Freddie Mac 2008 Annual Report Download - page 148

The table below provides information on credit enhancements and credit performance for our single-family Structured
Transactions.
Table 57 — Credit Enhancement, or CE, and Credit Performance of Single-Family Structured Transactions
(1)
Structured Transaction Type 2008 2007
Average CE
Coverage
(2)
Delinquency
Rate
(3)
2008 2007
Unpaid Principal Balance
at December 31,
Year Ended
December 31,
Credit Losses
(4)
(in millions) (in millions)
Pass-through .......................................... $18,335
(5)
$12,779
(5)
0.00% 2.56% $77 $5
Overcollateralization .................................... 5,250 6,544 19.08% 18.77% 3 0
Total Single-Family Structured Transactions . . . ................. $23,585 $19,323 4.25% 7.23% $80 $5
(1) We primarily execute two types of Structured Transactions: those using securities with senior/subordinated structures as well as other forms of credit
enhancements, which represent the amount of protection against financial loss, and those without such structures, which we categorize as pass-through
transactions. Credit enhancement percentages for each category are calculated based on information available from third-party financial data providers
and exclude certain loan-level credit enhancements, such as private mortgage insurance, that may also afford additional protection to us.
(2) Average credit enhancement represents a weighted-average coverage percentage, is based on unpaid principal balances and includes overcollateralization
and subordination at December 31, 2008.
(3) Based on the number of loans that are past due 90 days or more, or in the process of foreclosure at December 31, 2008.
(4) Represents the total of our guaranteed payments that has exceeded the remittances of the underlying collateral and includes amounts charged-off during
the period. Charge-offs are the amount of contractual principal balance that has been discharged in order to satisfy the mortgage and extinguish our
guarantee.
(5) Includes $1.9 billion and $2.1 billion at December 31, 2008 and 2007, respectively, that are securitized FHA/VA loans, for which those agencies provide
recourse for 100% of qualifying losses associated with the loan.
The delinquency rates associated with single-family Structured Transactions have increased significantly during 2008
compared to prior years. Although our credit losses to date have been mitigated to a large extent by credit enhancement, we
have increased our provision for credit losses on these securities during 2008 since significantly less credit enhancement
remains for these transactions. Our credit losses on Structured Transactions during 2008 are principally related to option
ARM loans underlying several of these transactions. We are actively monitoring the credit performance of the loans
underlying these Structured Transactions, particularly those originated during 2006 and 2007, and we will continue to work
with the servicers of these loans on their loss mitigation efforts in 2009.
We also use credit enhancements to mitigate risk on certain multifamily mortgages and mortgage revenue bonds. The
types of credit enhancements used for multifamily mortgage loans include recourse to the mortgage seller, third-party
guarantees or letters of credit, cash escrows, subordinated participations in mortgage loans or structured pools, sharing of
losses with sellers, and cross-default and cross-collateralization provisions. Cross-default and cross-collateralization
provisions typically work in tandem. With a cross-default provision, if the loan on a property goes into default, we have the
right to declare specified other mortgage loans of the same borrower or certain of its affiliates to be in default and to
foreclose those other mortgages. In cases where the borrower agrees to cross-collateralization, we have the additional right to
apply excess proceeds from the foreclosure of one mortgage to amounts owed to us by the same borrower or its specified
affiliates relating to other multifamily mortgage loans we own. At December 31, 2008 and 2007, in connection with
multifamily mortgage loans owned by us and underlying PCs and Structured Securities, but excluding Structured
Transactions, we had credit enhancements as described above, which provide for reimbursement of default losses up to a
maximum totaling $3.3 billion and $1.2 billion, respectively, excluding coverage under cross-collateralization and cross-
default provisions.
Other Credit Risk Management Activities
To compensate us for unusual levels of risk in some mortgage products, we may charge upfront delivery fees above a
base management and guarantee fee, which is calculated based on credit risk factors such as the mortgage product type, loan
purpose, LTV ratio and other loan or borrower attributes. In addition, we occasionally use financial incentives and credit
derivatives in situations where we believe they will benefit our credit risk management strategy. These arrangements are
intended to reduce our credit-related expenses, thereby improving our overall returns.
During 2008, we implemented certain increases in delivery fees, which are paid at the time of securitization. These
increases included a 25 basis point fee assessed on all loans purchased or guaranteed through flow-business channels, as well
as higher or new upfront fees for certain mortgages deemed to be higher-risk based on product type, property type, loan
purpose, LTV ratio and/or borrower credit scores. We negotiated increases in our contractual fee rates for PC issuances
through bulk channels throughout 2008 in response to increases in market pricing of mortgage credit risk. Certain of our
planned increases in delivery fees that were to be implemented in November 2008, including an additional 25 basis point
increase in fees for flow-business purchases, were cancelled. During the fourth quarter of 2008, we made significant changes
to delivery fee schedules that take effect for settlements on and after January 2, 2009, including increasing certain delivery
fees based on combinations of LTV ratios, credit scores, product types and other characteristics. The appointment of FHFA
as Conservator and the Conservator’s subsequent directive that we provide increased support to the mortgage market has
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