Freddie Mac 2005 Annual Report Download - page 84

has increased the values of properties underlying the mortgages in our portfolio. We monitor regional geographic markets
for changes in these trends, particularly with respect to new loans originated in regional markets that have had signiÑcant
house price appreciation, and may seek to reinsure a portion of this risk should we determine that the possibility of such
changes warrants action. Historical experience has shown that defaults are less likely to occur on mortgages with lower
estimated current loan-to-value ratios. Furthermore, in the event of a default, increases in house prices generally reduce the
total amount of loss, thereby mitigating credit losses.
Credit Score. Credit scores are a useful measure for assessing the credit quality of a borrower. Credit scores are
numbers reported by credit repositories, based on statistical models, that summarize an individual's credit record and predict
the likelihood that a borrower will repay future obligations as expected. FICO» scores, developed by Fair, Isaac and Co.,
Inc., are the most commonly used credit scores today. FICO scores are ranked on a scale of approximately 300 to
850 points. Statistically, consumers with higher credit scores are more likely to repay their debts as expected than those with
lower scores. The weighted average credit score for the Total mortgage portfolio (based on the credit score at origination)
remained high at 725 at December 31, 2005 and 723 at both December 31, 2004 and 2003, indicating borrowers with strong
credit quality.
Loan Purpose. Mortgage loan purpose indicates how the borrower intends to use the funds from a mortgage loan. The
three general categories are: purchase, cash-out reÑnance, or other reÑnance. In a purchase transaction, funds are used to
acquire a property. In a cash-out reÑnance transaction, in addition to paying oÅ an existing Ñrst mortgage lien, the borrower
obtains additional funds that may be used for other purposes, including paying oÅ subordinate mortgage liens and
providing unrestricted cash proceeds to the borrower. In other reÑnance transactions, the funds are used to pay oÅ an existing
Ñrst mortgage lien and may be used in limited amounts for certain speciÑed purposes; such reÑnances are generally referred
to as ""no cash-out'' or ""rate and term'' reÑnances. Other reÑnance transactions also include reÑnance mortgages for which
the delivery data provided was not suÇcient for us to determine whether the mortgage was a cash-out or a no cash-out
reÑnance transaction. Given similar loan characteristics (e.g., loan-to-value ratios), purchase transactions have the lowest
likelihood of default followed by no-cash out reÑnances and then cash out reÑnances. As a practical matter, however, no-cash
out reÑnances tend to have lower loan-to-value ratios and borrowers with higher credit scores than purchase transactions
and as such, have better overall performance than purchase transactions.
Property Type. Single-family mortgage loans are deÑned as mortgages secured by housing with up to four living units.
Mortgages on one-unit properties tend to have lower credit risk than mortgages on multiple-unit properties.
Occupancy Type. Borrowers may purchase a home as a primary residence, second/vacation home or investment
property that is typically a rental property. Mortgage loans on properties occupied by the borrower as a primary or secondary
residence tend to have a lower credit risk than mortgages on investment properties.
Geographic Concentration. Since our business involves purchasing mortgages from every geographic region in the
U.S., we maintain a geographically diverse mortgage portfolio. This diversiÑcation generally mitigates credit risks arising
from changing local economic conditions. See ""NOTE 17: CONCENTRATION OF CREDIT AND OTHER RISKS'' to
our consolidated Ñnancial statements for more information concerning the distribution of our Total mortgage portfolio by
geographic region. Our Total mortgage portfolio's geographic distribution was relatively stable from 2003 to 2005, and
remains broadly diversiÑed across these regions.
Loss Mitigation Activities. Within our Total mortgage portfolio, we expect and price for some mortgage loans to
become non-performing due to changes in general economic conditions, changes in the Ñnancial status of individual
borrowers or other factors. Table 38 summarizes our non-performing assets. The increase in our non-performing assets
from 2001 through 2003 was primarily driven by higher delinquencies associated with our alternative collateral deals. While
these delinquencies result in higher levels of non-performing assets, we have limited loss exposure due to the credit
enhancements associated with these securities. The increase in our troubled debt restructurings from 2004 to 2005 was
primarily related to multifamily loans impacted by Hurricane Katrina. At December 31, 2005, troubled debt restructurings
as shown in Table 38 included multifamily loans aÅected by Hurricane Katrina with unpaid principal balances totaling
approximately $210 million.
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