Freddie Mac 2009 Annual Report Download - page 99

well as an increase in the average fee rates shown in the table below and higher upfront fee amortization. Amortization of
upfront fees increased as a result of cumulative catch-up adjustments recognized during 2008, which result in a pattern of
revenue recognition that is more consistent with our economic release from risk and the timing of the recognition of losses
on pools of mortgage loans we guarantee.
Table 23 below provides summary information about management and guarantee earnings for the Single-family
Guarantee segment.
Table 23 — Segment Management and Guarantee Earnings — Single-Family Guarantee
Amount Rate Amount Rate Amount Rate
2009 2008 2007
Year Ended December 31,
(dollars in millions, rates in basis points)
Contractual management and guarantee fees ................................. $2,778 15.1 $2,868 15.9 $2,514 15.7
Amortization of credit fees included in other liabilities .......................... 892 4.8 861 4.8 375 2.3
Total Segment Earnings management and guarantee income . . . ................... 3,670 19.9 3,729 20.7 2,889 18.0
Adjustments to reconcile to consolidated GAAP:
Reclassification between net interest income and guarantee fee
(1)
................. 229 198 29
Credit guarantee-related activity adjustments
(2)
............................. (956) (633) (342)
Multifamily management and guarantee income
(3)
........................... 90 76 59
Management and guarantee income, GAAP ................................. $3,033 $3,370 $2,635
(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 income recognized related to our Multifamily segment that is not included in our Single-family Guarantee segment.
We implemented limited delivery fee increases in 2009 for mortgages with certain combinations of LTV ratios and other
higher-risk loan characteristics, subject to certain maximum limits. We also experienced competitive pressure on our
contractual management and guarantee fee rates, which limited our ability to increase our rates as customers renew their
contracts. The Conservator’s directive that we provide increased support to the mortgage market has also affected our
guarantee pricing decisions by limiting our ability to adjust our fees for current expectations of credit risk, and will likely
continue to do so. Due to these competitive and other pressures, we do not have the ability to raise our contractual guarantee
and management fee rates to offset the increased provision for credit losses on existing business. Consequently, we expect to
continue to report a Segment Earnings (loss), net of taxes for the Single-family Guarantee segment for the foreseeable future.
In 2009, 2008 and 2007, the average balance of our single-family credit guarantee portfolio increased 2%, 12% and
14%, respectively. Our mortgage purchase volumes are impacted by several factors, including origination volumes, mortgage
product and underwriting trends, competition, customer-specific behavior, contract terms, and governmental initiatives
concerning our business activities. Origination volumes can be affected by government programs, such as the increase in
refinance loan volume during 2009 associated with the Home Affordable Refinance Program. Single-family mortgage
purchase volumes from individual customers can fluctuate significantly. We have tightened our guidelines for mortgages we
purchase and we have seen improvements in the credit quality of mortgages delivered to us in 2009. As a result, there has
been a shift in the composition of our new mortgage purchases during 2008 and 2009 to a greater proportion of fixed-rate
mortgages with relatively higher average FICO scores and lower original LTV ratios (for which we receive a lower fee), and
a reduction in our purchases of interest-only and lower documentation mortgage loans.
During 2009, 2008 and 2007 our Segment Earnings provision for credit losses for the Single-family Guarantee segment
was $30.3 billion, $16.7 billion and $3.0 billion, respectively. Segment earnings provision for credit losses increased in 2009,
compared to 2008, and 2008 increased compared to 2007, due to continued credit deterioration in our single-family credit
guarantee portfolio, primarily related to 2007 and 2006 vintage loans and certain higher risk categories of loans. However, as
unemployment rates have risen in 2009, the housing downturn has impacted a broader group of borrowers and delinquency
rates have risen significantly for all types of loans. Unemployment rates worsened significantly during 2009. The U.S.
Bureau of Labor Statistics reported unemployment rates in California, Florida, Arizona and Nevada of 12.4%, 11.8%, 9.1%
and 13.0%, respectively, while the national rate was 10.0% as of December 31, 2009. 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 loans purchased under our financial guarantees, which are recognized in different line items in our GAAP
statements of operations.
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