Freddie Mac 2014 Annual Report Download - page 108

103 Freddie Mac
Loans with Payment Changes
There are several types of mortgage products that contain terms which result in scheduled changes in the borrower's
monthly payments after specified initial periods. In most cases, the change will result in an increase in the borrower's monthly
payment, which may increase the risk that the borrower will default on the loan.
The table below presents information for mortgage loans in our single-family credit guarantee portfolio, excluding Other
Guarantee Transactions, at December 31, 2014 that contain terms that will result in payment changes for the borrower. The
UPB amounts in the table below are aggregated by product type and categorized by the year in which the loan will experience a
payment change. The timing of the actual payment change may differ from that presented in the table due to a number of
factors, including if the borrower refinances the loan. Loans where the year of first payment change is 2014 or prior have
already had one or more payment changes as of December 31, 2014; loans where the year of first payment change is 2015 or
later have not yet had a payment change as of December 31, 2014 and will not experience a payment change until a future
period.
Table 46 — Single-Family Loans with Scheduled Payment Changes by Year at December 31, 2014(1)
2014 and Prior 2015 2016 2017 2018 2019 Thereafter Total
(in millions)
ARM/interest-only(2) $ 9,343 $ 2,371 $ 3,512 $ 5,634 $ 2,261 $ 132 $ 311 $ 23,564
Fixed/interest-only(2) 7 125 588 2,731 587 7 192 4,237
ARM/amortizing(3) 17,897 2,559 5,078 5,470 6,097 10,333 21,714 69,148
Step-rate modified(4) 3,724 19,708 27,851 29,037 18,876 6,360 3,480 42,255
$ 139,204
(1) Excludes mortgage loans underlying Other Guarantee Transactions (such as option ARM loans), since the payment change information is not available
to us for these loans.
(2) Categorized by the year in which the loan begins requiring payment of principal.
(3) Categorized by the year of next scheduled contractual reset date.
(4) Represents modified loans that are scheduled to experience an increase in their contractual interest rate in a given year. Individual loans will appear in
each year for which they are scheduled to experience a rate increase. As such, individual years will not sum to the total. Includes the portion, if any, of
UPB that is non-interest bearing under the terms of the modification.
Interest-Only Loans
Interest-only loans have an initial period during which the borrower pays only interest, and at a specified date the
monthly payment increases to begin reflecting repayment of principal. Interest-only loans represented approximately 2% of the
UPB of our single-family credit guarantee portfolio at both December 31, 2014 and 2013. We discontinued purchasing such
loans on September 1, 2010. The balance of these loans has declined significantly in recent years as many of these borrowers
have repaid their loans, completed foreclosure transfers or foreclosure alternatives, refinanced, or received loan modifications
into an amortizing loan product (and thus these loans are no longer classified as interest-only loans).
We believe that the serious delinquency rates of interest-only loans during the last two years have been more affected by
macro-economic conditions, such as unemployment rates and cumulative home price declines in many geographic areas since
2006, than by the increase in the borrower’s monthly payment. However, we continue to monitor the performance of these
loans as many are scheduled to begin amortizing in 2015 and 2016, which will subject the borrowers to higher monthly
payments. As of December 31, 2014, approximately 66% of all interest-only loans in our single-family credit guarantee
portfolio had not yet begun amortization of principal and 28% had current LTV ratios greater than 100%. Since a substantial
portion of these loans were originated in 2005 through 2008 and are located in geographic areas that were most affected by
declines in home prices that began in 2006, we believe that the serious delinquency rate for interest-only loans will remain high
in 2015.
Adjustable-Rate Mortgage Loans
Adjustable-rate mortgage loans may have initial periods during which the interest rate and monthly payment remains
fixed, until a specified date, when the interest rate begins to adjust, or they may adjust at regular intervals after origination
(typically annually). In a rising interest rate environment, ARM borrowers typically default at a higher rate than fixed-rate
borrowers.
Excluding loans underlying Other Guarantee Transactions, there was $92.7 billion in UPB of ARM loans in our single-
family credit guarantee portfolio as of December 31, 2014. Approximately 29% of these loans experienced an interest rate
change in 2014 and prior and approximately 5% will experience an interest rate change in 2015. We believe that the serious
delinquency rates of adjustable-rate loans that experienced an interest rate reset during the last two years have not been
significantly affected by the change in the interest rate of the loan. Except for interest-only loans that began to amortize at the
reset date, there were not significant increases in the borrowers’ payments when these loans reached their first reset dates
because market interest rates have generally declined in recent years. In recent years, ARM loans have experienced high serious
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