Freddie Mac 2014 Annual Report Download - page 86

81 Freddie Mac
Table 30 — Non-Agency Mortgage-Related Securities Backed by Subprime, Option ARM, and Alt-A Loans and Certain
Related Credit Statistics
As of
12/31/2014 9/30/2014 6/30/2014 3/31/2014 12/31/2013
(dollars in millions)
UPB:(1)
Subprime $ 27,682 $ 30,706 $ 34,083 $ 37,958 $ 39,694
Option ARM 8,287 8,493 9,716 10,197 10,426
Alt-A 4,549 4,995 6,339 7,904 9,147
Gross unrealized losses, pre-tax:
Subprime $ 610 $ 880 $ 1,577 $ 2,037 $ 2,780
Option ARM 183 223 346 381 381
Alt-A 32 30 59 83 135
Present value of expected future credit losses:(2)(3)
Subprime $ 4,262 $ 4,568 $ 4,954 $ 6,024 $ 6,400
Option ARM 987 1,161 1,470 1,651 1,802
Alt-A 457 546 785 1,084 1,165
Collateral delinquency rate:(4)
Subprime 32% 32% 33% 34% 35%
Option ARM 27 27 29 31 32
Alt-A 20 20 21 22 22
Average credit enhancement:(5)
Subprime 9% 9% 6% 7% 9%
Option ARM — — (2) (1) —
Alt-A 2 2 (1) (1) —
Cumulative collateral loss:(6)
Subprime 32% 32% 32% 31% 30%
Option ARM 25 25 25 24 24
Alt-A 15 15 15 15 13
(1) Not affected by settlement amounts we received related to our investments in certain non-agency mortgage-related securities. For more information, see
“NOTE 15: CONCENTRATION OF CREDIT AND OTHER RISKS — Non-Agency Mortgage-Related Security Issuers.”
(2) Represents our estimate of the present value of future contractual cash flows that we do not expect to collect, discounted at the effective interest rate
determined based on the security’s contractual cash flows and the initial acquisition costs. This discount rate is only utilized to analyze the cumulative
credit deterioration for securities since acquisition and may be lower than the discount rate used to measure ongoing other-than-temporary impairment
to be recognized in earnings for securities that have experienced a significant improvement in expected cash flows since the last recognition of other-
than-temporary impairment recognized in earnings.
(3) We regularly evaluate the underlying estimates and models we use when determining the present value of expected future credit losses and update our
assumptions to reflect our historical experience and current view of economic factors. As a result, data in different periods may not be comparable.
(4) Determined based on the number of loans that are two monthly payments or more past due that underlie the securities using information obtained from
a third-party data provider.
(5) Reflects the ratio of the current principal amount of the securities issued by a trust that will absorb losses in the trust before any losses are allocated to
securities that we own. Percentage generally calculated based on: (a) the total UPB of securities subordinate to the securities we own, divided by (b) the
total UPB of all of the securities issued by the trust (excluding notional balances). Only includes credit enhancement provided by subordinated
securities; excludes credit enhancement provided by bond insurance. Negative values are shown when unallocated collateral losses will be allocated to
the securities that we own in excess of current remaining credit enhancement, if any. The unallocated collateral losses have been considered in our
assessment of other-than-temporary impairment. Average credit enhancements increased at September 30, 2014 primarily due to sales of non-agency
mortgage-related securities included as part of a settlement agreement in the third quarter of 2014.
(6) Based on the actual losses incurred on the collateral underlying these securities. Actual losses incurred on the securities that we hold are significantly
less than the losses on the underlying collateral as presented in this table, as non-agency mortgage-related securities backed by subprime, option ARM,
and Alt-A loans were generally structured to include credit enhancements, particularly through subordination and other structural enhancements.
Our estimate of the present value of expected future credit losses on our available-for-sale non-agency mortgage-related
securities decreased to $5.8 billion at December 31, 2014 from $6.4 billion at September 30, 2014. All of these amounts have
been reflected in our net impairment of available-for-sale securities recognized in earnings in this period or prior periods. The
decrease in the present value of expected future credit losses on our available-for-sale securities was primarily driven by: (a)
sales of non-agency mortgage-related securities; and (b) a decline in interest rates.
The investments we hold in non-agency mortgage-related securities backed by subprime, option ARM, and Alt-A loans
were generally structured to include credit enhancements, particularly through subordination and other structural
enhancements. Bond insurance is an additional credit enhancement covering some of the non-agency mortgage-related
securities. These credit enhancements are the primary reason we expect our actual losses, through principal or interest
shortfalls, to be less than the underlying collateral losses in the aggregate. In most cases, we continued to experience the
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