Freddie Mac 2008 Annual Report Download - page 152

including issues of affordability and reduced income documentation requirements. While features of these products have
been on the market for some time, their prevalence in the market and in our total mortgage portfolio increased in 2006 and
2007. Despite an increase in adjustable-rate and optional payment mortgages in the origination market in the last few years,
mortgage loans and loans underlying our PCs and Structured Securities are predominately single-family long-term fixed-rate
products.
Adjustable-Rate, Interest-Only and Option ARM Loans
These mortgages are designed to offer borrowers greater choices in their payment terms. Adjustable-rate mortgages
typically have initial periods during which the interest rate is fixed. After this initial period, which can typically range from
two to ten years, the interest rate on the loan will then periodically reset based on a current market rate. Interest-only
mortgages allow the borrower to pay only interest for a fixed period of time before the loan begins to amortize. Option ARM
loans permit a variety of repayment options, which include minimum, interest only, fully amortizing 30-year and fully
amortizing 15-year payments. Minimum payment option loans allow the borrower to make monthly payments that are less
than the interest accrued for the period. The unpaid interest, known as negative amortization, is added to the principal
balance of the loan, which increases the outstanding loan balance. At a specified date, the payment terms are recast, which
can result in substantial increases in monthly payments by the borrower. There are approximately $10.8 billion and
$12.8 billion of option ARM mortgage loans, including some MTA loans, which are a type of option ARM, underlying our
Structured Transactions as of December 31, 2008 and 2007, respectively. Originations of interest-only and option ARM loans
in the market declined substantially in 2008. Our purchases of interest-only mortgage products decreased in 2008,
representing approximately 6% of our single-family mortgage portfolio purchases compared to approximately 20% in 2007.
We did not purchase any option ARM mortgage loans during 2008 and 2007. At December 31, 2008 and 2007, interest-only
and option ARM loans collectively represented approximately 9% and 10%, respectively, of the unpaid principal balance of
our single-family mortgage portfolio. We also invest in non-agency mortgage-related securities backed by MTA adjustable-
rate mortgage loans. As of December 31, 2008 and 2007, we had $19.6 billion and $21.2 billion, respectively, of non-agency
mortgage related securities classified as having MTA loans as collateral. See “CONSOLIDATED BALANCE SHEET
ANALYSIS — Mortgage-Related Investments Portfolio” for credit statistics and other information, including discussion of
our impairment on certain of these securities.
Table 59 presents information for single-family mortgage loans underlying our PCs and Structured Securities, excluding
Structured Transactions, at December 31, 2008 that contain adjustable payment terms. The reported balances in the table are
aggregated by adjustable-rate loan product type and categorized by year of the next scheduled contractual reset date. At
December 31, 2008, approximately 35% of the adjustable-rate single-family mortgage loans underlying our PCs and
Structured Securities are scheduled to have interest rates that reset in 2009 or 2010. The timing of the actual reset dates may
differ from those presented due to a number of factors, including refinancing or exercising of other provisions within the
terms of the mortgage.
Table 59 — Single-Family Scheduled Adjustable-Rate Resets by Year at December 31, 2008
(1)
2009 2010 2011 2012 2013 Thereafter Total
(in millions)
ARMs/amortizing . . . . ............................ $27,801 $16,509 $10,741 $ 7,306 $ 8,110 $10,286 $ 80,753
ARMs/interest-only . . ............................ 5,523 16,970 25,615 29,199 18,165 26,057 121,529
Balloon/resets . . . . . . ............................ 2,256 5,659 2,474 758 292 95 11,534
Adjustable-rate loans
(2)
............................ $35,580 $39,138 $38,830 $37,263 $26,567 $36,438 $213,816
(1) Based on the unpaid principal balances of mortgage products that contain adjustable-rate interest provisions. These reported balances are based on the
unpaid principal balance of the underlying mortgage loans and do not reflect the publicly-available security balances we use to report the composition of
our PCs and Structured Securities. Excludes mortgage loans underlying Structured Transactions since the adjustable-rate reset information was not
available for these loans.
(2) Represents the portion of the unpaid principal balances that are scheduled to reset during the period specified above.
Higher Risk Combinations
Combining certain loan characteristics often can indicate a higher degree of credit risk. For example, single-family
mortgages with both high LTV ratios and borrowers who have lower credit scores typically experience higher rates of
delinquency and default and higher credit losses. However, our participation in these categories generally contributes to our
affordable housing goals. At December 31, 2008, approximately 1% of mortgage loans in our single-family mortgage
portfolio were made to borrowers with credit scores below 620 and had first lien, original LTV ratios, greater than 90% at
the time of mortgage origination. In addition, as of December 31, 2008, 4% of Alt-A single-family loans we own or have
guaranteed were made to borrowers with credit scores below 620 at mortgage origination. In prior years, as home prices
increased, many borrowers used second liens at the time of purchase to reduce the LTV ratio on first lien mortgages.
Including this secondary financing by third parties, we estimate that the percentage of first lien loans we own or have
guaranteed that had total original LTV ratios above 90% at origination was approximately 14% at both December 31, 2008
and 2007.
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