Freddie Mac 2005 Annual Report Download - page 86

time. These Ñnancial incentives may also take the form of a fee payable to us by the seller if the mortgages delivered to us
do not meet certain credit standards.
We have also entered into risk-sharing agreements. Under these agreements, default losses on speciÑc mortgage loans
delivered by sellers are compared to default losses on reference pools of mortgage loans with similar characteristics. Based
upon the results of that comparison, we remit or receive payments based upon the default performance of the speciÑed
mortgage loans. These agreements are accounted for as credit derivatives rather than Ñnancial guarantees, in part, because
we may make payments to the seller/servicer under these agreements (depending upon actual default experience over the
lives of the mortgages). The total notional amount of mortgage loans subject to these agreements was approximately
$2.4 billion and $10.9 billion at December 31, 2005 and 2004, respectively. These risk-sharing agreements are derivatives
classiÑed as no hedge designation, with changes in fair value recorded as Derivative gains (losses) on the consolidated
statements of income. The fair value of these risk-sharing agreements is recorded in Derivative assets, at fair value and
Derivative liabilities, at fair value on the consolidated balance sheets, with net amounts of $(1) million and $(2) million at
December 31, 2005 and 2004, respectively.
Although these arrangements are part of our overall credit risk management strategy, we have not treated them as credit
enhancements for purposes of describing our Total mortgage portfolio characteristics because the Ñnancial incentive and
credit derivative agreements may result in us making payments to the seller/servicer.
Credit Performance. Credit losses are a useful indicator of credit risk management activities; however, they must
ultimately be considered relative to the revenue received for assuming the underlying credit risk. Several key statistics
associated with potential and actual credit losses are detailed in the tables below.
Delinquencies. Table 39 presents delinquency information for the single-family loans underlying our Total mortgage
portfolio.
Table 39 Ì Single-Family Ì Delinquency Rates Ì By Region(1)(2)(3)
December 31,
2005 2004 2003
Northeast ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 0.22% 0.24% 0.28%
Southeast ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 0.38 0.31 0.32
North centralÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 0.30 0.27 0.27
SouthwestÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 0.64 0.26 0.28
West ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 0.11 0.15 0.19
Total non-credit-enhanced Ì all regions ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 0.30 0.24 0.27
Total credit-enhanced Ì all regions ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 2.46 2.75 2.96
Total credit-enhanced and non-credit-enhanced Ì all regions ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 0.69% 0.73% 0.86%
(1) Based on mortgage loans in the Retained portfolio and Total Guaranteed PCs and Structured Securities Issued, excluding that portion of Structured
Securities that is backed by Ginnie Mae CertiÑcates.
(2) Based on the number of mortgages 90 days or more delinquent or in foreclosure. Excludes delinquencies in alternative collateral deals.
(3) Region Designation: West (AK, AZ, CA, GU, HI, ID, MT, NV, OR, UT, WA); Northeast (CT, DE, DC, MA, ME, MD, NH, NJ, NY, PA, RI,
VT, VA, WV); North central (IL, IN, IA, MI, MN, ND, OH, SD, WI); Southeast (AL, FL, GA, KY, MS, NC, PR, SC, TN, VI); Southwest (AR,
CO, KS, LA, MO, NE, NM, OK, TX, WY). Beginning in 2005, Puerto Rico and Virgin Islands were reclassiÑed from Northeast to Southeast.
While overall single-family delinquencies have declined over the past three years as a result of generally strong
economic conditions and continued house price appreciation in the United States, non-credit enhanced delinquencies
increased in 2005, with some regional variation, primarily due to Hurricane Katrina. See ""Table 6.3 Ì Delinquency
Performance'' in ""NOTE 6: LOAN LOSS RESERVES'' to the consolidated Ñnancial statements for detailed delinquency
performance information.
Our multifamily delinquency rate remained very low at zero percent, 0.06 percent and 0.05 percent at the end of 2005,
2004 and 2003, respectively. Hurricane Katrina has not aÅected our reported multifamily delinquency rate because the
contractual terms of certain aÅected mortgage loans, with unpaid principal balances totaling $210 million at December 31,
2005, were modiÑed. Multifamily delinquencies may include mortgage loans where the borrowers are not paying as agreed,
but principal and interest are being paid to us under the terms of a credit enhancement agreement.
70 Freddie Mac