory action, credit ratings, security prices, and
credit default swap levels traded on the insurers. We consider loan level information including estimated current LTV ratios,
FICO scores, and other loan level characteristics. We also consider the differences between the loan level characteristics of
the performing and non-performing loan populations.
Table 8.3 presents the modeled default rates and severities, without regard to subordination, that are used to determine
whether our senior interests in certain non-agency mortgage-related securities will experience a cash shortfall. Our
proprietary default model requires assumptions about future home prices, as defaults and severities are modeled at the loan
level and then aggregated. The model uses projections of future home prices at the state level. Assumptions of voluntary
prepayment rates derived from our proprietary prepayment models are also an input to the present value of expected losses
and are discussed below.
Table 8.3 — Significant Modeled Attributes for Certain Non-Agency Mortgage-Related Securities
Subprime first lien Option ARM Fixed Rate Variable Rate Hybrid Rate
Alt-A
(1)
December 31, 2010
(dollars in millions)
Issuance Date
2004 and prior:
UPB........................................... $ 1,354 $ 129 $1,010 $ 583 $2,385
Weighted average collateral defaults
(2)
.................... 35% 38% 8% 50% 26%
Weighted average collateral severities
(3)
................... 56% 53% 46% 52% 39%
Weighted average voluntary prepayment rates
(4)
............. 4% 6% 9% 2% 4%
Average credit enhancement
(5)
......................... 41% 20% 14% 19% 16%
2005:
UPB........................................... $ 7,771 $ 3,128 $1,334 $ 936 $4,335
Weighted average collateral defaults
(2)
.................... 55% 53% 24% 58% 45%
Weighted average collateral severities
(3)
................... 66% 63% 53% 57% 49%
Weighted average voluntary prepayment rates
(4)
............. 1% 8% 6% 1% 3%
Average credit enhancement
(5)
......................... 54% 18% 6% 28% 7%
2006:
UPB........................................... $21,710 $ 7,605 $ 620 $1,283 $1,342
Weighted average collateral defaults
(2)
.................... 65% 66% 39% 66% 57%
Weighted average collateral severities
(3)
................... 70% 69% 60% 63% 56%
Weighted average voluntary prepayment rates
(4)
............. 5% 6% 4% 2% 3%
Average credit enhancement
(5)
......................... 19% 7% 9% 1% 4%
2007:
UPB........................................... $22,921 $ 4,784 $ 171 $1,522 $ 396
Weighted average collateral defaults
(2)
.................... 63% 65% 54% 67% 64%
Weighted average collateral severities
(3)
................... 72% 70% 68% 66% 67%
Weighted average voluntary prepayment rates
(4)
............. 5% 3% 2% 3% 3%
Average credit enhancement
(5)
......................... 21% 15% 16% 1% 0%
Total:
UPB........................................... $53,756 $15,646 $3,135 $4,324 $8,458
Weighted average collateral defaults
(2)
.................... 62% 63% 23% 62% 42%
Weighted average collateral severities
(3)
................... 70% 69% 56% 62% 50%
Weighted average voluntary prepayment rates
(4)
............. 4% 5% 6% 2% 3%
Average credit enhancement
(5)
......................... 25% 12% 10% 9% 9%
(1) Excludes non-agency mortgage-related securities backed by other loans, which are primarily comprised of securities backed by home equity lines of
credit.
(2) The expected cumulative default rate expressed as a percentage of the current collateral UPB.
(3) The expected average loss given default calculated as the ratio of cumulative loss over cumulative default rate for each security.
(4) The security’s voluntary prepayment rate represents the average of the monthly voluntary prepayment rate weighted by the security’s outstanding UPB.
(5) Reflects the ratio of the current amount of the securities that will absorb losses in the securitization structure before any losses are allocated to securities
that we own. Percentage generally calculated based on the total UPB of all credit enhancement in the form of subordination of the security divided by
the total UPB of all of the tranches of collateral pools from which credit support is drawn for the security that we own. Excludes credit enhancement
provided by monoline bond insurance.
In evaluating the non-agency mortgage-related securities backed by subprime, option ARM, and Alt-A and other loans
for other-than-temporary impairment, we noted that the percentage of securities that were AAA-rated and the percentage that
were investment grade declined significantly since acquisition. While these ratings have declined, the ratings themselves are
not determinative that a loss is more or less likely. While we consider credit ratings in our analysis, we believe that our
detailed security-by-security analyses provide a more consistent view of the ultimate collectibility of contractual amounts due
to us. As such, we have impaired securities with current ratings ranging from CCC to AAA and have determined that other
securities within the same ratings were not other-than-temporarily impaired. However, we carefully consider individual
ratings, especially those below investment grade, including changes since December 31, 2010.
Our analysis is conducted on a quarterly basis and is subject to change as new information regarding delinquencies,
severities, loss timing, prepayments, and other factors becomes available. While it is reasonably possible that, under certain
218 Freddie Mac