Freddie Mac 2011 Annual Report Download - page 109

that remain in our portfolio and consequently reduced management and guarantee income associated with loans originated
in 2005 through 2008 (we do not recognize Segment Earnings management and guarantee income on non-accrual
mortgage loans). We also believe that the management and guarantee fees associated with originations after 2008 will not
be sufficient to offset the future expenses associated with our 2005 to 2008 guarantee issuances for the foreseeable future.
Consequently, we expect to continue reporting net losses for the Single-family Guarantee segment in 2012.
Segment Earnings management and guarantee income increased slightly in 2011, as compared to 2010, primarily due
to an increase in amortization of delivery fees, partially offset by a lower average balance of the single-family credit
guarantee portfolio during 2011. Segment Earnings management and guarantee income increased slightly in 2010
compared to 2009, primarily due to an increase in amortization of delivery fees. The increase in amortization of delivery
fees in 2011 and 2010 was due to the effect of declining interest rates during these years, which increased both actual
refinance activity and our expectation of future refinancing activity.
The UPB of the Single-family Guarantee managed loan portfolio was $1.7 trillion at December 31, 2011, compared
to $1.8 trillion and $1.9 trillion at December 31, 2010 and 2009, respectively. The declines in 2011 and 2010 reflect that
the amount of single-family loan liquidations has exceeded new loan purchase and guarantee activity, which we believe is
due, in part, to declines in the amount of single-family mortgage debt outstanding in the market and increased competition
from Ginnie Mae and FHA/VA. Our loan purchase and guarantee activity in 2011 was at the lowest level we have
experienced in the last several years. The liquidation rate on our securitized single-family credit guarantees was
approximately 24%, 29%, and 24% for 2011, 2010, and 2009, respectively. We expect the size of our Single-family
Guarantee managed loan portfolio will decline slightly during 2012.
Refinance volumes continued to be high during 2011 due to continued low interest rates, and, based on UPB,
represented 78% of our single-family mortgage purchase volume during 2011 compared to 80% of our single-family
mortgage purchase volume during 2010. Relief refinance mortgages comprised approximately 33% and 35% of our total
refinance volume during 2011 and 2010, respectively. Over time, relief refinance mortgages with LTV ratios above 80%
may not perform as well as relief refinance mortgages with LTV ratios of 80% and below because of the continued high
LTV ratios of these loans. There is an increase in borrower default risk as LTV ratios increase, particularly for loans with
LTV ratios above 80%. In addition, relief refinance mortgages may not be covered by mortgage insurance for the full
excess of their UPB over 80%. Approximately 12% of our single-family purchase volume in both 2011 and 2010 was
relief refinance mortgages with LTV ratios above 80%. Relief refinance mortgages of all LTV ratios comprised
approximately 11% and 7% of the UPB in our total single-family credit guarantee portfolio at December 31, 2011 and
2010, respectively.
On October 24, 2011, FHFA, Freddie Mac, and Fannie Mae announced a series of FHFA-directed changes to HARP
in an effort to attract more eligible borrowers whose monthly payments are current and who can benefit from refinancing
their home mortgages. For more information about our relief refinance mortgage initiative, see “RISK
MANAGEMENT — Credit Risk — Mortgage Credit Risk — Single-Family Mortgage Credit Risk — Single-Family Loan
Workouts and the MHA Program.”
Similar to our purchases in 2009 and 2010, the credit quality of the single-family loans we acquired in 2011
(excluding relief refinance mortgages) is significantly better than that of loans we acquired from 2005 through 2008, as
measured by early delinquency rate trends, original LTV ratios, FICO scores, and the proportion of loans underwritten
with fully documented income. Mortgages originated after 2008, including relief refinance mortgages, represent a growing
proportion of our single-family credit guarantee portfolio. The UPB of loans originated in 2005 to 2008 within our single-
family credit guarantee portfolio continues to decline due to liquidations, which include prepayments, refinancing activity,
foreclosure alternatives, and foreclosure transfers. We currently expect that, over time, the replacement (other than through
relief refinance activity) of the 2005 to 2008 vintages, which have a higher composition of loans with higher-risk
characteristics, should positively impact the serious delinquency rates and credit-related expenses of our single-family
credit guarantee portfolio. However, the rate at which this replacement is occurring slowed beginning in 2010, due
primarily to a decline in the volume of home purchase mortgage originations and delays in the foreclosure process.
Provision for credit losses for the Single-family Guarantee segment was $12.3 billion, $18.8 billion, and $29.1 billion
in 2011, 2010, and 2009, respectively. The provision for credit losses in 2011 reflects a decline in the rate at which
single-family loans transition into serious delinquency or are modified, but was partially offset by our lowered
expectations for mortgage insurance recoveries, which is due to the continued deterioration in the financial condition of
the mortgage insurance industry in 2011. See “RISK MANAGEMENT — Credit Risk — Institutional Credit Risk” for
further information on our mortgage insurance counterparties. Segment Earnings provision for credit losses declined in
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