Freddie Mac 2008 Annual Report Download - page 146

Act. The Reform Act allows increases in our single-family conforming loan limits beginning January 1, 2009, based on
changes in the housing price index established by FHFA. Consistent with existing guidance, any decreases in this index
would be accumulated and would be used to offset any future increases in the housing price index, so that loan limits do not
decrease from year-to-year. In “high-cost” areas — where 115% of the median house price exceeds the otherwise applicable
conforming loan limit — the Reform Act sets the loan limits at the lesser of (i) 115% of the median house price for the area
or (ii) 150% of the conforming loan limit, currently $625,500 for a one-family residence.
On February 17, 2009, President Obama signed the Recovery Act, which provides that, for mortgages originated in
calendar year 2009, the loan limits for “high cost” areas will be the higher of the limit determined under the Reform Act and
the limit determined under the Economic Stimulus Act of 2008.
For our purchases of multifamily mortgage loans, we significantly rely on an intensive pre-purchase underwriting
process and, in some cases, credit enhancements. Our underwriting process includes assessments of the local market, the
borrower, the property manager, the property’s historical and projected financial performance and the property’s physical
condition, which may include a physical inspection of the property. We rely for the most part on third-party appraisals and
environmental and engineering reports. We have also engaged third-party underwriters to underwrite mortgages on our
behalf. During 2007, we began a program of delegated underwriting for certain multifamily mortgages we purchase or
securitize and we expanded our use of delegated underwriting during 2008.
Credit Enhancements
Our charter generally requires that single-family mortgages with LTV ratios above 80% at the time of purchase must be
covered by one of the following: (a) mortgage insurance from a mortgage insurer that we determine is qualified on the
portion above 80% of the outstanding balance; (b) a seller’s agreement to repurchase or replace any mortgage in default (for
such period and under such circumstances as we may require); or (c) retention by the seller of at least a 10% participation
interest in the mortgages. In addition, for some mortgage loans, we elect to share the default risk by transferring a portion of
that risk to various third parties through a variety of other credit enhancements. In many cases, the lender’s or third party’s
risk is limited to a specific level of losses at the time the credit enhancement becomes effective. In addition, on February 18,
2009, the Obama Administration announced the HASP, which includes an initiative that will allow mortgages owned or
guaranteed by us to be refinanced without obtaining credit enhancement beyond that already in place for that loan. For more
information, see “EXECUTIVE SUMMARY — Conservatorship.”
At December 31, 2008 and 2007, credit-enhanced mortgages and mortgage-related securities represented approximately
18% and 17% of the $1,914 billion and $1,800 billion, respectively, of the unpaid principal balance of our total mortgage
portfolio, excluding non-Freddie Mac guaranteed mortgage-related securities, our Structured Transactions and that portion of
issued Structured Securities that is backed by Ginnie Mae Certificates. We exclude non-Freddie Mac guaranteed mortgage-
related securities because they expose us primarily to institutional credit risk. We exclude that portion of Structured
Securities backed by Ginnie Mae Certificates because the incremental credit risk to which we are exposed is considered
insignificant. Although many of our Structured Transactions are credit enhanced, we present the credit enhancement coverage
information separately in Table 57 below due to the use of subordination in many of the securities’ structures. See
“CONSOLIDATED BALANCE SHEETS ANALYSIS — Mortgage-Related Investments Portfolio” for additional information
on our investments in non-Freddie Mac mortgage-related securities. We recognized recovery proceeds of $611 million,
$421 million and $282 million in 2008, 2007 and 2006, respectively, under our primary and pool mortgage insurance policies
and other credit enhancements as discussed below related to our single-family mortgage portfolio.
Our ability and desire to expand or reduce the portion of our total mortgage portfolio covered by credit enhancements
will depend on our evaluation of the credit quality of new business purchase opportunities, the risk profile of our portfolio
and the future availability of effective credit enhancements at prices that permit an attractive return. While the use of credit
enhancements reduces our exposure to mortgage credit risk, it increases our exposure to institutional credit risk. As
guarantor, we remain responsible for the payment of principal and interest if mortgage insurance or other credit
enhancements do not provide full reimbursement for covered losses. If an entity that provides credit enhancement fails to
fulfill its obligation, the result could be a reduction in the amount of our recovery of charge-offs in our GAAP results.
Primary mortgage insurance is the most prevalent type of credit enhancement protecting our total mortgage portfolio
and is typically provided on a loan-level basis for certain single-family mortgages. Primary mortgage insurance transfers
varying portions of the credit risk associated with a mortgage to a third-party insurer. The amount of insurance we obtain on
any mortgage depends on our requirements and our assessment of risk. We may, from time to time, agree with the insurer to
reduce the amount of coverage that is in excess of our charter’s minimum requirement. Most mortgage insurers increased
premiums and tightened underwriting standards during 2008. These actions may impact our ability to serve borrowers
making a down payment of less than 20% of the value of the property at the time of loan origination. In order to file a claim
under a primary mortgage insurance policy, the insured loan must be in default and the borrower’s interest in the underlying
property must have been extinguished, such as through a foreclosure action. The mortgage insurer has a prescribed period of
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