Freddie Mac 2004 Annual Report Download - page 92

Our Total new business purchases, which consist of mortgage loans and non-Freddie Mac mortgage-
related securities that are purchased for our Retained portfolio, as well as to become collateral for issued PCs
and Structured Securities, totaled $494,588 million, $834,864 million and $650,705 million during 2004, 2003
and 2002, respectively. Our Total new business purchases during 2003 were the highest in our history.
Interest rates for Ñxed-rate mortgages declined during 2002 and through the Ñrst half of 2003, resulting in
a surge of mortgage reÑnancing activity during both of these years. In the latter half of 2003, interest rates for
Ñxed-rate mortgages rose from the low point reached in mid-2002, but still ended the year at relatively low
levels compared to historical standards. During 2004, interest rates were less volatile than in prior years.
Total mortgage purchases were $367,524 million, $716,775 million and $543,848 million during 2004,
2003 and 2002, respectively. Mortgage lenders tend to deliver more Ñxed-rate residential mortgages to the
GSEs as compared to ARM/Öoating-rate products. 30-year and 15-year Ñxed-rate mortgages represented
80 percent, 87 percent and 86 percent of our Total mortgage purchases for 2004, 2003 and 2002. Fixed-rate
mortgage volume peaked in 2002 because declining interest rates increased the number of borrowers that
qualiÑed for and chose this mortgage product. ARMs/Floating-Rate and Balloon/Resets mortgages repre-
sented 17 percent, 11 percent and 12 percent of our Total mortgage purchases for 2004, 2003 and 2002,
respectively, highlighting borrowers increasing preference for ARMs/Floating-Rate products.
Total non-Freddie Mac mortgage-related securities purchased were $127,064 million, $118,089 million
and $106,857 million during 2004, 2003 and 2002, respectively. During 2004, the mix of purchases changed
signiÑcantly compared to 2003 and 2002. SpeciÑcally, we purchased signiÑcantly more non-agency single-
family and other mortgage-related securities due to a number of factors described in ""CONSOLIDATED
BALANCE SHEETS ANALYSIS Ì Retained Portfolio,'' partially oÅset by a reduction in the purchase of
Fannie Mae securities. In addition, during 2003 and 2004, part of our strategy to support PC price
performance included the purchase and sale of other agency securities.
The liquidation rate on the Total mortgage portfolio totaled 28 percent, 55 percent and 40 percent for the
years ended December 31, 2004, 2003 and 2002, respectively. The relatively higher liquidation rates in 2003
and 2002 compared to 2004 reÖect accelerated borrower prepayments due to low Ñxed interest rates during
2002 and the Ñrst half of 2003.
The percentage of purchases with credit enhancements totaled 19 percent, 16 percent and 20 percent for
the years ended December 31, 2004, 2003 and 2002, respectively. Credit enhancements primarily include
third-party, primary loan-level mortgage insurance, third-party pool issuance or other arrangements in which
the third party has retained a portion of the default risk by pledging collateral or agreeing to accept losses on
loans that default. The drop in purchases with credit enhancements in 2003 compared to 2004 and 2002 was
due primarily to a decline in the number of loans purchased that are covered by primary mortgage insurance,
or PMI, which is not required for mortgage loans with low loan-to-value ratios. Purchases in 2003 had the
lowest weighted average loan-to-value ratio for the three years presented (i.e., 68 percent for 2003 compared
to 71 percent and 70 percent for 2004 and 2002, respectively) because the percentage of reÑnance mortgage
purchases was highest in 2003 of the three years presented (i.e., 81 percent for 2003 compared to 60 percent
and 74 percent for 2004 and 2002, respectively). Loan-to-value ratios tend to be lower for reÑnance mortgages
as compared to purchase money mortgages due to the strong house price appreciation experienced in recent
years. Our future ability and desire to utilize credit enhancements will depend on our evaluation of the credit
quality of new business purchase opportunities and the future availability of eÅective credit enhancements at
prices that permit an attractive return. See ""RISK MANAGEMENT Ì Credit Risks Ì Mortgage Credit
Risk Ì Mortgage Credit Risk Management Strategies'' for more information.
We generate a signiÑcant portion of our mortgage purchase volume through several key mortgage lenders
that have entered into special business arrangements with us. See ""BUSINESS Ì Credit Guarantee
Activities'' for information about these relationships and consequent risks.
For a discussion of Resecuritization Activity, see ""CONSOLIDATED RESULTS OF OPERA-
TIONS Ì Resecuritization Fees.''
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