Freddie Mac 2011 Annual Report Download - page 152

Except for interest-only loans that began to amortize at the reset date, there were not significant increases to the
borrowers’ payments when these loans reached their first reset dates because market interest rates have generally declined
in recent years. Interest-only loans are a higher-risk mortgage product, which feature an increase in the monthly payment
at the date of first reset which is not solely related to the contractual interest rate (i.e., when the monthly payment begins
to include principal). In recent years, ARM loans have experienced high serious delinquency rates well before reaching
dates at which the loans have reached their first rate reset. We believe that ARM loan performance during the last three
years has been more adversely affected by changes in employment, home prices, and other regional and macro-economic
conditions, than by changes in the interest rates of the loans. See “RISK FACTORS — Competitive and Market Risks —
Changes in interest rates could negatively impact our results of operations, stockholders’ equity (deficit) and fair value of
net assets” for additional information. Since a substantial portion of ARM loans were originated in 2005 through 2008
and are located in geographical areas that have been most impacted by declines in home prices since 2006, we believe
that the serious delinquency rate for ARM loans will continue to remain high in 2012.
Conforming Jumbo Loans
We purchased $27.7 billion and $23.9 billion of conforming jumbo loans during the years ended December 31, 2011
and 2010, respectively. The UPB of conforming jumbo loans in our single-family credit guarantee portfolio as of
December 31, 2011 and December 31, 2010 was $49.8 billion and $37.8 billion, respectively. The average size of these
loans was approximately $545,000 and $548,000 at December 31, 2011 and December 31, 2010, respectively. See
“BUSINESS — Regulation and Supervision — Legislative and Regulatory Developments” for further information on the
conforming loan limits.
Other Categories of Single-Family Mortgage Loans
While we have classified certain loans as subprime or Alt-A for purposes of the discussion below and elsewhere in
this Form 10-K, there is no universally accepted definition of subprime or Alt-A, and our classification of such loans may
differ from those used by other companies. For example, some financial institutions may use FICO scores to delineate
certain residential mortgages as subprime. In addition, we do not rely primarily on these loan classifications to evaluate
the credit risk exposure relating to such loans in our single-family credit guarantee portfolio. For a definition of the
subprime and Alt-A single-family loans and securities in this Form 10-K, see “GLOSSARY.”
Subprime Loans
Participants in the mortgage market may characterize single-family loans based upon their overall credit quality at
the time of origination, generally considering them to be prime or subprime. While we have not historically characterized
the loans in our single-family credit guarantee portfolio 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 Credit Guarantee Portfolio” and “Table 57 — Single-Family Credit Guarantee Portfolio by Attribute
Combinations” for further information). In addition, we estimate that approximately $2.3 billion and $2.5 billion of
security collateral underlying our Other Guarantee Transactions at December 31, 2011 and December 31, 2010,
respectively, were identified as subprime based on information provided to us when we entered into these transactions.
We also categorize our investments in non-agency mortgage-related securities as subprime if they were identified as
such based on information provided to us when we entered into these transactions. At December 31, 2011 and
December 31, 2010, we held $49.0 billion and $54.2 billion, respectively, in UPB of non-agency mortgage-related
securities backed by subprime loans. These securities were structured to provide credit enhancements, and 7% and 10% of
these securities were investment grade at December 31, 2011 and December 31, 2010, respectively. The credit
performance of loans underlying these securities deteriorated significantly beginning in 2008. 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
Although there is no universally accepted definition of Alt-A, 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, may be underwritten with lower or alternative income or
asset documentation requirements compared to a full documentation mortgage loan, or both. The UPB of Alt-A loans in
our single-family credit guarantee portfolio declined to $94.3 billion as of December 31, 2011 from $115.5 billion as of
December 31, 2010. The UPB of our Alt-A loans declined in 2011 primarily due to refinancing into other mortgage
products, foreclosure transfers, and other liquidation events. As of December 31, 2011, for Alt-A loans in our single-
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