Freddie Mac 2015 Annual Report Download - page 256

Financial Statements Notes to the Consolidated Financial Statements | Note 6
Freddie Mac 2015 Form 10-K 254
Non-Agency Mortgage-Related Securities Backed by Subprime, Option ARM, Alt-A and Other
Loans
We believe the unrealized losses on the non-agency mortgage-related securities we hold are mainly
attributable to poor underlying collateral performance, limited liquidity, and risk premiums. In evaluating
securities for impairment, we use an external model that considers the credit performance of the
underlying collateral, including current LTV ratio, delinquency status, servicer performance, loan
modification terms and status, borrower credit information, and the collectability of amounts from bond
insurers. The model also incorporates assumptions about the economic environment, including future
home prices, unemployment, and interest rates to project underlying collateral prepayment speeds,
delinquency and default rates, and loss severities. Circumstances in which it is expected that a principal
and interest shortfall will occur and there is substantial uncertainty surrounding a bond insurer’s ability to
pay all future claims can give rise to recognition of other-than-temporary impairment in earnings. For
additional information regarding bond insurers, see Note 13.
The following table presents the modeled attributes, including default rates, prepayment rates, and
severities, without regard to subordination, that are used to determine whether our interests in certain
available-for-sale non-agency mortgage-related securities will experience a cash shortfall.
December 31, 2015
(dollars in millions) Subprime Option ARM Alt-A
UPB $ 17,295 $ 5,309 $ 2,696
Weighted average collateral defaults(1) 43% 27 % 23%
Weighted average collateral severities(2) 65% 63 % 48%
Weighted average voluntary prepayment rates(3) 3% 10 % 11%
Average credit enhancements(4) 6% (1)% 1%
(1) The expected cumulative default rate is expressed as a percentage of the current collateral UPB.
(2) The expected average loss given default is calculated as the ratio of cumulative loss over cumulative default for each
security.
(3) The security’s voluntary prepayment rate represents the average of the monthly voluntary prepayment rate weighted by the
security’s outstanding UPB.
(4) Positive values reflect the amount of subordination and other financial support (excluding credit enhancement provided by
bond insurance) that will incur losses in the securitization structure before any losses are allocated to securities that we own.
Percentage generally calculated based on the total UPB of securities subordinate to the securities we own, divided by the
total UPB of all of the securities issued by the trust (excluding notional balances). Negative values are shown when
unallocated collateral losses will be allocated to the securities that we own in excess of current remaining credit
enhancement, if any. The unallocated collateral losses have been considered in our assessment of other-than-temporary
impairment.
In evaluating the non-agency mortgage-related securities backed by subprime, option ARM, and Alt-A and
other loans for other-than-temporary impairment, we noted that the percentage of securities that were
AAA-rated and the percentage that were investment grade declined significantly since acquisition. While
these ratings have declined, the ratings themselves are not determinative that a loss is more or less likely.
While we may consider credit ratings in our analysis, we believe that our detailed security-by-security
analyses provide a more comprehensive view of the ultimate collectability of contractual amounts due to
us.
Our analysis is subject to change as new information regarding delinquencies, severities, loss timing,
prepayments, and other factors becomes available. While it is possible that, under certain conditions,
collateral losses on our remaining available-for-sale securities for which we have not recorded an
impairment charge could exceed our credit enhancement levels and a principal or interest loss could
occur, we do not believe that those conditions were likely as of December 31, 2015.