Freddie Mac 2008 Annual Report Download - page 145

Table 56 — Mortgage Performance Comparison
12/31/2008 09/30/2008 06/30/2008 03/31/2008 12/31/2007
As of
Delinquency rate:
Freddie Mac’s single-family mortgage portfolio
(1)
...................... 1.72% 1.22% 0.93% 0.77% 0.65%
Industry — prime loans
(2)
...................................... 3.74 2.87 2.35 1.99 1.67
Industry — subprime loans
(2)
.................................... 23.11 19.56 17.85 16.42 14.44
12/31/08 09/30/2008 06/30/2008 03/31/2008 12/31/2007
For the Three Months Ended
Foreclosures starts ratio
(3)
:
Freddie Mac’s single-family mortgage portfolio
(1)
...................... 0.36% 0.36% 0.31% 0.30% 0.24%
Industry — prime loans
(2)
...................................... 0.68 0.61 0.61 0.55 0.43
Industry — subprime loans
(2)
.................................... 3.96 4.23 4.26 4.08 3.71
(1) Excludes our Structured Transactions and mortgages covered under long-term standby commitment agreements and is based on the number of loans
90 days or more past due, as well as those in the process of foreclosure. Our temporary suspension of foreclosure sales on occupied homes in the fourth
quarter of 2008 resulted in more loans remaining delinquent and lower foreclosures than without this suspension. See “Mortgage Credit Risk —
Delinquencies” for further information on the delinquency rates of our single-family mortgage portfolio excluding Structured Transactions.
(2) Source: Mortgage Bankers Association’s National Delinquency Survey representing the total of first lien single-family loans in the survey categorized as
prime or subprime, respectively. Excludes FHA and VA loans.
(3) Represents the ratio of the number of loans that entered the foreclosure process during the respective quarter divided by the number of loans in the
portfolio at the end of the quarter.
Underwriting Requirements and Quality Control Standards
We use a process of delegated underwriting for the single-family mortgages we purchase or securitize. In this process,
we provide originators with a series of mortgage underwriting standards and the originators represent and warrant to us that
the mortgages sold to us meet these requirements. We subsequently review a sample of these loans and, if we determine that
any loan is not in compliance with our contractual standards, we may require the seller/servicer to repurchase that mortgage
or make us whole in the event of a default. We have also expanded our review of the underwriting of loans that we own or
guarantee that default in order to assess the sellers’ compliance with the representations and warranties under our purchase
contracts. We provide originators with written standards and/or automated underwriting software tools to assist them in
comparing loans to our standards. We use other quantitative credit risk management tools that are designed to evaluate
single-family mortgages and monitor the related mortgage credit risk for loans we may purchase. These statistically based
risk assessment tools increase our ability to distinguish among single-family loans based on their expected risk, return and
importance to our mission. In many cases, underwriting standards are tailored under contracts with individual customers.
During 2008, 2007 and 2006, our seller/servicers utilized our standard underwriting loan evaluation tool for 42%, 41% and
46%, respectively, of loans purchased for our single-family mortgage portfolio. A significant portion of the mortgages we
purchase are underwritten by our seller/servicers using alternative automated underwriting systems or agreed-upon
underwriting standards that differ from our system or guidelines, which has increased our credit risk.
Mortgage originators significantly tightened their credit standards during 2008 in response to declining market
conditions, causing conforming, fixed-rate mortgages to be the predominant product during 2008. We also made significant
changes to our underwriting standards in 2008 which we expect will reduce our credit risk exposure for new business. These
changes include reducing purchases of mortgages with LTV ratios over 95%, and limiting combinations of higher-risk
characteristics in loans we purchase, including those with reduced documentation. In some cases, binding commitments
under existing customer contracts have delayed the effective dates of underwriting adjustments for a period of months. There
has been a shift in the composition of our new issuances during 2008 to a greater proportion of higher-quality, fixed-rate
mortgages and a reduction in our guarantees of interest-only and Alt-A mortgage loans. For example, Alt-A loans made up
approximately 23% and 19% of our single-family mortgage purchase volume during 2007 and 2006, respectively; however,
Alt-A mortgages made up approximately $26 billion or 7% of our single-family mortgage purchase volume during 2008. In
October 2008, we announced that we will no longer purchase mortgages originated in reliance on reduced documentation of
income and assets and mortgages to borrowers with credit scores below a specified minimum on and after March 1, 2009.
The Economic Stimulus Act of 2008 increased the conforming loan limit in certain “high-cost” areas for single-family
mortgages originated from July 1, 2007 through December 31, 2008 to the higher of the applicable 2008 conforming loan
limit ($417,000 for a one-family residence) or 125% of the median house price for the geographic area, not to exceed 175%
of the applicable base limit, or $729,750, for a one-family residence. We specified certain credit requirements for loans we
accepted in this category, including but not limited to: (a) limitations in certain volatile home price markets, (b) required
borrower documentation of income and assets, (c) limits on cash-out refinancing amounts and (d) a maximum original LTV
ratio of 90%. We began purchasing and securitizing these “conforming jumbo” mortgages in April 2008. Our purchases of
these loans into our total mortgage portfolio for 2008 totaled $2.6 billion in unpaid principal balance.
In November 2008, FHFA announced that the base conforming loan limit for the GSEs will remain at the current level
of $417,000 for a one-family residence for 2009 with higher limits in certain “high-cost” areas, as defined under the Reform
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