Freddie Mac 2011 Annual Report Download - page 24

Underwriting Requirements and Quality Control Standards
We use a process of delegated underwriting for the single-family mortgages we purchase or securitize. In this
process, our contracts with seller/servicers describe mortgage underwriting standards and the seller/servicers represent and
warrant to us that the mortgages sold to us meet these standards. In our contracts with individual seller/servicers, we may
waive or modify selected underwriting standards. Through our delegated underwriting process, mortgage loans and the
borrowers’ ability to repay the loans are evaluated using several critical risk characteristics, including, but not limited to,
the borrower’s credit score and credit history, the borrower’s monthly income relative to debt payments, the loan’s original
LTV ratio, the documentation level, the number of borrowers, the type of mortgage product, and the occupancy type of
the loan. We subsequently review a sample of these loans and, if we determine that any loan is not in compliance with
our contractual standards, we may require the seller/servicer to repurchase that mortgage. In lieu of a repurchase, we may
agree to allow a seller/servicer to indemnify us against loss in the event of a default by the borrower or enter into some
other remedy. During 2011 and 2010, we reviewed a significant number of loans that defaulted in order to assess the
sellers’ compliance with our purchase contracts. For more information on our seller/servicers’ repurchase obligations,
including recent performance under those obligations, see “MD&A — RISK MANAGEMENT — Credit Risk —
Institutional Credit Risk — Single-family Mortgage Seller/Servicers.”
The majority of our single-family mortgage purchase volume is evaluated using an automated underwriting software
tool, either our tool (Loan Prospector), the seller/servicers’ own tool, or Fannie Mae’s tool. The percentage of our single-
family mortgage purchase flow activity volume evaluated by the loan originator using Loan Prospector prior to being
purchased by us was 41%, 39%, and 45% during 2011, 2010, and 2009, respectively. Beginning in 2009, we added a
number of additional credit standards for loans evaluated by other underwriting tools to improve the quality of loans we
purchase that are evaluated using these other tools. Consequently, we do not currently believe that the use of a tool other
than Loan Prospector significantly increases our loan performance risk.
Other Guarantee Commitments
In certain circumstances, we provide our guarantee of mortgage-related assets held by third parties, in exchange for a
guarantee fee, without securitizing the related assets. For example, we provide long-term standby commitments to certain
of our single-family customers, which obligate us to purchase seriously delinquent loans that are covered by those
agreements. In addition, during 2010 and 2009, we issued guarantees under the TCLFP on securities backed by HFA
bonds as part of the HFA Initiative. See “NOTE 2: CONSERVATORSHIP AND RELATED MATTERS — Housing
Finance Agency Initiative” for further information.
Credit Enhancements
Our charter requires that single-family mortgages with LTV ratios above 80% at the time of purchase be covered by
specified credit enhancements or participation interests. Primary mortgage insurance is the most prevalent type of credit
enhancement protecting our single-family credit guarantee portfolio, and is typically provided on a loan-level basis. In
addition, we employ other types of credit enhancements to further manage certain credit risk, including indemnification
agreements, collateral pledged by lenders and subordinated security structures. We also have pool insurance covering
certain single-family loans, though we did not purchase any pool insurance on single-family loans during 2011 or 2010.
Loss Mitigation and Loan Workout Activities
Loan workout activities are a key component of our loss mitigation strategy for managing and resolving troubled
assets and lowering credit losses. Our single-family loss mitigation strategy emphasizes early intervention by servicers in
delinquent mortgages and provides alternatives to foreclosure. Other single-family loss mitigation activities include
providing our single-family servicers with default management tools designed to help them manage non-performing loans
more effectively and to assist borrowers in retaining home ownership where possible, or facilitate foreclosure alternatives
when continued homeownership is not an option. Loan workouts are intended to reduce the number of delinquent
mortgages that proceed to foreclosure and, ultimately, mitigate our total credit losses by reducing or eliminating a portion
of the costs related to foreclosed properties and avoiding the additional credit losses that likely would be incurred in a
REO sale.
Our loan workouts include:
• Forbearance agreements, where reduced payments or no payments are required during a defined period, generally
less than one year. They provide additional time for the borrower to return to compliance with the original terms of
the mortgage or to implement another loan workout. During 2011, the average time period granted for completed
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