Freddie Mac 2015 Annual Report Download - page 106

Management's Discussion and Analysis Risk Management | SF Credit Risk
Freddie Mac 2015 Form 10-K 104
Other Higher Risk Loans - Alt-A and Subprime Loans
While we have referred to certain loans as subprime or Alt-A for purposes of the discussion below and
elsewhere in this Form 10-K, there is no universally accepted definition of subprime or Alt-A, and the
classification of such loans may differ from company to company. For example, some financial institutions
may use credit scores to delineate certain residential loans as subprime. We do not rely on these loan
classifications to evaluate the credit risk exposure relating to such loans in our single-family credit
guarantee portfolio.
Participants in the mortgage market may characterize single-family loans based upon their overall credit
quality at the time of origination, generally considering them to be prime or subprime. While we have not
historically characterized the loans in our single-family credit guarantee portfolio as either prime or
subprime, we monitor the amount of loans we have guaranteed with characteristics that indicate a higher
degree of credit risk. In addition, we estimate that approximately $1.5 billion and $1.7 billion of security
collateral underlying our other securitization products at December 31, 2015 and 2014, respectively, were
identified as subprime based on information provided to us when we entered into these transactions.
Many mortgage market participants classify single-family loans with credit characteristics that range
between their prime and subprime categories as Alt-A because these loans have a combination of
characteristics of each category, may be underwritten with lower or alternative income or asset
documentation requirements compared to a full documentation loan, or both. Although we have
discontinued new purchases of loans with lower documentation standards, we continued to purchase
certain amounts of such loans in cases where the loan was either purchased pursuant to a previously
issued guarantee, part of our relief refinance initiative, or part of another refinance loan initiative and the
pre-existing loan was originated under less than full documentation standards. In the event we purchase
a refinance loan and the original loan had been previously identified as Alt-A, such refinance loan may no
longer be categorized or reported as an Alt-A loan in this Form 10-K and our other financial reports
because the new refinance loan replacing the original loan would not be identified by the seller/servicer
as an Alt-A loan. As a result, our reported Alt-A balances may be lower than would otherwise be the case
had such refinancing not occurred. From the time the relief refinance initiative began in 2009 to
December 31, 2015, we have purchased approximately $32.8 billion of relief refinance loans that were
previously categorized as Alt-A loans in our portfolio, including $1.6 billion in 2015.
The table below contains information on Alt-A loans in our single-family credit guarantee portfolio.
December 31, 2015 December 31, 2014
(dollars in billions) UPB CLTV % Modified SDQ Rate UPB CLTV % Modified SDQ Rate
Alt-A $ 40.2 77% 23.1% 6.32% $ 48.3 82% 19.9%8.53%
The UPB of Alt-A loans in our single-family credit guarantee portfolio declined during 2015 primarily due
to borrowers refinancing into other mortgage products, foreclosure transfers, and other liquidation events.
Significant portions of the Alt-A loans in our portfolio are concentrated in Arizona, California, Florida, and
Nevada.
Geographic Concentrations
We purchase mortgage loans from across the U.S. and maintain a geographically diverse portfolio.
However, local economic conditions can affect borrowers’ ability to repay and the value of the underlying