Freddie Mac 2010 Annual Report Download - page 263

have not purchased option ARM loans in 2010 or 2009, and beginning September 1, 2010, we no longer purchase interest-
only loans.
Participants in the mortgage market often characterize single-family loans based upon their overall credit quality at the
time of origination, generally considering them to be prime or subprime. 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. However, there is no universally
accepted definition of subprime or Alt-A. 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. In the event we purchase a refinance mortgage in either our relief
refinance mortgage initiative or in another mortgage refinance initiative and the original loan had been previously identified
as Alt-A, such refinance loan may no longer be categorized or reported as Alt-A in Table 19.3 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. For non-agency mortgage-
related securities that are backed by Alt-A loans, we categorize securities as Alt-A if the securities were identified as such
based on information provided to us when we entered into these transactions.
Although we do not categorize single-family mortgage loans we purchase or guarantee as prime or subprime, we
recognize that there are a number of mortgage loan types with certain characteristics that indicate a higher degree of credit
risk. For example, a borrower’s credit score is a useful measure for assessing the credit quality of the borrower. Statistically,
borrowers with higher credit scores are more likely to repay or have the ability to refinance than those with lower scores.
The industry has viewed those borrowers with credit scores below 620 based on the FICO scores scale as having a higher
risk of delinquency.
Presented below is a summary of the serious delinquency rates of certain higher-risk categories of single-family loans in
our single-family credit guarantee portfolio. During 2010 and 2009, a significant percentage of our charge-offs and REO
acquisition activity was associated with these loan groups. 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%). Loans with a combination of these attributes will have an even higher risk of delinquency than
those with isolated characteristics.
Table 19.3 — Certain Higher-Risk Categories in the Single-Family Credit Guarantee Portfolio
(1)
2010 2009 2010 2009
Percentage of
Portfolio
(1)
Serious
Delinquency
Rate
As of December 31,
Interest-only loans . . . . ............................................................. 5% 7% 18.4% 17.6%
Option ARM loans . . . . ............................................................. 1% 1% 21.2% 17.9%
Alt-A
(2)
........................................................................ 6% 8% 12.2% 12.3%
Original LTV ratio greater than 90%
(3)
loans . . . ............................................ 9% 8% 7.8% 9.1%
Lower original FICO scores (less than 620) ................................................ 3% 4% 13.9% 14.9%
(1) Based on UPB.
(2) Alt-A loans may not include those loans that were previously classified as Alt-A and that have been refinanced as either a relief refinance mortgageor
in another refinance mortgage initiative.
(3) Based on our first lien exposure on the property. Includes the credit-enhanced portion of the loan and excludes any secondary financing by third parties.
The percentage of borrowers in our single-family credit guarantee portfolio, based on UPB, with estimated current LTV
ratios greater than 100% was 18% at both December 31, 2010 and 2009. As estimated current LTV ratios increase, the
borrower’s equity in the home decreases, which negatively affects the borrower’s ability to refinance or to sell the property
for an amount at or above the balance of the outstanding mortgage loan. If a borrower has an estimated current LTV ratio
greater than 100%, the borrower is “underwater” and is more likely to default than other borrowers. The serious delinquency
rate for single-family loans with estimated current LTV ratios greater than 100% was 14.9% and 14.8% as of December 31,
2010 and 2009, respectively.
We categorize our investments in non-agency mortgage-related securities as subprime, option ARM, or Alt-A if the
securities were identified as such based on information provided to us when we entered into these transactions. We have not
identified option ARM, CMBS, obligations of states and political subdivisions, and manufactured housing securities as either
subprime or Alt-A securities. See “NOTE 8: INVESTMENTS IN SECURITIES” for further information on these categories
and other concentrations in our investments in securities.
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