Freddie Mac 2011 Annual Report Download - page 148

Loan-to-Value Ratio
An important safeguard against credit losses on mortgage loans in our single-family credit guarantee portfolio is
provided by the borrowers’ equity in the underlying properties. As estimated current LTV ratios increase, the borrower’s
equity in the home decreases, which negatively affects the borrower’s ability to refinance or sell the property for an
amount at or above the balance of the outstanding mortgage loan. There is an increase in borrower default risk as LTV
ratios increase, particularly for loans with LTV ratios above 80%. If a borrower has an estimated current LTV ratio greater
than 100%, the borrower is “underwater” and, based upon historical information, is more likely to default than other
borrowers due to limits in the ability to sell or refinance. The UPB of mortgages in our single-family credit guarantee
portfolio with estimated current LTV ratios greater than 100% was 20% and 18% as of December 31, 2011 and
December 31, 2010, respectively. The serious delinquency rate for single-family loans with estimated current LTV ratios
greater than 100% was 12.8% and 14.9% as of December 31, 2011 and December 31, 2010, respectively. Due to declines
in home prices since 2006, we estimate that as of December 31, 2011, approximately 49% of the loans originated in 2005
through 2008 that remained in our single-family credit guarantee portfolio as of that date had current LTV ratios greater
than 100%. In recent years, loans with current LTV ratios greater than 100% contributed disproportionately to our credit
losses. As of December 31, 2011 and December 31, 2010, for the loans in our single-family credit guarantee portfolio
with greater than 80% estimated current LTV ratios, the borrowers had a weighted average credit score at origination of
724 and 721, respectively.
Credit Score
Credit scores are a useful measure for assessing the credit quality of a borrower. Credit scores are numbers reported
by credit repositories, based on statistical models, that summarize an individual’s credit record. FICO scores are the most
commonly used credit scores today. FICO scores are ranked on a scale of approximately 300 to 850 points. Statistically,
borrowers with higher credit scores are more likely to repay or have the ability to refinance than those with lower scores.
We only obtain credit scores of borrowers at the time of origination and do not typically receive updated data on borrower
credit scores after origination. Credit scores presented within this Annual Report on Form 10-K are at the time of
origination and may not be indicative of borrowers’ creditworthiness at December 31, 2011.
Loan Purpose
Mortgage loan purpose indicates how the borrower intends to use the funds from a mortgage loan. In a purchase
transaction, the funds are used to acquire a property. In a cash-out refinance transaction, in addition to paying off existing
mortgage liens, the borrower obtains additional funds that may be used for other purposes, including paying off
subordinate mortgage liens and providing unrestricted cash proceeds to the borrower. In other refinance transactions, the
funds are used to pay off existing mortgage liens and may be used in limited amounts for certain specified purposes; such
refinances are generally referred to as “no cash-out” or “rate and term” refinances. The percentage of home purchase
loans in our loan acquisition volume remained at low levels during 2011. Historically low interest rates contributed to
high refinance activity in 2011, though it declined from 2010 levels. Cash-out refinancings generally have had a higher
risk of default than mortgages originated in no cash-out, or rate and term, refinance transactions.
Property Type
Townhomes and detached single-family houses are the predominant type of single-family property. Condominiums
are a property type that historically experiences greater volatility in home prices than detached single-family residences.
Condominium loans in our single-family credit guarantee portfolio have a higher percentage of first-time homebuyers and
homebuyers whose purpose is for investment or for a second home. In practice, investors and second home borrowers
often seek to finance the condominium purchase with loans having a higher original LTV ratio than other borrowers.
Approximately 36% of the condominium loans within our single-family credit guarantee portfolio are in California,
Florida, and Illinois, which are among the states that have been most adversely affected by the economic recession and
housing downturn. Condominium loans comprised 15% of our credit losses during both years ended December 31, 2011
and 2010, while these loans comprised 8% of our single-family credit guarantee portfolio at both dates.
Occupancy Type
Borrowers may purchase a home as a primary residence, second/vacation home or investment property that is
typically a rental property. Mortgage loans on properties occupied by the borrower as a primary residence tend to have a
lower credit risk than mortgages on investment properties or secondary residences.
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