Freddie Mac 2009 Annual Report Download - page 164

Our multifamily loan portfolio consists of product types that are categorized based on loan terms. Multifamily loans
may be interest-only or amortizing, fixed or variable rate, or may switch between fixed and variable rate over time. However,
our multifamily loans are generally for shorter terms than single-family loans, and most have balloon maturities ranging
from five to ten years. Amortizing loans reduce our credit exposure over time because the unpaid principal balance declines
with each mortgage payment. Fixed-rate loans may also create less risk for us because the borrower’s payments are
determined at origination, and, therefore, the risk that the monthly mortgage payment could increase if interest rates rise as
with a variable-rate mortgage is eliminated. As of December 31, 2009 and 2008, approximately 82% and 85%, respectively,
of the multifamily loans in our total mortgage portfolio had fixed interest rates while the remaining loans had variable-rates.
We estimate that the percentage of loans in our multifamily mortgage portfolio with a current LTV ratio of greater than
100% was approximately 6% as of December 31, 2009, and our estimate of the current average DSCR for these loans was
0.97, based on the latest available income information for these properties. Our estimates of the current LTV ratios for
multifamily loans are based on our internal estimates of property value, for which we may use changes in tax assessments,
market vacancy rates, rent growth and comparable property sales in local areas as well as third-party appraisals for a portion
of the portfolio. We periodically perform our own valuations or obtain third-party appraisals in cases where a significant
deterioration in a borrower’s financial condition has occurred, the borrower has applied for refinancing consideration, or in
certain other circumstances where we deem it appropriate to reassess the property value.
Because multifamily loans have a balloon payment and typically have a shorter contractual term than single-family
mortgages, the maturity date for a multifamily loan is also an important loan characteristic. Borrowers may be less able to
refinance their obligations during periods of rising interest rates, which could lead to default if the borrower is unable to find
affordable refinancing. Loan size at origination does not generally indicate the degree of a loan’s risk however, it does
indicate our potential exposure to a credit event.
While we believe the underwriting practices we employ for our multifamily loan portfolio are prudent, the recession in
the U.S. negatively impacted many multifamily residential properties. Our delinquency rates have remained relatively low
compared to other industry participants, which we believe to be, in part, the result of our underwriting standards versus those
used by others in the industry. In addition, the majority of our multifamily loan portfolio was originated in the last three
years and late payments to date on these loans have not been significant. We monitor the financial performance of our
multifamily borrowers and during 2009 we observed significant deterioration in measures such as the DSCR and estimated
current LTV ratios for the properties. See “Table 8 — Credit Statistics, Multifamily Loan and Guarantee Portfolios” for
quarterly trends in certain multifamily key credit statistics. To the extent multifamily loans reach maturity and a borrower
with deterioration in cash flows and property market value requires refinancing of the property, we will work with the
borrower to obtain principal repayment to reduce the refinanced balance to conform to our underwriting standards. However,
should a distressed borrower not have the financial capacity to do so, we may either experience higher default rates and
credit losses, or need to provide continued financing ourselves at below-market rates through a troubled debt restructuring.
This refinancing risk for multifamily loans is greater for those loans with balloon provisions where the remaining unpaid
principal balance is due upon maturity. Of the $98.6 billion in unpaid principal balances of our multifamily mortgage
portfolio as of December 31, 2009, approximately 2% and 4% will reach their maturity during 2010 and 2011, respectively.
Portfolio Management Activities
Credit Enhancements
As discussed above, our charter generally requires that single-family mortgages with LTV ratios above 80% at the time
of purchase must be covered by specified credit enhancements or participation interests. In addition, for some mortgage
loans, we elect to share the default risk by transferring a portion of that risk to various third parties through a variety of
other credit enhancements. In many cases, the lender’s or third party’s risk is limited to a specific level of losses at the time
the credit enhancement becomes effective. For more information, see “Single-Family Underwriting Requirements and
Quality Control Standards.”
At December 31, 2009 and 2008, credit-enhanced mortgages and mortgage-related securities represented approximately
16% and 18% of the $2.0 trillion and $1.9 trillion, respectively, of the unpaid principal balance of our total mortgage
portfolio, excluding non-Freddie Mac mortgage-related securities, that portion of issued Structured Securities that is backed
by Ginnie Mae Certificates and Structured Transactions, including those backed by HFA bonds. See “MHA PROGRAM
AND OTHER EFFORTS TO ASSIST THE U.S. HOUSING MARKET — Housing Finance Agency Initiative” for more
information about our involvement in the HFA Initiative. We exclude non-Freddie Mac mortgage-related securities because
they are discussed separately since we do not service the underlying loans. See “CONSOLIDATED BALANCE SHEETS
ANALYSIS — Investments in Securities — Mortgage-Related Securities” for credit enhancement and other information
about our investments in non-Freddie Mac mortgage-related securities. We exclude that portion of Structured Securities
backed by Ginnie Mae Certificates and HFA bonds because we consider the incremental credit risk to which we are exposed
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