Freddie Mac 2008 Annual Report Download - page 92

consistent with our economic release from risk and the timing of the recognition of losses on pools of mortgage loans we
guarantee.
Table 22 below provides summary information about management and guarantee earnings for the Single-family
Guarantee segment. Management and guarantee earnings consist of contractual amounts due to us related to our management
and guarantee fees as well as amortization of upfront fees.
Table 22 — Segment Management and Guarantee Earnings — Single-Family Guarantee
Amount Rate Amount Rate Amount Rate
2008 2007 2006
Year Ended December 31,
(dollars in millions, rates in basis points)
Contractual management and guarantee fees ................................. $2,868 15.9 $2,514 15.7 $2,186 15.5
Amortization of credit fees included in other liabilities .......................... 861 4.8 375 2.3 355 2.5
Total Segment Earnings management and guarantee income . . . ................... 3,729 20.7 2,889 18.0 2,541 18.0
Adjustments to reconcile to consolidated GAAP:
Reclassification between net interest income and guarantee fee
(1)
................. 200 29 (37)
Credit guarantee-related activity adjustments
(2)
............................. (633) (342) (172)
Multifamily management and guarantee earnings
(3)
.......................... 74 59 61
Management and guarantee income, GAAP ................................. $3,370 $2,635 $2,393
(1) Management and guarantee fees earned on mortgage loans held in our mortgage-related investments portfolio are reclassified from net interest income
within the Investments segment to management and guarantee fees within the Single-family Guarantee segment. Buy-up and buy-down fees are
transferred from the Single-family Guarantee segment to the Investments segment.
(2) Primarily represents credit fee amortization adjustments.
(3) Represents management and guarantee earnings recognized related to our Multifamily segment that is not included in our Single-family Guarantee
segment.
In 2008 and 2007, the average balance of our single-family credit guarantee portfolio increased approximately 12% and
14%, respectively. Our single-family mortgage purchase and guarantee volumes are impacted by several factors, including
origination volumes, mortgage product and underwriting trends, competition, customer-specific behavior and contract terms.
Mortgage purchase volumes from individual customers can fluctuate significantly. Mortgage originators significantly
tightened their credit standards during 2008 in response to 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. As a result, 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 guarantee of
interest-only and Alt-A mortgage loans. For example, Alt-A loans made up approximately 22% and 18% of our mortgage
purchase volume during 2007 and 2006, respectively; however, Alt-A loans made up approximately $26 billion or 7% of our
single-family mortgage purchase volume during 2008. In October 2008, we announced that, on and after March 1, 2009, 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. See “CREDIT RISKS — Mortgage Credit Risk — Underwriting
Requirements and Quality Control Standards” for further information.
During 2008, we implemented certain increases in delivery fees, which are paid at the time of securitization. Upfront
fees are recognized in Segment Earnings management and guarantee fee income rather than as part of income on guarantee
obligation under GAAP. For more information on our changes in underwriting requirements and delivery fees as well as their
effect on the composition of our single-family credit guarantee portfolio, see “CREDIT RISKS — Mortgage Credit Risk.”
The appointment of FHFA as Conservator and the Conservator’s directive that we provide increased support to the mortgage
market has affected our guarantee pricing decisions and will likely continue to do so.
Net interest income in this segment decreased in 2008 compared to 2007, due to our December 2007 change to record
trust management fees within Single-family Guarantee other non-interest income, whereas previously the expected net float
benefits were recorded in Single-family Guarantee net interest income. In addition, Single-family Guarantee trust
management fees, included in other non-interest income, were negatively impacted by declines in interest rates during 2008,
which resulted in lower income on interest-earning assets of the trust.
Our Segment Earnings provision for credit losses for the Single-family Guarantee segment increased to $16.7 billion in
2008, compared to $3.0 billion in 2007, due to continued credit deterioration in our single-family credit guarantee portfolio,
primarily related to 2007 and 2006 loan purchases. Mortgages in our portfolio originated in 2007 and 2006 have had higher
delinquency rates as well as higher loss severities on a per-property basis. Our provision is based on our estimate of incurred
credit losses inherent in both our mortgage loan and our single-family credit guarantee portfolio using recent historical
performance, such as the trends in delinquency rates, recent charge-off experience, recoveries from credit enhancements and
other loss mitigation activities. Our Segment Earnings provision for loan loss is generally higher than amounts recorded
under GAAP due to the inclusion of foregone interest income on impaired loans and additional provision expense related to
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