Freddie Mac 2014 Annual Report Download - page 75

70 Freddie Mac
credit losses in 2013 due to improvements in home prices and counterparty settlements for representation and warranty
violations.
We maintain a consistent market presence by providing lenders with a constant source of liquidity for conforming
mortgage products. Issuances of our guarantees were $260 billion and $435 billion in 2014 and 2013, respectively.
Origination volumes in the U.S. residential mortgage market declined significantly during 2014 compared to 2013, driven
by a significant decline in the volume of refinance mortgages. We attribute this decline to higher average mortgage interest
rates in 2014 compared to 2013. Many borrowers have already refinanced their loans in recent years at relatively low interest
rates, and thus may be less likely to do so in the future.
The UPB of the single-family credit guarantee portfolio was $1.7 trillion at both December 31, 2014 and 2013. Our
purchase activity in 2014 declined to $255.3 billion in UPB compared to $422.7 billion in UPB during 2013 and $426.8 billion
during 2012. The liquidation rate on our single-family credit guarantees also declined to approximately 15% in 2014 compared
to 28% in 2013 and 33% in 2012. At December 31, 2014 and 2013, there were approximately 10.6 million and 10.7 million
loans, respectively, in our single-family credit guarantee portfolio, including 2.1 million and 2.0 million relief refinance
mortgages, respectively. The average UPB of loans in our single-family credit guarantee portfolio was approximately $156,000
and $155,000 at December 31, 2014 and 2013, respectively.
We refer to single-family loans we acquired beginning in 2009, excluding HARP and other relief refinance mortgages, as
our New single-family book. We do not include HARP and other relief refinance mortgages in our New single-family book,
since underwriting procedures for these mortgages are limited, and as a result, we believe that, in many cases, these mortgages
generally reflect many of the credit risk attributes of the original loans (many of which were originated between 2005 and
2008).
Our New single-family book continues to represent an increasing share of our overall single-family credit guarantee
portfolio and comprised 60% of this portfolio as of December 31, 2014. The serious delinquency rate for the New single-family
book was 0.24% as of December 31, 2014 and its credit losses were $97 million in 2014. As of December 31, 2014, loans
originated after 2008 have, on a cumulative basis, provided management and guarantee income that has exceeded the credit-
related and administrative expenses associated with these loans. We expect these loans to continue to provide management and
guarantee income that exceeds credit-related and administrative expenses over the long term, in aggregate. For more
information on the composition of our single-family credit guarantee portfolio, see "Table 43 — Single-Family Credit
Guarantee Portfolio Data by Year of Origination."
Segment Earnings management and guarantee income was $5.2 billion in 2014, compared to $4.9 billion in 2013 and
$4.4 billion in 2012. The increase in 2014 from 2013 was primarily due to a higher average guarantee fee rate and a higher
average balance of the single-family credit guarantee portfolio. The increase in 2013 from 2012 was primarily due to an
increase in amortization of buy-down fees (which we began recording in the Single-family Guarantee segment during the
fourth quarter of 2012). Segment Earnings management and guarantee income also benefited in 2013 from a higher average
guarantee fee rate compared to 2012.
At the direction of FHFA, we implemented two across-the-board increases in guarantee fees in 2012. The average
management and guarantee fee we charged for new acquisitions in 2014 was 57.4 basis points, compared to 51.4 basis points in
2013. The guarantee fee we charge on new acquisitions generally consists of a combination of up front delivery fees and a base
monthly fee. The higher average guarantee fees charged on new acquisitions in 2014 were primarily due to higher levels of
home purchase loans combined with a change in the characteristics of the mortgages we purchased in 2014, including loans
with higher LTV ratios and borrowers with lower average credit scores than in 2013. The average Segment Earnings
management and guarantee income was 31.2 basis points in 2014 and 30.0 basis points in 2013. The difference between the
average guarantee fee charged on new acquisitions and the average Segment Earnings management and guarantee income, in
basis points, reflects different methodologies for recognizing up-front delivery fee income. The average guarantee fee rate
charged on new acquisitions recognizes up-front delivery fee income over the estimated life of the related loans using our
expectations of prepayments and other liquidations, whereas the Segment Earnings rate recognizes these amounts over the
contractual life of the related loans (usually 30 years). In addition, the average Segment Earnings management and guarantee
income reflects an average of our total mortgage portfolio and is not limited to 2014 purchases. Loans acquired prior to 2012
have lower contractual management and guarantee fee rates than loans we acquired in 2014 and 2013. We seek to issue
guarantees with fee terms that we believe are commensurate with the risks assumed and that will, over the long-term: (a)
provide management and guarantee fee income that, in aggregate, exceeds our anticipated credit-related and administrative
expenses on the single-family credit guarantee portfolio; and (b) provide a return on the capital that would be needed to support
the related credit risk.
Our Segment Earnings management and guarantee fee income is influenced by our PC price performance because we
adjust our fees based on the relative price performance of our PCs compared to comparable Fannie Mae securities. A decline in
this price performance could adversely affect our segment financial results. 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
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