Freddie Mac 2014 Annual Report Download - page 109

104 Freddie Mac
delinquency rates well before reaching the dates at which the loans have reached their first rate reset. We believe that serious
delinquency rates of ARM 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 changes in the interest
rates of the loans. Since a substantial portion of ARM loans were originated in 2005 through 2008 and are located in
geographic areas that have been most affected by declines in home prices since 2006, we believe that the serious delinquency
rate for ARM loans will continue to remain high in 2015.
Step-Rate Modified Loans
Many of our HAMP loans have provisions for reduced interest rates that remain fixed for the first five years of the
modification and then increase at a rate of up to one percent per year until the interest rate has been adjusted to the market rate
that was in effect at the time of the modification. We refer to these types of HAMP loans as “step-rate modified loans.” The risk
of default may increase for borrowers with step-rate modified loans due to the increase in monthly payments resulting from
these scheduled increases in the interest rate of the loans. In January 2015, we implemented an additional principal reduction
incentive for borrowers who continue to perform on their HAMP loans. This incentive is designed to reduce the risk that these
borrowers will default on their loans. For more information, see “BUSINESS — Our Business — Our Business Segments —
Single-Family Guarantee Segment — Single-Family Loan Workouts and the MHA Program — HAMP and Non-HAMP
Modifications.”
We had $42.3 billion in UPB of step-rate modified loans in our single-family credit guarantee portfolio at December 31,
2014. Approximately 9% of these loans experienced interest rate resets in 2014, and approximately 47% will experience rate
resets in 2015. As of December 31, 2014, the average current interest rate for all step-rate modified loans was 2.30%, and the
average final interest rate that these loans are scheduled to reach in the future was 4.48%. As of December 31, 2014, the serious
delinquency rate for step-rate modified loans completed in 2010, 2011, 2012, and 2013 or after was 9.67%, 9.52%, 8.89%, and
7.51%, respectively.
Option ARM Loans
Most option ARM loans have initial periods during which the borrower has various options as to the amount of each
monthly payment, until a specified date, when the terms are recast. We have not purchased option ARM loans in our single-
family credit guarantee portfolio since 2007. At both December 31, 2014 and 2013, option ARM loans represented less than 1%
of the UPB of our single-family credit guarantee portfolio. This exposure included $4.9 billion and $5.5 billion in UPB of
option ARM securities underlying certain of our Other Guarantee Transactions at December 31, 2014 and 2013, respectively.
While we have not categorized these option ARM securities as either subprime or Alt-A securities for presentation in this Form
10-K and elsewhere in our reporting, they could exhibit similar credit performance to collateral identified as subprime or Alt-A.
For reporting purposes, loans within the option ARM category continue to be presented in that category following a
modification of the loan, even though the modified loan no longer provides for optional payment provisions. As of
December 31, 2014 and 2013, approximately 12.5% and 11.0%, respectively, of the option ARM loans within our single-family
credit guarantee portfolio had been modified. For information on our exposure to option ARM loans through our holdings of
non-agency mortgage-related securities, see “CONSOLIDATED BALANCE SHEETS ANALYSIS — Investments in
Securities.”
Other Categories of Single-Family Mortgage Loans
While we have classified certain loans as subprime or Alt-A for purposes of the discussion below and elsewhere in this
Form 10-K, there is no universally accepted definition of subprime or Alt-A, and our classification of such loans may differ
from those used by other companies. For example, some financial institutions may use credit scores to delineate certain
residential mortgages as subprime. In addition, we do not rely primarily on these loan classifications to evaluate the credit risk
exposure relating to such loans in our single-family credit guarantee portfolio. For a definition of the subprime and Alt-A
single-family loans and securities in this Form 10-K, see “GLOSSARY.”
Subprime Loans
Participants in the mortgage market may characterize single-family loans based upon their overall credit quality at the
time of origination, generally considering them to be prime or subprime. While we have not historically characterized the loans
in our single-family credit guarantee portfolio as either prime or subprime, we monitor the amount of loans we have guaranteed
with characteristics that indicate a higher degree of credit risk (see “Risk Profile — Higher-Risk Loans in the Single-Family
Credit Guarantee Portfolio” and “Table 48 — Single-Family Credit Guarantee Portfolio by Attribute Combinations” for further
information). In addition, we estimate that approximately $1.7 billion and $1.8 billion in UPB of security collateral underlying
our Other Guarantee Transactions at December 31, 2014 and 2013, respectively, were identified as subprime based on
information provided to us when we entered into these transactions.
We also categorize our investments in non-agency mortgage-related securities as subprime if they were identified as such
based on information provided to us when we entered into these transactions. At December 31, 2014 and 2013, we held $27.7
billion and $39.7 billion, respectively, in UPB of non-agency mortgage-related securities backed by subprime loans.
Approximately 4% and 5% of these securities were investment grade at December 31, 2014 and 2013, respectively. The credit
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