Freddie Mac 2014 Annual Report Download - page 121

116 Freddie Mac
unsecuritized held-for-investment multifamily loans as of December 31, 2014, approximately 22% will mature during 2015 and
2016, and the remaining 78% will mature in 2017 and beyond.
Our multifamily mortgage portfolio consists of product types that are categorized based on loan terms. Multifamily loans
may: (a) be amortizing or interest-only (for the full term or a portion thereof); and (b) have a fixed or variable rate of interest.
Our multifamily loans generally have shorter terms than single-family mortgages and typically have balloon maturities ranging
from five to ten years.
Multifamily Credit Enhancements
Our primary business model in the Multifamily segment is to purchase multifamily mortgage loans for aggregation and
then securitization through issuance of multifamily K Certificates. With this model, we have securitized $92.8 billion in UPB of
multifamily loans between 2009 and 2014 and have attracted private capital to the multifamily market from investors who
purchase subordinated securities that we do not issue or guarantee. These securities are backed by loans that are sourced by our
seller/servicers and directly underwritten by us. Our K Certificate transactions are structured such that private investors that
hold unguaranteed subordinated securities are the first to absorb losses on the underlying loans. The amount of subordination to
the guaranteed certificates is set at a level that we believe is sufficient to cover the expected credit losses on the loans. As a
result, we believe private investors will absorb the expected credit risk in these transactions and thereby reduce the loss
exposure to us and U.S. taxpayers. At December 31, 2014 and 2013, the UPB of K Certificates with subordination coverage
was $75.5 billion and $59.3 billion, respectively, and the average subordination coverage on these securities was 18% at both
dates. See “NOTE 4: MORTGAGE LOANS AND LOAN LOSS RESERVES” for additional information about credit
protections and other forms of credit enhancements covering loans in our multifamily mortgage portfolio.
Multifamily Delinquencies
We report multifamily delinquency rates based on UPB of mortgage loans in our multifamily mortgage portfolio that are
two monthly payments or more past due or in the process of foreclosure, as reported by our servicers. Mortgage loans that have
been modified are not counted as delinquent as long as the borrower is less than two monthly payments past due under the
modified terms.
Our delinquency rates continue to be among the lowest in the industry. There were 8 and 16 delinquent loans in our
multifamily mortgage portfolio at December 31, 2014 and 2013, respectively. Our multifamily mortgage portfolio delinquency
rate of 0.04% and 0.09% at December 31, 2014 and 2013, respectively, reflects continued strong portfolio performance and
positive market fundamentals. Our delinquency rate for credit-enhanced loans was 0.05% and 0.11% at December 31, 2014 and
2013, respectively, and for non-credit-enhanced loans was 0.02% and 0.07% at December 31, 2014 and 2013, respectively. The
delinquency rate on loans underlying our K Certificates transactions was 0.01% and 0.07% at December 31, 2014 and 2013,
respectively. Since we began issuing K Certificates, we have experienced no credit losses associated with our guarantees on
these securities. As of December 31, 2014, approximately 80% of the loans in our multifamily mortgage portfolio that were two
or more monthly payments past due, measured on a UPB basis, had credit enhancements that we currently believe will mitigate
our expected losses on those loans and guarantees.
See “NOTE 15: CONCENTRATION OF CREDIT AND OTHER RISKS” for more information about the loans in our
multifamily mortgage portfolio, including geographic and other concentrations of risk associated with these loans.
Institutional Credit Risk Overview
We have exposure to many types of institutional counterparties, including; (a) seller/servicers; (b) mortgage insurers; (c)
bond insurers; (d) cash and other investments counterparties; (e) agency and non-agency mortgage-related security issuers; (f)
document custodians; and (g) derivative counterparties. The failure of any of our significant counterparties to meet their
obligations to us could have a material adverse effect on our results of operations, financial condition, and our ability to
conduct future business. Our credit losses could increase if an entity that provides credit enhancement fails to fulfill its
obligation (e.g., a mortgage insurer fails to pay a claim), as this would reduce the amount of our credit loss recoveries. For
more information, see “RISK FACTORS — Competitive and Market Risks — We depend on our institutional counterparties to
provide services that are critical to our business, and our results of operations or financial condition may be adversely affected
if one or more of our counterparties do not meet their obligations to us.”
Institutional Credit Risk Management Framework
Our principal strategies for managing institutional credit risk are: (a) maintaining policies and procedures, including
eligibility standards that govern our business with our counterparties; (b) evaluating counterparty financial strength and
performance; (c) monitoring our exposure to our counterparties; and (d) actively engaging underperforming counterparties and
limiting our losses from nonperformance of obligations, when possible.
In 2014, we developed internal evaluation models that we use to monitor the financial strength of our counterparties.
These models determine probabilities of default that we use to assess and classify each of our counterparties. We assign risk or
exposure limits to each counterparty based on this classification. We apply this risk management approach to the major types of
our counterparties discussed below.
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