Freddie Mac 2012 Annual Report Download - page 34

Our lending decisions are largely based on the assessment of the property’s ability to provide rents that will generate
sufficient operating cash flows to support payment of debt service obligations (both principal and interest) as measured by
the expected DSCR and the loan amount relative to the value of the property as measured by the LTV ratio. Multifamily
mortgages generally are without recourse to the borrower (i.e., the borrower is not personally liable for any deficiency
remaining after foreclosure and sale of the property), except in the event of fraud or certain other specified types of default.
Therefore, repayment of the mortgage depends on the ability of the underlying property to generate cash flows sufficient to
cover the related debt obligations. That, in turn, depends on conditions in the local rental market, local and regional economic
conditions, the physical condition of the property, the quality of property management, and the level of operating expenses.
Our Customers
We acquire a significant portion of our multifamily mortgage loans from several large seller/servicers. For 2012, our top
two multifamily sellers, CBRE Capital Markets, Inc. and Berkadia Commercial Mortgage, LLC, each accounted for more
than 10% of our multifamily purchase volume, and together accounted for approximately 34% of our multifamily purchase
volume. Our top 10 multifamily lenders represented an aggregate of approximately 80% of our multifamily purchase volume
for 2012.
A significant portion of our multifamily mortgage loans are serviced by several of our large customers. See “MD&A —
RISK MANAGEMENT — Credit Risk — Institutional Credit Risk —Seller/Servicers” for additional information.
Our Competition
We compete on the basis of: (a) price; (b) products, including our use of certain securitization structuring; and
(c) service. Historically, our principal competitors have been Fannie Mae, FHA, and other financial institutions that retain or
securitize multifamily mortgages, such as commercial and investment banks, dealers, thrift institutions, and insurance
companies. During the period of significant market volatility (primarily during 2008 and 2009), many of our competitors,
other than Fannie Mae and FHA, significantly curtailed their activities in the multifamily mortgage business relative to their
previous levels. Beginning in 2010, as multifamily fundamentals were improving, more market participants began to re-
emerge in the multifamily market, and we have faced increased competition.
Underwriting Requirements and Quality Control Standards
Our process and standards for underwriting multifamily mortgages differ from those used for single-family mortgages.
Unlike single-family mortgages, we currently do not use a delegated underwriting process for the newly-originated
multifamily mortgages we purchase or securitize. Instead, we typically underwrite and evaluate each mortgage prior to
purchase or providing our guarantee. This process includes review of third-party appraisals and cash flow analysis. Our
underwriting standards focus on loan quality measurement based, in part, on the LTV ratio and DSCR. The DSCR estimates
a multifamily borrower’s ability to service its mortgage obligation using the secured property’s cash flow, after deducting
non-mortgage expenses from income. The higher the DSCR, the more likely a multifamily borrower will be able to continue
servicing its mortgage obligation. Our standards for multifamily loans specify maximum original LTV ratio and minimum
DSCR that vary based on the loan characteristics, such as loan type (new acquisition or supplemental financing), loan term
(intermediate or longer-term), and loan features (interest-only or amortizing, fixed- or variable-rate). Our multifamily loans
are generally underwritten with requirements for a maximum original LTV ratio of 80% and a DSCR of greater than 1.25
(which for interest-only and partial interest-only loans is based on an assumed monthly payment that reflects amortization of
principal). In certain circumstances, our standards for multifamily loans allow for certain types of loans to have an original
LTV ratio over 80% and/or a DSCR of less than 1.25, typically where this will serve our mission and contribute to achieving
our affordable housing goals. In cases where we commit to purchase or guarantee a permanent loan upon completion of
construction or rehabilitation, we generally require additional credit enhancements, because underwriting for these loans
typically requires estimates of future cash flows for calculating the DSCR that is expected after construction or rehabilitation
is completed.
Multifamily seller/servicers make representations and warranties to us about the mortgage and about certain information
submitted to us in the underwriting process. We have the right to require that a seller/servicer repurchase a multifamily
mortgage for which there has been a breach of representation or warranty. However, because of our evaluation of
underwriting information for most multifamily properties prior to purchase, repurchases have been rare.
We generally require multifamily seller/servicers to service mortgage loans they have sold to us in order to mitigate
potential losses. This includes property monitoring tasks beyond those typically performed by single-family servicers. We
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