Freddie Mac 2009 Annual Report Download - page 157

Other Categories of Single-Family Mortgage Loans
Subprime Loans
Participants in the mortgage market often characterize single-family loans based upon their overall credit quality at the
time of origination, generally considering them to be prime or subprime. There is no universally accepted definition of
subprime. The subprime segment of the mortgage market primarily serves borrowers with poorer credit payment histories
and such loans typically have a mix of credit characteristics that indicate a higher likelihood of default and higher loss
severities than prime loans. Such characteristics might include a combination of high LTV ratios, low credit scores or
originations using lower underwriting standards, such as limited or no documentation of a borrower’s income. The subprime
market is intended to help certain borrowers by broadening the availability of mortgage credit. While we have not
historically characterized the single-family loans underlying our PCs and Structured Securities as either prime or subprime,
we do monitor the amount of loans we have guaranteed with characteristics that indicate a higher degree of credit risk (see
“Higher Risk Loans in the Single-Family Mortgage Portfolio” for further information). In addition, we estimate that
approximately $4.5 billion and $5.1 billion of security collateral underlying our Structured Transactions at December 31,
2009 and 2008, respectively, were classified as subprime, based on our determination that they are also higher risk loan
types.
We generally categorize our investments in non-agency mortgage-related securities as subprime if they were labeled as
subprime when we purchased them. At December 31, 2009 and 2008, we held $61.6 billion and $74.9 billion, respectively,
in unpaid principal balances of non-agency mortgage-related securities backed by subprime loans. These securities include a
credit enhancement, particularly through subordination, and 18% and 58% of these securities were investment grade at
December 31, 2009 and 2008, respectively. During 2008 and 2009 these securities experienced significant and rapid credit
deterioration. For more information on our exposure to subprime mortgage loans through our investments in non-agency
mortgage-related securities see “CONSOLIDATED BALANCE SHEETS ANALYSIS — Investments in Securities.”
Alt-A Loans
Many mortgage market participants classify single-family loans with credit characteristics that range between their
prime and subprime categories as Alt-A because these loans have a combination of characteristics of each category or may
be underwritten with lower or alternative documentation requirements relative to a full documentation mortgage loan, or
both. Although there is no universally accepted definition of Alt-A, industry participants have used this classification
principally to describe loans for which the underwriting process has been streamlined in order to reduce the underwriting
documentation requirements of the borrower or allow alternative documentation.
We principally acquired single-family mortgage loans originated as Alt-A from our traditional lenders that largely
specialize in originating prime mortgage loans. These lenders typically originate Alt-A loans as a complementary product
offering and generally follow an origination path similar to that used for their prime origination process. In determining our
Alt-A exposure on loans underlying our single-family mortgage portfolio, we classified mortgage loans as Alt-A if the lender
that delivered them to us classified the loans as Alt-A, or if the loans had reduced documentation requirements, as well as a
combination of certain credit characteristics and expected performance characteristics at acquisition which, when compared
to full documentation loans in our portfolio, indicate that the loan should be classified as Alt-A. There are circumstances
where loans with reduced documentation are not classified as Alt-A because the loans were part of a refinancing of a pre-
existing full documentation loan that we already guaranteed or the loans fall within various programs which we believe
support not classifying the loans as Alt-A.
We estimate that approximately $144 billion, or 8%, and $183 billion, or 10%, of the loans underlying our single-family
PCs and Structured Securities at December 31, 2009 and 2008, respectively, were classified as Alt-A mortgage loans. In
addition, we estimate that approximately $4 billion, or 8%, and $2 billion, or 6%, of our investments in single-family
mortgage loans on our consolidated balance sheets were classified as Alt-A at December 31, 2009 and 2008, respectively.
For all of these Alt-A loans combined, the average credit score was 721, and the estimated current average LTV ratio, based
on our first-lien exposure, was 94%. The delinquency rate for these Alt-A loans was 12.25% and 5.61% at December 31,
2009 and 2008, respectively. We implemented several changes in our underwriting and eligibility criteria in 2008 and 2009
to reduce our acquisition of certain higher risk loan products, including Alt-A loans. As a result, our purchases of single-
family Alt-A mortgage loans for our total mortgage portfolio totaled $0.5 billion in 2009 as compared to $26 billion in 2008.
Although we discontinued purchases of new mortgage loans with lower documentation standards for assets and income,
beginning March 1, 2009 (or as our customers’ contracts permit), we have continued to purchase certain amounts of such
mortgages, primarily in cases where the loan qualifies as a Freddie Mac Relief Refinance Mortgage
SM
and the pre-existing
mortgage was originated under less than full documentation standards.
We also invest in non-agency mortgage-related securities backed by single-family Alt-A loans. At December 31, 2009
and 2008, we held investments of $21.4 billion and $25.1 billion, respectively, of non-agency mortgage-related securities
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