Freddie Mac 2014 Annual Report Download - page 23

18 Freddie Mac
Market Presence and PC Support Activities
From time to time, we may undertake various activities in an effort to support: (a) our presence in the agency securities
market; or (b) the liquidity and price performance of our PCs relative to comparable Fannie Mae securities. These activities
may include the purchase and sale of agency securities, purchases of loans, dollar roll transactions, and the issuance of
REMICs and Other Structured Securities. Depending upon market conditions, there may be substantial variability in any period
in the total amount of securities we purchase or sell. In some cases, purchasing or selling agency securities could adversely
affect the price performance of our PCs relative to comparable Fannie Mae securities. While we may employ a variety of
strategies in an effort to support the liquidity and price performance of our PCs and may consider additional strategies, we may
cease such activities if deemed appropriate. For more information about our efforts to support the liquidity and relative price
performance for PCs, see “Our Business — Overview of the Mortgage Securitization and Guarantee Process.”
We incur costs in connection with our efforts to support our presence in the agency securities market or the liquidity and
price performance of our PCs, including by engaging in transactions that yield less than our target rate of return. For more
information, see “RISK FACTORS — Competitive and Market Risks — A significant decline in the price performance of or
demand for our PCs could have an adverse effect on the volume and/or profitability of our new single-family guarantee
business. The profitability of our multifamily business could be adversely affected by a significant decrease in demand for K
Certificates.”
Multifamily Segment
Our Multifamily segment provides liquidity to the multifamily market and supports a consistent supply of affordable
rental housing by purchasing and securitizing mortgage loans secured by properties with five or more units. The Multifamily
segment reflects results from our investment (both purchases and sales), securitization, and guarantee activities in multifamily
mortgage loans and securities. Our primary business model is to purchase multifamily mortgage loans for aggregation and then
securitization through issuance of multifamily K Certificates, which generally allows us to transfer the expected credit risk of
the loans to third-party investors.
Our Multifamily segment is focused on:
• Continuing to provide stability to the multifamily mortgage market, particularly the market for affordable housing,
while meeting FHFA's Scorecard requirements relating to our new business volumes.
• Maintaining a strong credit and capital management discipline.
The multifamily property market is affected by local and regional economic factors, such as employment rates,
construction cycles, preferences for homeownership versus renting, and relative affordability of single-family home prices, all
of which influence the supply and demand for multifamily properties and pricing for apartment rentals. Our multifamily loan
volume is largely sourced through established institutional channels where we are generally providing post-construction
financing to larger apartment project operators with established performance records.
Multifamily mortgages generally are without recourse to the borrower (i.e., the borrower is not liable for any deficiency
remaining after foreclosure and sale of the property), except in the event of fraud or certain other specified types of default.
Therefore, repayment of the mortgage depends on the ability of the underlying property to generate cash flows sufficient to
cover the related debt obligations. That, in turn, depends on conditions in the local rental market, local and regional economic
conditions, the physical condition of the property, the quality of property management, and the level of operating expenses.
Our Customers
We acquire our multifamily mortgage loans from a network of approved sellers. A significant portion of our multifamily
mortgage loans are serviced by several of our large customers. Our top two multifamily sellers, CBRE Capital Markets, Inc.
and Berkadia Commercial Mortgage LLC, accounted for 20% and 15%, respectively, of our multifamily new business volume
for 2014. Our top ten multifamily sellers represented an aggregate of approximately 84% of our multifamily new business
volume for 2014.
Our Competition
In the Multifamily segment, we compete on the basis of: (a) price; (b) products, including our use of certain securitization
structures; and (c) service. Our principal competitors are Fannie Mae, FHA, commercial and investment banks, CMBS
conduits, dealers, thrift institutions, and life insurance companies.
Underwriting Requirements and Quality Control Standards
Our process and standards for underwriting multifamily mortgages differ from those used for single-family mortgages as
we use a prior approval underwriting approach. With this approach, we maintain our credit discipline by completing our own
underwriting and credit review for each newly-originated multifamily loan prior to purchasing or guaranteeing it. This process
includes review of third-party appraisals and cash flow analysis. Our underwriting standards focus on loan quality measurement
based, in part, on the LTV ratio and DSCR. The DSCR estimates a multifamily borrower’s ability to service its mortgage
obligation (both principal and interest) using the secured property’s cash flow, after deducting non-mortgage expenses from
income. The higher the DSCR, the more likely a multifamily borrower will be able to continue servicing its mortgage
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