Freddie Mac 2015 Annual Report Download - page 120

Management's Discussion and Analysis Risk Management | MF Credit Risk
Freddie Mac 2015 Form 10-K 118
Transferring the Vast Majority of Expected Credit Losses to Third Parties Through K Certificates
and Similar Securitizations
We seek to transfer multifamily mortgage credit risk primarily through K Certificate transactions in which
we transfer substantially all of the first loss position associated with the underlying multifamily loans to
third-party investors. The amount of subordination to the guaranteed certificates in our K Certificate
transactions is set at a level that we believe is sufficient to cover the vast majority of the expected credit
losses on the loans. We continue to develop other strategies to reduce our credit exposure to multifamily
loans and securities by transferring credit risk to third parties.
We securitized $128.4 billion in UPB of multifamily loans in K Certificate transactions between 2009 and
2015. Excluding transactions without subordination, the average level of subordination on all outstanding
K Certificates was 18% as of both December 31, 2015 and 2014. Since we began issuing K Certificates,
we have experienced no credit losses associated with our guarantees on these securities. See “Our
Business Segments - Multifamily” for more information on K Certificates.
The table below shows the delinquency rates for both credit-enhanced and non-credit-enhanced loans in
our multifamily mortgage portfolio.
December 31,
2015 2014 2013
% of Portfolio Delinquency
Rate % of Portfolio Delinquency Rate % of Portfolio Delinquency Rate
Non-credit-enhanced 32% 0.03% 40% 0.02% 47% 0.07%
Credit-enhanced:
K Certificates 61 0.02% 53 0.01% 45 0.07%
Other 7 —% 7 0.35% 8 0.29%
Total 100% 0.02% 100%0.04%100%0.09%
Managing Our Portfolio, Including Loss Mitigation Activities
To help mitigate our potential losses, we generally require sellers to act as the primary servicer for loans
they have sold to us, including property monitoring tasks beyond those typically performed by single-
family servicers. For securitized loans, we typically transfer the master servicing role to the trustees on
behalf of the bondholders in accordance with the securitization and trust documents. Servicers for
unsecuritized loans over $1 million 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 financial
statements. In situations where a borrower or property is in distress, the frequency of communications
with the borrower may be increased. We rate servicing performance on a regular basis and we may
conduct on-site reviews to confirm compliance with our standards.
We primarily use credit enhancements, such as the subordination provided by K Certificates, to mitigate
our credit losses. For unsecuritized loans, we may offer a workout option to give the borrower an
opportunity to bring the loan current and retain ownership of the property, such as providing a short-term
extension of up to 12 months. These arrangements are entered into 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. Our multifamily
loan modification and other workout activities have been minimal in the last three years.