Freddie Mac 2008 Annual Report Download - page 151

credit enhancements or participation interests. In addition, we employ other types of credit enhancements, including pool
insurance, indemnification agreements, collateral pledged by lenders and subordinated security structures.
As shown in the table above, the percentage of loans with estimated current LTV ratios greater than 100% has increased
from 3% at December 31, 2007 to 13% of our single-family mortgage portfolio as of December 31, 2008. As estimated
current LTV ratios increase, the borrower’s equity in the home decreases, which negatively affects the borrower’s ability to
refinance or to sell the property and purchase a less expensive home or move to a rental property. If a borrower has an
estimated current LTV ratio greater than 100%, the borrower is “underwater” and thus is more likely to default than other
borrowers, regardless of the borrower’s financial condition. For the approximately 39% and 25% of single-family mortgage
loans with greater than 80% estimated current LTV ratios, the borrowers had a weighted average credit score at origination
of 714 and 708 at December 31, 2008 and 2007, respectively.
Credit Score
Credit scores are a useful measure for assessing the credit quality of a borrower. Credit scores are numbers reported by
credit repositories, based on statistical models, that summarize an individual’s credit record and predict the likelihood that a
borrower will repay future obligations as expected. FICO scores are the most commonly used credit scores today. FICO
scores are ranked on a scale of approximately 300 to 850 points. Statistically, consumers with higher credit scores are more
likely to repay their debts as expected than those with lower scores. At December 31, 2008, 2007 and 2006, the weighted
average credit score for our single-family mortgage portfolio (based on the credit score at origination) was 725, 723 and 725,
respectively.
Loan Purpose
Mortgage loan purpose indicates how the borrower intends to use the funds from a mortgage loan. The three general
categories are purchase, cash-out refinance and other refinance. In a purchase transaction, funds are used to acquire a
property. In a cash-out refinance transaction, in addition to paying off existing mortgage liens, the borrower obtains
additional funds that may be used for other purposes, including paying off subordinate mortgage liens and providing
unrestricted cash proceeds to the borrower. In other refinance transactions, the funds are used to pay off existing mortgage
liens and may be used in limited amounts for certain specified purposes; such refinances are generally referred to as “no
cash-out” or “rate and term” refinances. Other refinance transactions also include refinance mortgages for which the delivery
data provided was not sufficient for us to determine whether the mortgage was a cash-out or a no cash-out refinance
transaction. The percentage of purchase mortgages in our single-family portfolio acquisition volume has declined in each of
the last three years. Due to continued declines in mortgage interest rates, current economic conditions, and the prevalence of
modification programs we expect this trend will continue.
Property Type
Single-family mortgage loans are defined as mortgages secured by housing with up to four living units. Mortgages on
one-unit properties tend to have lower credit risk than mortgages on multiple-unit properties.
Occupancy Type
Borrowers may purchase a home as a primary residence, second/vacation home or investment property that is typically a
rental property. Mortgage loans on properties occupied by the borrower as a primary residence tend to have a lower credit
risk than mortgages on investment properties or secondary residences.
Geographic Concentration
Because our business involves purchasing mortgages from every geographic region in the U.S., we maintain a
geographically diverse single-family mortgage portfolio. While our single-family mortgage portfolio’s geographic distribution
was relatively stable from 2006 to 2008 and remains broadly diversified across these regions, we were negatively impacted
by material home price declines in each region during 2008. See “NOTE 18: CONCENTRATION OF CREDIT AND
OTHER RISKS” to our consolidated financial statements for more information concerning the distribution of our single-
family mortgage portfolio by geographic region.
Mortgage Product Types
Product mix affects the credit risk profile of our total mortgage portfolio. In general, 15-year amortizing fixed-rate
mortgages exhibit the lowest default rate among the types of mortgage loans we securitize and purchase, due to the
accelerated rate of principal amortization on these mortgages and the credit profiles of borrowers who seek and qualify for
them. In a rising interest rate environment, balloon/reset mortgages and ARMs typically default at a higher rate than fixed-
rate mortgages, although default rates for different types of ARMs may vary.
The primary mortgage products within our single-family mortgage portfolio are conventional first lien, fixed-rate
mortgage loans. We did not purchase any second lien mortgage loans in 2008 or 2007. However, during the past several
years, there was a rapid proliferation of mortgage product types designed to address a variety of borrower and lender needs,
148 Freddie Mac