Freddie Mac 2006 Annual Report Download - page 85

Other Credit Risk Management Activities. To compensate us for unusual levels of risk in some mortgage products, we
may charge incremental fees above a base guarantee fee calculated based on credit risk factors such as the mortgage product
type, loan purpose, loan-to-value ratio, and other loan or borrower attributes. In addition, we occasionally use Ñnancial
incentives and credit derivatives, as described below, in situations where we believe they will beneÑt our credit risk
management strategy. These arrangements are intended to reduce our credit-related expenses, thereby improving our overall
returns.
In some cases, we provide Ñnancial incentives in the form of lump sum payments to selected seller/servicers if they
deliver a speciÑed volume or percentage of mortgage loans meeting speciÑed credit risk standards over a deÑned period of
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 credit derivatives, including risk-sharing agreements. Under these risk-sharing 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 $1.9 billion and $2.4 billion at December 31, 2006 and 2005, respectively. In addition, the
total notional amount of mortgage loans in other credit derivatives was approximately $0.7 billion and $Ì billion at
December 31, 2006 and 2005, respectively. All credit derivatives were classiÑed as no hedge designation. The fair value of
these credit derivatives was not material at either December 31, 2006 or 2005.
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 risk-sharing and credit
derivative agreements may result in us making payments to the seller/servicer.
Delinquencies. We report single-family delinquency information based on the number of single-family mortgages that
are 90 days or more past due or in foreclosure. For multifamily loans, we report the delinquency when payment is 60 days or
more past due. Delinquencies on mortgage loans underlying Structured Transactions may be categorized as delinquent on a
diÅerent schedule than other mortgage loans due to variances in industry practice. We include all the single-family loans that
we own and those that are collateral for our PCs and Structured Securities, including those with signiÑcant credit
enhancement, in the calculation of delinquency information; however, we exclude that portion of Structured Securities that
is backed by Ginnie Mae CertiÑcates and certain Structured Transactions where delinquency data on the underlying
mortgage-related securities is not available. The Structured Transactions we have excluded represented 0.06 percent,
0.04 percent and 0.07 percent of our Total mortgage portfolio at December 31, 2006, 2005 and 2004, respectively, and these
securities were shadow rated AAA at the initial securitization. Shadow ratings are credit assessments performed by a rating
agency at time of origination, but are not published nor subsequently monitored. 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. Table 40 presents delinquency information for the single-family loans underlying our
Total mortgage portfolio.
Table 40 Ì Single-Family Ì Delinquency Rates Ì By Region(1)
December 31,
2006 2005 2004
Northeast(2) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 0.24% 0.22% 0.24%
Southeast(2) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 0.30 0.38 0.31
North Central(2) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 0.32 0.30 0.27
Southwest(2)ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 0.26 0.64 0.26
West(2) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 0.12 0.11 0.15
Total non-credit-enhanced Ì all regions(3) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 0.25 0.30 0.24
Total credit-enhanced Ì all regions(3) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 1.86 2.46 2.75
Total credit-enhanced and non-credit-enhanced Ì all regions(3)ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 0.53% 0.69% 0.73%
(1) 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.
(2) 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 and Structured Transactions.
(3) 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.
Our total single-family delinquency rate has declined over the past three years, with some regional variation, reÖecting
generally strong economic conditions and strong, but recently slowing, home price appreciation.
73 Freddie Mac