Freddie Mac 2014 Annual Report Download - page 98

93 Freddie Mac
related securities. For information about our holdings of these securities, see “CONSOLIDATED BALANCE SHEETS
ANALYSIS — Investments in Securities - Mortgage-Related Securities.”
Conditions in the single-family mortgage market improved in most geographic areas during the last two years. The
balance of non-performing single-family loans in our single-family credit guarantee portfolio declined in both 2014 and 2013,
but remains at elevated levels compared to our historical experience.
Single-Family Mortgage Credit Risk Framework and Profile
Our risk exposure to single-family loans is represented by all loans we either purchase or guarantee, which we refer to as
our single-family credit guarantee portfolio. Our principal strategies for managing single-family mortgage credit risk are: (a)
maintaining policies and procedures, including underwriting and servicing standards, that govern new business activity and our
portfolio; (b) monitoring the characteristics of the loans that we purchase or guarantee; (c) transferring a portion of our
mortgage credit risk through credit enhancements, including insurance and other risk transfer transactions; (d) monitoring loan
performance and making adjustments to our standards and policies, if necessary; (e) managing problem loans, including early
intervention through loan workouts and foreclosures; and (f) managing REO activities.
Maintaining Policies and Procedures for our New Business Activity
We use a process of delegated underwriting for the single-family mortgages we purchase or securitize. In this process, our
contracts with sellers describe mortgage eligibility and underwriting standards, and the sellers represent and warrant to us that
the mortgages sold to us meet these standards. Through our delegated underwriting process, mortgage loans and the borrowers’
ability to repay the loans are evaluated using a number of critical risk characteristics, including but not limited to, the credit
profile of the borrower, the features of the mortgage, and the LTV ratio.
As part of our quality control process, we review the underwriting documentation for a sample of loans we have
purchased for compliance with our standards. We give our sellers an opportunity to appeal ineligible loan determinations in
response to our request for the repurchase of the loan. The loan review and appeal process is lengthy. Although we are still
reviewing 2014 originations, we have completed a substantial number of reviews and compiled results of our review of 2013
originations. Based on reviews completed through December 31, 2014, the average aggregate ineligible loan rate across all
sellers for loans funded during 2013, 2012, and 2011 (excluding HARP and other relief refinance loans) was approximately
1.4%, 3.0%, and 5.7%, respectively. These rates may change in the future as our sellers may appeal our findings. The most
common underwriting defect found in our review of loans funded during 2013 (excluding HARP and other relief refinance
loans) related to the delivery of inaccurate income data. In recent periods, we also made revisions to our loan review process
that are designed to standardize the process and facilitate more timely review of loans we purchase.
We do not have our own mortgage loan servicing operation. Instead, our servicers perform the primary servicing function
on our loans on our behalf. This includes performing the loan workout and foreclosure activities described below in "Managing
Problem Loans." We have contractual arrangements with our servicers under which they represent and warrant that they will
service our loans in accordance with our standards. We monitor our servicers' compliance with our servicing standards and
periodically review their servicing operations process.
If we discover that representations and warranties were breached in either underwriting or servicing a loan (i.e., that
contractual standards were not followed), we can exercise certain contractual remedies to mitigate our actual or potential credit
losses on the loans. These contractual remedies may include the ability to require the seller or the servicer to repurchase the
loan at its current UPB.
For more information, see “BUSINESS — Our Business Segments — Single-Family Guarantee Segment —
Underwriting Requirements, Quality Control Standards and the Representation and Warranty Framework” and “Institutional
Credit Risk Profile — Single-family Mortgage Seller/Servicers.”
Monitoring the Characteristics of the Loans that We Purchase or Guarantee
We actively monitor the characteristics of loans we purchase, and our Enterprise Risk Management division establishes
limits on the quantity of loans we purchase that have certain higher risk characteristics. These limits are designed to help us
balance the amount of risk we can accept in our portfolio with the facilitation of affordable housing in a responsible manner.
The following are some of the loan and borrower characteristics we monitor.
• Original LTV Ratio: We use the original LTV ratio to measure the ability of the underlying property to protect our
interests in the loan. The higher the LTV ratio, the greater the risk we could incur a loss if the borrower defaults on the
loan, as the proceeds we could obtain on the sale of the underlying property might not be enough to cover our
exposure on the loan. We require credit enhancement on loans with an original LTV ratio greater than 80%. Due to our
participation in HARP, we have purchased a significant number of loans that have LTV ratios over 100% in the last
several years. HARP loans with LTV ratios over 100% represented 3% and 8% of our single-family mortgage
purchases in 2014 and 2013, respectively.
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