Freddie Mac 2010 Annual Report Download - page 47

the potential volume of delinquent mortgages to be purchased out of PC pools, it expects that any net additions to our
mortgage-related investments portfolio would be related to that activity. Therefore, our ability to take advantage of
opportunities to purchase or sell mortgage assets at attractive prices has been, and likely will continue to be, limited. In
addition, notwithstanding the expectations expressed by Treasury and FHFA regarding future selling activity, we can provide
no assurance that the cap on our mortgage-related investments portfolio will not, over time, force us to sell mortgage assets
at unattractive prices, particularly given the potential in coming periods for continued high volumes of loan modifications
and purchases of seriously delinquent loans, both of which result in the purchase of mortgage loans from our PCs for our
mortgage-related investments portfolio.
These limitations will reduce the earnings capacity of our mortgage-related investments portfolio business and require us
to place greater emphasis on our guarantee activities to generate revenue. However, under conservatorship, our ability to
generate revenue through guarantee activities may be limited, as we may be required to adopt business practices that provide
support for the mortgage market in a manner that serves our public mission and other non-financial objectives, but that may
negatively impact our future financial results. The combination of the restrictions on our business activities under the
Purchase Agreement and FHFA regulation, combined with our potential inability to generate sufficient revenue through our
guarantee activities to offset the effects of those restrictions, may have an adverse effect on our results of operations and
financial condition. There can be no assurance that the current profitability levels on our new single-family business would
be sufficient to attract new private sector capital in the future, should the company be in a position to seek such capital.
We are subject to mortgage credit risks, including mortgage credit risk relating to off-balance sheet arrangements;
increased credit costs related to these risks could adversely affect our financial condition and/or results of operations.
Mortgage credit risk is the risk that a borrower will fail to make timely payments on a mortgage we own or guarantee,
exposing us to the risk of credit losses and credit-related expenses. We are primarily exposed to mortgage credit risk with
respect to the single-family and multifamily loans that we hold on our consolidated balance sheets. We are also exposed to
mortgage credit risk with respect to securities and guarantee arrangements that are not reflected as assets on our consolidated
balance sheets. These relate primarily to: (a) Freddie Mac mortgage-related securities backed by multifamily loans;
(b) certain single-family Other Guarantee Transactions; and (c) other guarantee commitments, including long-term standby
commitments.
Factors that affect the level of our mortgage credit risk include the credit profile of the borrower, home prices, the
features of the mortgage loan, the type of property securing the mortgage, and local and regional economic conditions,
including unemployment rates. We continue to face significant mortgage credit risk, and our credit losses will likely increase
in the near term and remain significantly above historical levels for the foreseeable future due to the substantial number of
mortgage loans in our single-family credit guarantee portfolio on which borrowers owe more than their home is currently
worth, as well as the substantial backlog of seriously delinquent loans.
While mortgage interest rates remained low in 2010, many borrowers may not have been able to refinance into lower
interest mortgages due to substantial declines in home values, market uncertainty and continued high unemployment rates.
Therefore, there can be no assurance that continued low mortgage interest rates or efforts to modify and refinance mortgages
pursuant to the MHA Program will reduce our overall mortgage credit risk.
We also continue to have significant amounts of mortgage loans in our single-family credit guarantee portfolio with
certain characteristics, such as Alt-A, interest-only, option ARMs, loans with original LTV ratios greater than 90%, and loans
where borrowers had FICO scores less than 620 at the time of origination, that expose us to greater credit risk than do other
types of mortgage loans. See “Table 44 — Certain Higher — Risk Categories in the Single-Family Credit Guarantee
Portfolio” for more information.
Beginning in 2008, the conforming loan limits were significantly increased for mortgages originated in certain “high
cost” areas (the initial increases applied to loans originated after July 1, 2007). Due to our relative lack of experience with
these larger loans, purchases pursuant to the high cost conforming loan limits may also expose us to greater credit risks.
We also face the risk that multifamily borrowers will default if they are unable to refinance their loans at an affordable
rate. This risk is particularly important with respect to multifamily loans because such loans generally have a balloon
payment and typically have a shorter contractual term than single-family mortgages. 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. This risk is significant given the state of the economy, lower levels of liquidity, property cash flows,
and property market values. Of the $108.7 billion in UPB of loans in our multifamily mortgage portfolio as of December 31,
2010, approximately 2% and 4% will reach their maturity during 2011 and 2012, respectively.
44 Freddie Mac