Freddie Mac 2012 Annual Report Download - page 110

Based on our historical experience, the performance of the loans in an individual origination year can vary over time.
The aggregate UPB of loans and the corresponding management and guarantee fee income from an origination year will
decline over time due to repayments, refinancing, and other liquidation events. In addition, credit-related expenses related to
the remaining loans in the origination year will increase over time, as some borrowers experience financial difficulties and
default on their loans. As a result, there will likely be periods when an origination year is not profitable, though it may
remain profitable on a cumulative basis. We currently believe our management and guarantee fee rates for guarantee
issuances after 2008 (excluding the amounts associated with the Temporary Payroll Tax Cut Continuation Act of 2011),
when coupled with the higher credit quality of the mortgages within these new guarantee issuances, will provide
management and guarantee fee income, over the long term, that exceeds our expected credit-related and administrative
expenses associated with the underlying loans.
Our management and guarantee income associated with guarantee issuances in 2005 through 2008 has not been
adequate to cover the credit and administrative expenses associated with such loans, on a cumulative basis, primarily due to
the high rate of defaults on the loans originated in those years coupled with the high volume of refinancing of these loans that
has occurred since 2008. High levels of refinancing and delinquency since 2008 have significantly reduced the balance of
performing loans from those years 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).
Segment Earnings management and guarantee income increased during 2012 compared to 2011, primarily due to an
increase in amortization of delivery fees. The higher volume of delivery fees in recent periods was driven by a lower interest
rate environment during 2012, which increased refinance activity. At the direction of FHFA, we also implemented two
across-the-board increases in guarantee fees in 2012, as discussed below.
• Effective April 1, 2012, we increased the guarantee fee on single-family residential mortgages sold to us by 10 basis
points. Under the Temporary Payroll Tax Cut Continuation Act of 2011, the proceeds from this legislated increase are
being remitted to Treasury to fund the payroll tax cut that occurred in 2012. We pay these fees to Treasury on a
quarterly basis. The receipt of these fees is recognized within Segment Earnings management and guarantee income,
and the remittance of these fees to Treasury is reported in Segment Earnings non-interest expense. We recognized
$108 million of expense in 2012 (and a similar amount of income) related to these fees. While we expect these fees to
become significant over time, the effect of these fees was less than a 1 basis point increase to the average rate of our
aggregate Segment Earnings management and guarantee income in 2012. As of December 31, 2012, there were
approximately 1.5 million loans totaling $311.9 billion in UPB in our single-family credit guarantee portfolio that are
subject to these fees.
• In the fourth quarter of 2012, we implemented, at FHFA’s direction, a further increase of an average of 10 basis
points in our guarantee fees on single-family mortgages sold to us.
Our management and guarantee fee income is also influenced by our PC price performance because we adjust our fees
based on the relative price performance of our PCs compared to comparable Fannie Mae securities. A decline in security
performance could negatively impact our segment financial results. While security performance and single-family market
share improved on average, in the second half of 2012, security performance was volatile and weaker than historical trends
near the end of 2012. For more information, see “BUSINESS — Our Business Segments — Investments Segment — PC
Support Activities,” and “RISK FACTORS — Competitive and Market Risks — A significant decline in the price
performance of or demand for our PCs could have an adverse effect on the volume and/or profitability of our new single-
family guarantee business.”
The UPB of the Single-family Guarantee managed loan portfolio was $1.6 trillion and $1.7 trillion at December 31,
2012 and, 2011, respectively. The liquidation rate on our securitized single-family credit guarantees was approximately 33%,
24%, and 29% for 2012, 2011, and 2010, respectively, and increased in 2012 due to significant refinancing activity caused by
historically low interest rates and, to a lesser extent, the impact of the expanded HARP initiative. Our guarantee issuances
increased from $305 billion in 2011 to $446 billion in 2012 primarily due to refinance activity. However, we expect the size
of our Single-family Guarantee managed loan portfolio will continue to decline during 2013.
Refinance volumes represented 82% of our single-family mortgage purchase volume in 2012, compared to 78% in
2011, based on UPB. We purchased significant volumes of relief refinance mortgages and HARP loans (i.e., relief refinance
loans with LTV ratios above 80%) in both 2012 and 2011. Over time, HARP loans may not perform as well as other
105 Freddie Mac