Freddie Mac 2014 Annual Report Download - page 24

19 Freddie Mac
obligation. Our standards for multifamily loans specify a maximum original LTV ratio and a minimum DSCR that vary based
on the loan characteristics, such as loan type (new acquisition or supplemental financing), loan term (intermediate or longer-
term), and loan features (interest-only or amortizing, fixed- or variable-rate). Our multifamily loans are generally underwritten
with requirements for a maximum original LTV ratio of 80% and a DSCR of greater than 1.25 (which for interest-only and
partial interest-only loans is based on an assumed monthly payment that reflects amortization of principal). In certain
circumstances, our standards for multifamily loans allow for certain types of loans to have an original LTV ratio over 80% and/
or a DSCR of less than 1.25, typically where this will serve our mission and contribute to achieving our affordable housing
goals. In addition to DSCR and LTV ratio, we consider other qualitative factors, such as borrower experience and the strength
of the local market, in the credit decision we make on each loan.
Multifamily sellers make representations and warranties to us about the mortgage and about certain information
submitted to us in the underwriting process. We have the right to require that a seller repurchase a multifamily mortgage for
which there has been a breach of representation or warranty. However, because of our evaluation of underwriting information
for most multifamily properties prior to purchase, repurchases have been rare.
We generally require multifamily sellers to service mortgage loans they have sold to us to mitigate potential losses. This
includes property monitoring tasks beyond those typically performed by single-family servicers. We are the master servicer for
loans in our multifamily mortgage portfolio. In our securitizations (e.g., K Certificates), we typically transfer the master
servicing responsibilities for securitized loans to the trustees on behalf of the bondholders in accordance with the securitization
and trust documents. For unsecuritized loans over $1 million in our portfolio, servicers must generally submit an annual
assessment of the mortgaged property to us based on the servicer’s analysis of the property as well as the borrower’s quarterly
financial statements. In situations where a borrower or property is in distress, the frequency of communications with the
borrower may be increased. Because the activities of multifamily seller/servicers are an important part of our loss mitigation
process, we rate their performance regularly and may conduct on-site reviews of their servicing operations in an effort to
confirm compliance with our standards.
Loss Mitigation Activities
As discussed above, we primarily use subordination, such as in K Certificate transactions, to mitigate credit losses on the
loans we purchase or guarantee. For unsecuritized loans (for which we are the master servicer), we may offer a workout option
to a borrower in distress. For example, we may modify the terms of a multifamily mortgage loan (e.g., providing a short-term
loan extension of up to 12 months), which gives the borrower an opportunity to bring the loan current and retain ownership of
the property. These arrangements are made with the expectation that we will recover our initial investment or minimize our
losses. We do not enter into these arrangements in situations where we believe we would experience a loss in the future that is
greater than or equal to the loss we would experience if we foreclosed on the property at the time of the agreement. For many
of our unsecuritized loans, we use other types of credit enhancements that also help mitigate potential losses in the event of
default.
Securitization Activities
We primarily securitize multifamily mortgage loans through Other Guarantee Transactions (i.e., K Certificates). To a
lesser extent, we provide guarantees of the payment of principal and interest on tax-exempt multifamily pass-through
certificates backed by multifamily housing revenue bonds. These housing revenue bonds are collateralized by mortgage loans
on low- and moderate-income multifamily housing developments. We refer to these transactions as Other Structured Securities.
In 2014, in order to expand our securitization activities for a broader number of investors, we entered into other types of
securitization transactions, including issuing PCs backed by multifamily mortgage loans. See “Our Business — Overview of the
Mortgage Securitization and Guarantee Process” for additional information about our securitization activities.
From time to time, we may undertake various activities in an effort to support the liquidity of our K Certificates. These
activities are similar to those described above in “Investments Segment — Market Presence and PC Support Activities.”
Other Guarantee Commitments
In certain circumstances, we provide our guarantee on mortgage-related assets held by third parties, in exchange for a
management and guarantee fee, without securitizing those assets. For example, we guarantee the payment of principal and
interest on certain tax-exempt multifamily housing revenue bonds secured by low- and moderate-income multifamily mortgage
loans. In addition, we have issued guarantees under the TCLFP on securities backed by HFA bonds as part of the HFA Initiative
(certain of which are still outstanding). See “NOTE 2: CONSERVATORSHIP AND RELATED MATTERS — Housing
Finance Agency Initiative” for further information.
Conservatorship and Related Matters
Since September 2008, we have been operating in conservatorship, with FHFA acting as our Conservator. The
conservatorship and related matters continue to have wide-ranging effects on us, including our management, business activities,
financial condition and results of operations.
In connection with our entry into conservatorship, we entered into the Purchase Agreement with Treasury. Under the
Purchase Agreement, we issued to Treasury both senior preferred stock and a warrant to purchase common stock. We refer to
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