Freddie Mac 2012 Annual Report Download - page 122

Table 26 — Non-Agency Mortgage-Related Securities Backed by Subprime First Lien, Option ARM, and Alt-A Loans
and Certain Related Credit Statistics(1)
As of
12/31/2012 9/30/2012 6/30/2012 3/31/2012 12/31/2011
(dollars in millions)
UPB:
Subprime first lien(2) ................................................ $44,066 $45,166 $46,306 $47,478 $48,644
Option ARM ..................................................... 12,012 12,477 12,958 13,508 13,949
Alt-A(3) .......................................................... 12,634 13,055 13,471 13,885 14,260
Gross unrealized losses, pre-tax:(4)
Subprime first lien (2) ................................................ $ 9,128 $10,464 $12,810 $12,661 $13,401
Option ARM ..................................................... 1,785 2,502 2,997 2,909 3,169
Alt-A(3) .......................................................... 1,093 1,488 2,082 2,094 2,612
Present value of expected future credit losses:(5)
Subprime first lien (2) ................................................ $ 7,159 $ 7,129 $ 6,571 $ 7,325 $ 6,746
Option ARM ..................................................... 3,542 3,442 3,296 3,908 4,251
Alt-A (3) ......................................................... 1,739 1,699 1,956 2,237 2,235
Collateral delinquency rate: (6)
Subprime first lien (2) ................................................ 39% 39% 40% 42% 42%
Option ARM ..................................................... 38 40 42 43 44
Alt-A (3) ......................................................... 23 24 24 25 25
Average credit enhancement: (7)
Subprime first lien (2) ................................................ 15% 17% 19% 20% 21%
Option ARM ..................................................... 3 4 5 6 7
Alt-A (3) ......................................................... 4 5 5 6 7
Cumulative collateral loss: (8)
Subprime first lien (2) ................................................ 26% 25% 24% 23% 22%
Option ARM ..................................................... 21 20 19 18 17
Alt-A (3) ......................................................... 10 10 9 9 8
(1) See “Ratings of Non-Agency Mortgage-Related Securities” for additional information about these securities.
(2) Excludes non-agency mortgage-related securities backed exclusively by subprime second liens. Certain securities identified as subprime first lien may be
backed in part by subprime second-lien loans, as the underlying loans of these securities were permitted to include a small percentage of subprime
second-lien loans.
(3) Excludes non-agency mortgage-related securities backed by other loans, which are primarily comprised of securities backed by home equity lines of
credit.
(4) Represents the aggregate of the amount by which amortized cost, after other-than-temporary impairments, exceeds fair value measured at the individual
lot level.
(5) Represents our estimate of the present value of future contractual cash flows that we do not expect to collect, discounted at the effective interest rate
determined based on the security’s contractual cash flows and the initial acquisition costs. This discount rate is only utilized to analyze the cumulative
credit deterioration for securities since acquisition and may be lower than the discount rate used to measure ongoing other-than-temporary impairment to
be recognized in earnings for securities that have experienced a significant improvement in expected cash flows since the last recognition of other-than-
temporary impairment recognized in earnings.
(6) Determined based on the number of loans that are two monthly payments or more past due that underlie the securities using information obtained from a
third-party data provider.
(7) Reflects the ratio of the current principal amount of the securities issued by a trust that will absorb losses in the trust before any losses are allocated to
securities that we own. Percentage generally calculated based on: (a) the total UPB of securities subordinate to the securities we own, divided by (b) the
total UPB of all of the securities issued by the trust (excluding notional balances). Only includes credit enhancement provided by subordinated securities;
excludes credit enhancement provided by bond insurance.
(8) Based on the actual losses incurred on the collateral underlying these securities. Actual losses incurred on the securities that we hold are significantly
less than the losses on the underlying collateral as presented in this table, as non-agency mortgage-related securities backed by subprime, option ARM,
and Alt-A loans were generally structured to include credit enhancements, particularly through subordination and other structural enhancements.
For purposes of our cumulative credit deterioration analysis, our estimate of the present value of expected future credit
losses on our available-for-sale non-agency mortgage-related securities decreased to $13.2 billion at December 31, 2012
from $14.0 billion at December 31, 2011. All of these amounts have been reflected in our net impairment of available-for-
sale securities recognized in earnings in this period or prior periods. The decrease in the present value of expected future
credit losses was primarily driven by: (a) improvements in forecasted home prices over the expected life of our available-for-
sale securities; (b) the impact of lower interest rates in 2012 resulting in a benefit from expected structural credit
enhancements on the securities; and (c) realized cash shortfalls. This decrease was partially offset by an increase in the
present value of expected future credit loss estimates related to the impact of our implementation, in the fourth quarter of
2012, of a third-party model, which enhanced our approach to estimating other-than-temporary impairments of our single-
family non-agency mortgage-related securities. For more information regarding our implementation of this model, see
“NOTE 7: INVESTMENTS IN SECURITIES — Impairment Recognition on Investments in Securities.”
Since the beginning of 2007, we have incurred actual principal cash shortfalls of $2.8 billion on impaired non-agency
mortgage-related securities, including $315 million and $1.3 billion related to the three and twelve months ended
December 31, 2012, respectively. Many of the trusts that issued non-agency mortgage-related securities we hold were
structured so that realized collateral losses in excess of structural credit enhancements are not passed on to investors until the
investment matures. We currently estimate that the future expected principal and interest shortfalls on non-agency mortgage-
117 Freddie Mac