Freddie Mac 2010 Annual Report Download - page 23

affect the liquidity of the market for PCs. For more information, see “RISK FACTORS — Competitive and Market Risks —
Any decline in the price performance of or demand for our PCs could have an adverse effect on the volume and profitability
of our new single-family guarantee business.”
Multifamily Segment
The Multifamily segment reflects results from our investments and guarantee activities in multifamily mortgage loans
and securities. Our new purchases of multifamily mortgage loans are primarily made for purposes of aggregation and then
securitization, which supports the availability of financing for multifamily properties. Our Multifamily segment does not
issue REMIC securities but does issue Other Structured Securities, Other Guarantee Transactions, and other guarantee
commitments. We also purchase non-agency CMBS for investment; however we have not purchased significant amounts of
non-agency CMBS for investment since 2008.
Prior to 2008, we principally purchased and held multifamily loans for investment purposes. Beginning in 2008, we also
began purchasing certain multifamily mortgages for securitization purposes. In 2010, we purchased $10.3 billion of loans as
part of our CME initiative and subsequently issued $6.4 billion of Other Guarantee Transaction certificates. Subject to
market conditions, we expect to continue purchasing multifamily loans as part of our further expansion of the multifamily
securitization business in 2011. We may also sell multifamily loans from time to time.
The multifamily property market is affected by general economic factors, such as employment rates, construction cycles,
and relative affordability of single-family home prices, all of which influence the supply and demand for multifamily
properties and pricing for apartment rentals. Our multifamily loan volume is largely sourced through established institutional
channels where we are generally providing post-construction financing to larger apartment project operators with established
performance records. Our lending decisions are primarily based on an assessment of the property’s ability to generate
sufficient operating cash flows to support payment of debt service obligations as measured by the expected DSCR.
Prior to 2010, our Multifamily segment also included investments in LIHTC partnerships formed for the purpose of
providing equity funding for affordable multifamily rental properties. In these investments, we provided equity contributions
to partnerships designed to sponsor the development and ongoing operations for low- and moderate-income multifamily
apartments. We planned to realize a return on our investment through reductions in income tax expense that result from
federal income tax credits and the deductibility of operating losses generated by the partnerships. However, we no longer
invest in these partnerships because we do not expect to be able to use the underlying federal income tax credits or the
operating losses generated from the partnerships as a reduction to our taxable income because of our inability to generate
sufficient taxable income or to sell these interests to third parties. See “NOTE 4: VARIABLE INTEREST ENTITIES” for
additional information.
Our Customers
We acquire a significant portion of our multifamily mortgage loans from several large seller/servicers. Our top three
multifamily lenders, CBRE Capital Markets, Inc., Wells Fargo Multifamily Capital and Berkadia Commercial
Mortgage LLC, each accounted for more than 10%, and collectively represented approximately 44% of our multifamily
purchase volume during 2010.
We also enter into other guarantee commitments for multifamily mortgage loans, HFA bonds, and housing revenue
bonds held by third parties. By engaging in these activities, we provide liquidity to this sector of the mortgage market.
Our Competition
Historically, our principal competitors have been Fannie Mae, FHA, and other financial institutions that retain or
securitize multifamily mortgages, such as commercial and investment banks, dealers, thrift institutions, and insurance
companies. Since 2008, most of our competitors, other than Fannie Mae and FHA, have ceased their activities in the
multifamily mortgage business or severely curtailed these activities relative to their previous levels. Some market participants
began to re-enter the market on a limited basis in 2010. We compete on the basis of price, products, structure and service.
Underwriting Requirements and Quality Control Standards
For our purchase or guarantee of multifamily mortgage loans, we rely significantly on pre-purchase underwriting, which
includes third-party appraisals and cash flow analysis. The underwriting standards we provide to our seller/servicers focus on
loan quality measurement based, in part, on the LTV ratio and DSCR at origination. The DSCR is one indicator of future
credit performance. The DSCR estimates a multifamily borrower’s ability to service its mortgage obligation using the
secured property’s cash flow, after deducting non-mortgage expenses from income. The higher the DSCR, the more likely a
multifamily borrower will be able to continue servicing its mortgage obligation. Our standards for multifamily loans specify
maximum original LTV ratio and minimum DSCR that vary based on the loan characteristics, such as loan type (new
acquisition or supplemental financing), loan term (intermediate or longer-term), and loan features (interest-only or
amortizing, fixed- or variable-rate). Since the beginning of 2009, our multifamily loans are generally underwritten with
20 Freddie Mac