Freddie Mac 2015 Annual Report Download - page 119

Management's Discussion and Analysis Risk Management | MF Credit Risk
Freddie Mac 2015 Form 10-K 117
MULTIFAMILY MORTGAGE CREDIT RISK
We manage our exposure to multifamily mortgage credit risk using the following principal strategies:
• Maintaining policies and procedures for new business activity, including prudent underwriting
standards;
• Transferring the vast majority of expected credit losses to third parties through K Certificates and
similar securitizations; and
• Managing our portfolio, including loss mitigation activities.
Maintaining Policies and Procedures for New Business Activity, Including Prudent Underwriting
Standards
We use a prior approval underwriting approach for multifamily loans, in contrast to the delegated
underwriting approach used for single-family loans. Under this approach, we maintain credit discipline by
completing our own underwriting and credit review for each new loan prior to issuance of a loan
commitment, including review of third-party appraisals and cash flow analysis. Our underwriting standards
focus on the LTV ratio and DSCR, which estimates ability to repay using the secured property’s cash flow,
after expenses. A higher DSCR indicates lower credit risk. Our standards require maximum LTV ratios
and minimum DSCRs that vary based on the characteristics and features of the loan. Loans are generally
underwritten with a maximum original LTV ratio of 80% and a DSCR of greater than 1.25, assuming
monthly payments that reflect amortization of principal. However, certain loans may have a higher LTV
ratio and/or a lower DSCR, typically where this will serve our mission and contribute to achieving our
affordable housing goals. For more detail on LTV ratios of our portfolio, see "Managing Our Portfolio,
Including Loss Mitigation Activities" in this section. Consideration is also given to other qualitative factors,
such as borrower experience and the strength of the local market. Sellers provide certain representations
and warranties to us regarding the loans they sell to us, and are required to repurchase loans for which
there has been a breach of representation or warranty. However, repurchases of multifamily loans have
been extremely rare due to our underwriting approach prior to purchase.
Multifamily loans may be amortizing or interest-only (for the full term or a portion thereof) and have a fixed
or variable rate of interest. Multifamily loans generally have shorter terms than single-family loans and
typically have maturities ranging from five to ten years. Most multifamily loans require a balloon payment
at maturity, making ability to refinance or pay off the loan at maturity a key attribute. Some borrowers may
be unable to refinance during periods of rising interest rates or adverse market conditions.
The table below presents our multifamily loan purchases and other guarantee issuances, by product term.
December 31,
2015 2014 2013
(dollars in millions) Amount % of Total Amount % of Total Amount % of Total
10-year loans, fixed or adjustable $ 20,603 43% $ 11,069 39% $ 14,977 58%
7-year loans, fixed or adjustable 16,875 36 11,773 42 7,393 29
Other 9,786 21 5,494 19 3,502 13
Total $ 47,264 100% $ 28,336 100% $ 25,872 100%