Freddie Mac 2012 Annual Report Download - page 142

in property values since 2006, such as California, Florida, Nevada and Arizona. See “NOTE 15: CONCENTRATION OF
CREDIT AND OTHER RISKS” for more information concerning the distribution of our single-family credit guarantee
portfolio by geographic region.
Mortgages with Second Liens
The presence of a second lien can increase the risk that a borrower will default. A second lien reduces the borrower’s
equity in the home, and has a negative effect on the borrower’s ability to refinance or sell the property for an amount at or
above the combined balances of the first mortgage and second lien. As of December 31, 2012 and 2011, approximately 14%
and 15%, respectively, of the loans in our single-family credit guarantee portfolio had second-lien financing by third parties
at the time of origination of the first mortgage, and we estimate that these loans comprised 17% of our seriously delinquent
loans at both dates, based on UPB. Borrowers are free to obtain second-lien financing after origination and we are not
entitled to receive notification when a borrower does so. Therefore, it is likely that additional borrowers have post-origination
second-lien mortgages.
Attribute Combinations
Certain combinations of loan characteristics often can indicate a higher degree of credit risk. For example, single-family
mortgages with both high LTV ratios and borrowers who have lower credit scores typically experience higher rates of serious
delinquency and default. We estimate that there were $12.0 billion and $11.1 billion at December 31, 2012 and 2011,
respectively, of loans in our single-family credit guarantee portfolio with both original LTV ratios greater than 90% and
FICO scores less than 620 at the time of loan origination. Certain mortgage product types, including interest-only or option
ARM loans, that have additional higher risk characteristics, such as lower credit scores or higher LTV ratios, will also have a
higher risk of default than those same products without these characteristics. See “Table 52 — Single-Family Credit
Guarantee Portfolio by Attribute Combinations” for information about certain attribute combinations of our single-family
mortgage loans.
Single-Family Mortgage Product Types
Product mix affects the credit risk profile of our total mortgage portfolio. The primary mortgage products in our single-
family credit guarantee portfolio are first lien, fixed-rate mortgage loans. In general, 15-year amortizing fixed-rate mortgages
exhibit the lowest default rate among the types of mortgage loans we securitize and purchase, due to the accelerated rate of
principal amortization on these mortgages and the credit profiles of borrowers who qualify for them. In a rising interest rate
environment, balloon/reset and ARM borrowers typically default at a higher rate than fixed-rate borrowers. However, in
recent years, during which interest rates have generally remained relatively low, our delinquency and default rates on
adjustable-rate and balloon/reset mortgage loans have continued to be as high as, or higher than, those on fixed-rate loans
because these borrowers also have been affected by declining housing and economic conditions and/or had other higher-risk
characteristics. Effective January 1, 2013, we no longer purchase balloon/reset mortgages. Interest-only and option ARM
loans are higher-risk mortgage products based on the features of these types of loans. See “Other Categories of Single-
Family Mortgage Loans” below for additional information on higher-risk mortgages in our single-family credit guarantee
portfolio.
For purposes of presentation within this Form 10-K and elsewhere in our reporting, we have categorized loans that have
been modified under HAMP as fixed-rate loans, notwithstanding the rate adjustment provision of HAMP. Our HAMP loan
modifications typically result in an initial below-market interest rate that after five years gradually adjusts to a new rate that
is fixed for the remaining life of the loan. While HAMP loans have a rate adjustment provision, the future rates of the loans
are determined at the time of modification rather than at a subsequent date.
The following paragraphs provide information on the interest-only, option ARM, adjustable-rate, and conforming jumbo
loans in our single-family credit guarantee portfolio. Interest-only and option ARM loans have experienced significantly
higher serious delinquency rates than fixed-rate amortizing mortgage products.
Interest-Only Loans
Interest-only loans have an initial period during which the borrower pays only interest, and at a specified date the
monthly payment increases to begin reflecting repayment of principal. Interest-only loans represented approximately 3% and
4% of the UPB of our single-family credit guarantee portfolio at December 31, 2012 and 2011, respectively. We
discontinued purchasing such loans on September 1, 2010. The balance of these loans has declined significantly in recent
137 Freddie Mac