Freddie Mac 2012 Annual Report Download - page 62

guarantee fee on single-family residential mortgages sold to us by 10 basis points. However, 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. Therefore, our business and financial condition will not benefit from this increase in
guarantee fees. For more information, see “BUSINESS — Our Business Segments — Single-Family Guarantee Segment —
Overview of the Mortgage Securitization Process.”
We are subject to mortgage credit risks, including mortgage credit risk relating to off-balance sheet arrangements;
increased credit costs related to these risks could adversely affect our financial condition and/or results of operations.
Mortgage credit risk is the risk that a borrower will fail to make timely payments on a mortgage we own or guarantee,
exposing us to the risk of credit losses and credit-related expenses. We are primarily exposed to mortgage credit risk with
respect to the single-family and multifamily loans that we own or guarantee and hold on our consolidated balance sheets. We
are also exposed to mortgage credit risk with respect to securities and guarantee arrangements that are not reflected as assets
on our consolidated balance sheets. These relate primarily to: (a) Freddie Mac mortgage-related securities backed by
multifamily loans; (b) certain Other Guarantee Transactions; and (c) other guarantee commitments, including long-term
standby commitments and liquidity guarantees.
Single-family mortgage credit risk is primarily influenced by the credit profile of the borrower (e.g., credit score, credit
history, and monthly income relative to debt payments), documentation level, the number of borrowers, the features of the
mortgage itself, the purpose of the mortgage, occupancy type, the type of property securing the mortgage, the LTV ratio of
the loan, and local and regional economic conditions, including home prices and unemployment rates. Our credit losses will
remain elevated for the near term due to the substantial number of mortgage loans in our single-family credit guarantee
portfolio on which borrowers owe more than their home is currently worth, as well as the substantial inventory of seriously
delinquent loans.
While mortgage interest rates remained low in 2012, there can be no assurance that continued low mortgage interest
rates or efforts to modify and refinance mortgages pursuant to the MHA Program (including pursuant to the revisions to
HARP announced in October 2011) and to modify mortgages under our other loss mitigation initiatives will reduce our
overall mortgage credit risk.
We also continue to have significant amounts of mortgage loans in our single-family credit guarantee portfolio with
certain characteristics, such as Alt-A, interest-only, option ARMs, loans with original LTV ratios greater than 90%, and loans
where borrowers had FICO scores less than 620 at the time of origination, that expose us to greater credit risk than do other
types of mortgage loans. As of December 31, 2012, loans with one or more of the above characteristics comprised
approximately 22% of our single-family credit guarantee portfolio. See “Table 46 — Certain Higher-Risk Categories in the
Single-Family Credit Guarantee Portfolio” for more information.
Our multifamily mortgage credit risk is affected by the mortgaged property’s ability to generate rental income from
which debt service can be paid. That ability in turn is affected by rental market conditions (e.g., rental and vacancy rates), the
physical condition of the property, the quality of the property’s management, and the level of operating costs. Our primary
multifamily business strategy is to purchase loans for aggregation and then securitization through K Certificates, whereby we
mitigate our credit risk exposure by structuring our securities to shift a significant portion of expected losses to third party
investors through the sale of subordinate tranches. The subordinate tranches that we do not guarantee provide credit loss
protection to the senior classes that we do guarantee. While the subordination is set at an amount we believe is adequate to
cover expected credit losses, the amount of such subordination may not be sufficient to prevent us from incurring credit
losses with respect to any senior classes that we guarantee.
A risk we continue to monitor is that multifamily borrowers will default if they are unable to refinance their loans at an
affordable rate. This risk is particularly important with respect to multifamily loans because such loans generally have a
balloon payment and typically have a shorter contractual term than single-family mortgages. Borrowers may be less able to
refinance their obligations during periods of rising interest rates, reduced demand for rental housing, or weak economic
conditions, which could lead to default if the borrower is unable to find affordable refinancing. However, of the
$127.4 billion in UPB of loans in our multifamily mortgage portfolio as of December 31, 2012, only approximately 3% and
5% will reach their maturity during 2013 and 2014, respectively.
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