Freddie Mac 2015 Annual Report Download - page 92

Management's Discussion and Analysis Risk Management | SF Credit Risk
Freddie Mac 2015 Form 10-K 90
SINGLE-FAMILY MORTGAGE CREDIT RISK
We manage our exposure to single-family mortgage credit risk using the following principal strategies:
• Maintaining policies and procedures for new business activity, including prudent underwriting
standards;
• Offering private investors new and innovative ways to share in the credit risk of the Core single-family
book;
• Monitoring loan performance and characteristics for the single-family credit guarantee portfolio and
individual sellers and servicers;
• Engaging in loss mitigation activities; and
• Managing foreclosure and REO activities.
Maintaining Policies and Procedures for New Business Activity, Including Prudent Underwriting
Standards
We use a delegated underwriting process in connection with our acquisition of single-family loans
whereby we set eligibility and underwriting standards and sellers represent and warrant to us that loans
they sell to us meet these standards. Our eligibility and underwriting standards evaluate loans based on a
number of characteristics, including those discussed in the “Monitoring Loan Performance and
Characteristics for the Single-family Credit Guarantee Portfolio and Individual Sellers and Servicers”
section below. We can exercise certain contractual remedies, including requiring repurchase of the loan,
for loans that do not meet our standards.
Limits are established on the purchase of loans with certain higher risk characteristics. These limits are
designed to balance our credit risk exposure with the facilitation of affordable housing in a responsible
manner. Our purchase guidelines generally provide for a maximum original LTV ratio of 95%, with certain
exceptions such as a maximum LTV ratio of 80% for cash-out refinance loans, and no maximum LTV ratio
for fixed-rate HARP loans. In March 2015, we began to purchase certain loans with LTV ratios up to 97%
under an initiative designed to serve a targeted segment of creditworthy borrowers. We fully discontinued
purchases of Alt-A loans in 2009, interest-only loans in 2010, and option ARM loans in 2007.
The majority of our purchase volume is evaluated using our own proprietary underwriting software (Loan
Prospector (“LP”)), the seller’s software, or Fannie Mae’s software. During 2015 and 2014, 54% and 47%,
respectively, of our purchase volume was evaluated using LP. The performance of non-LP loans is
monitored to ensure compliance with our risk appetite.
We employ a quality control process to review loan underwriting documentation for compliance with our
standards on a sample basis. Many delinquent loans and all loans that result in credit losses are also
reviewed. Sellers may appeal ineligible loan determinations prior to repurchase of the loan. Our reviews
of 2014 originations are largely complete, while our reviews of 2015 originations are ongoing. The
average aggregate ineligible loan rate across all sellers for loans funded during 2014, 2013, and 2012,
excluding HARP and other relief refinance loans, was approximately 1.1%, 1.4%, and 3.0%, respectively,
based on reviews completed through 2015. The most common underwriting defect found in our review of
loans funded during 2014 related to the delivery of insufficient income data.
We made changes in recent periods to standardize our quality control process and facilitate more timely
reviews. These changes allow us to identify breaches of representations and warranties early in the life of