Freddie Mac 2008 Annual Report Download - page 103

Furthermore, different market participants could arrive at materially different conclusions regarding the likelihood of various
default and severity outcomes, and these differences tend to be magnified for nontraditional products such as MTA loans.
Hypothetical Scenarios on our Investments in Non-Agency Mortgage-Related Securities
We present hypothetical scenarios based on the key assumptions in our analyses designed to simulate the distribution of
cash flows from the underlying loans to the securities that we hold considering different default rate and severity
assumptions. In preparing each scenario, we use numerous assumptions (in addition to the default rate and severity
assumptions), including, but not limited to, the timing of losses, prepayment rates, the collectability of excess interest and
interest rates that could materially impact the results. Since we do not use this analysis for determination of our reported
results under GAAP, this analysis is hypothetical and may not be indicative of our actual results.
Tables 28 – 30 provide the summary results of the default rate and severity hypothetical scenarios for our investments in
available-for-sale non-agency mortgage-related securities backed by first lien subprime, Alt-A and MTA loans at
December 31, 2008. In previous quarters we divided the portfolios into delinquency quartiles and ran more stressful default
rates on the quartiles with the highest levels of current delinquencies. In light of increasing uncertainty concerning default
rates and severity due to the overall deterioration in the economy and the impact of loan modifications, pending bankruptcy
reform legislation and other government intervention on the loans underlying our securities, we increased the number of
default and severity scenarios to reflect a broader range of possible outcomes. While the more stressful scenarios are beyond
what we currently believe are probable, these tables give insight into the potential economic losses under hypothetical
scenarios.
In addition to the hypothetical scenarios, these tables also display underlying collateral performance and credit
enhancement statistics, by vintage and quartile of delinquency. Within each of these quartiles, there is a distribution of both
credit enhancement levels and delinquency performance, and individual security performance will differ from the quartile as
a whole. Furthermore, some individual securities with lower subordination could have higher delinquencies. The projected
economic losses presented for each hypothetical scenario represent the present value of possible cash shortfalls given the
related assumptions. In past quarters we have included the present value of both the principal and interest shortfalls.
However, we do not believe that the interest shortfalls are representative of our risk of economic loss as these amounts
represent returns on our investment versus returns of our investment. As such, the projected economic losses include the
present value of potential principal shortfalls only. Additionally, some of these securities are not subject to principal write-
downs until their legal final maturity, which leads to a smaller present value loss than on a security that could take principal
write-downs earlier. However, these amounts do not represent the other-than-temporary impairment charge that would result
under the given scenario. Any other-than-temporary impairment charges would vary depending on the fair value of the
security at that point in time, and could be higher than the amount of losses indicated by these scenarios.
Investments in Non-Agency Mortgage-Related Securities backed by First Lien Subprime Loans
The hypothetical scenarios for our non-agency mortgage-related securities backed by first lien subprime loans use
cumulative default rates and severities of 60% to 80%. Since different market participants could arrive at materially different
conclusions regarding the likelihood of various default and severity outcomes, we have provided a range of possible
outcomes. Current collateral delinquency rates presented in Table 28 averaged 38% for first lien subprime loans.
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