Exact name of registrant as specified in its charter. Freddie Mac. Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. PART I. Item 1. Item 1A. Risk Factors. Item 1B. Unresolved Staff Comments. Item 2. Item 3. Legal Proceedings.
Item 4. Mine Safety Disclosures. Item 5. Item 6. Selected Financial Data. Item 7. Mortgage Market and Economic Conditions, and Outlook. Consolidated Results of Operations. Consolidated Balance Sheets Analysis.
Fannie, Freddie Revoke Automatic Repurchase Requests | Appraisal Institute
Risk Management. Liquidity and Capital Resources. Fair Value Measurements and Analysis. Off-Balance Sheet Arrangements.
Contractual Obligations. Critical Accounting Policies and Estimates. Risk Management and Disclosure Commitments. Item 7A. Item 8. Financial Statements and Supplementary Data. Item 9. Item 9A. Controls and Procedures. Item 9B. Other Information. Item Directors, Executive Officers and Corporate Governance.
Executive Compensation. Principal Accounting Fees and Services. Exhibits and Financial Statement Schedules. Mortgage-Related Investments Portfolio. Affordable Housing Goals for to Affordable Housing Goals and Results for and Quarterly Common Stock Information. Mortgage Market Indicators. Summary Consolidated Statements of Comprehensive Income. Net Interest Income. Derivative Gains Losses. Other Income. Non-Interest Expense.
Investments in Available-For-Sale Securities. Investments in Trading Securities. Mortgage-Related Securities Purchase Activity. Derivative Fair Values and Maturities. Changes in Derivative Fair Values. Other Short-Term Debt. Freddie Mac Mortgage-Related Securities. Changes in Total Equity Deficit. Single-Family Relief Refinance Loans.
Table of Contents Table. Single-Family Serious Delinquency Rates. Non-Performing Assets. REO Activity by Region. Credit Loss Performance. Single-Family Charge-offs and Recoveries by Region. Loan Loss Reserves Activity. Single-Family Credit Loss Sensitivity. Repurchase Request Activity and Counterparty Balances. Loans Released from Repurchase Obligations.
Mortgage Insurance by Counterparty. Bond Insurance by Counterparty. Derivative Counterparty Credit Exposure. Freddie Mac Credit Ratings. Contractual Obligations by Year at December 31, Board of Directors Committee Membership. Funding Levels for Performance-Based Compensation. Non-Qualified Deferred Compensation. Equity Compensation Plan Information. Auditor Fees. Consolidated Statements of Comprehensive Income. Consolidated Balance Sheets.
Consolidated Statements of Equity Deficit. Consolidated Statements of Cash Flows. Note 1: Summary of Significant Accounting Policies. Note 2: Conservatorship and Related Matters. Note 3: Variable Interest Entities. Note 6: Real Estate Owned. Note 7: Investments in Securities. Note 8: Debt Securities and Subordinated Borrowings. Note 9: Financial Guarantees. Note Derivatives. Note Income Taxes. Note Segment Reporting. Note Regulatory Capital. Note Concentration of Credit and Other Risks. Note Fair Value Disclosures. Note Legal Contingencies. Quarterly Selected Financial Data.
This Annual Report on Form K includes forward-looking statements that are based on current expectations and are subject to significant risks and uncertainties. These forward-looking statements are made as of the date of this Form K and we undertake no obligation to update any forward-looking statement to reflect events or circumstances after the date of this Form K. Conservatorship and Government Support for Our Business. We are dependent upon the continued support of Treasury and FHFA in order to continue operating our business.
Our ability to access funds from Treasury under the Purchase Agreement is critical to keeping us solvent and avoiding the appointment of a receiver by FHFA under statutory mandatory receivership provisions. The conservatorship and related matters have had a wide-ranging impact on us, including our regulatory supervision, management, business, financial condition, and results of operations.
There is significant uncertainty as to whether or when we will emerge from conservatorship, as it has no specified termination date, and as to what changes may occur to our business structure during or following conservatorship, including whether we will continue to exist. We are not aware of any current plans of our Conservator to significantly change our business model or capital structure in the near-term. Our future structure and role will be determined by the Administration and Congress, and there are likely to be significant changes beyond the near-term.
We have no ability to predict the outcome of these deliberations. As our Conservator, FHFA succeeded to all rights, titles, powers and privileges of Freddie Mac, and of any stockholder, officer or director thereof, with respect to the company and its assets. FHFA, as Conservator, has directed and will continue to direct certain of our business activities and strategies. FHFA has delegated certain authority to our Board of Directors to oversee, and to management to conduct, day-to-day operations.
The directors serve on behalf of, and exercise authority as directed by, the Conservator. Our current business objectives reflect direction we have received from the Conservator including the Conservatorship Scorecard , our charter, other legislation, and public statements from FHFA and Treasury officials. Our business objectives have changed considerably since we entered into conservatorship and may continue to change. Certain changes to our business objectives and strategies are designed to provide support for the mortgage market in a manner that serves our public mission and other non-financial objectives.
However, these changes to our business objectives and strategies may not contribute to our profitability. Some of these changes increase our expenses, while others require us to forego revenue opportunities. FHFA stated that the steps envisioned in the plan are consistent with each of the housing finance reform frameworks set forth in the report delivered by the Administration to Congress in February , which is described below, as well as with the leading congressional proposals previously introduced.
Build a new infrastructure for the secondary mortgage market;. Maintain foreclosure prevention activities and credit availability for new and refinanced mortgages. The report recommends winding down Freddie Mac and Fannie Mae, and states that the Administration will work with FHFA to determine the best way to responsibly reduce the role of Freddie Mac and Fannie Mae in the market and ultimately wind down both institutions. The report states that these efforts must be undertaken at a deliberate pace, which takes into account the impact that these changes will have on borrowers and the housing market.
The report states that the government is committed to ensuring that Freddie Mac and Fannie Mae have sufficient capital to perform under any guarantees issued now or in the future and the ability to meet any of their debt obligations, and further states that the Administration will not pursue policies or reforms in a way that would impair the ability of Freddie Mac and Fannie Mae to honor their obligations.
This amendment effectively ends the circular practice of taking draws from Treasury to pay dividends to Treasury, thereby helping to preserve remaining funding available to us under the Purchase Agreement. This amount will be reduced by any future draws. Under the Purchase Agreement, our ability to repay the liquidation preference of the senior preferred stock is limited and we will not be able to do so for the foreseeable future, if at all.
The aggregate liquidation preference of the senior preferred stock will increase further if we receive additional draws. Executive Summary. Freddie Mac is a GSE chartered by Congress in with a public mission to provide liquidity, stability, and affordability to the U. We have maintained a consistent market presence since our inception, providing mortgage liquidity in a wide range of economic environments. Table of Contents foreclosures.
Summary of Financial Results. During , we observed certain signs of improvement in the housing market, which contributed positively to our financial results. Our Primary Business Objectives. Our business objectives reflect direction we have received from the Conservator, including the Conservatorship Scorecard.
We provide liquidity and support to the U. Our support enables borrowers to have access to a variety of conforming mortgage products, including the prepayable year fixed-rate mortgage, which historically has represented the foundation of the mortgage market. Our support provides lenders with a constant source of liquidity for conforming mortgage products. Our consistent market presence provides assurance to our customers that there will be a buyer for their conforming loans that meet our credit standards. We believe this liquidity provides our customers with confidence to continue lending in difficult environments.
We are an important counter-cyclical influence as we stay in the market even when other sources of capital have withdrawn. Borrowers typically pay a lower interest rate on loans acquired or guaranteed by Freddie Mac, Fannie Mae, or Ginnie Mae. Mortgage originators are able to offer homebuyers and homeowners lower mortgage rates on conforming loan products, in part because of the value investors place on GSE-guaranteed mortgage-related securities. In December , we estimated that borrowers were paying an average of 43 basis points less on these conforming loans than on non-conforming loans.
These estimates were based on data provided by HSH Associates, a third-party provider of mortgage market data. We are focused on reducing the number of foreclosures and helping to keep families in their homes. In , we continued to introduce new initiatives designed to help eligible borrowers keep their homes and avoid foreclosure. Since , we have helped more than , borrowers experiencing hardship complete a loan workout. We implemented a number of changes to HARP in late and We have purchased HARP loans provided to nearly , borrowers since the initiative began in , including more than , borrowers during Under our loan workout programs, our servicers contact borrowers and attempt to help borrowers experiencing hardship stay in their homes or avoid foreclosure.
Our servicers seek and also facilitate the completion of foreclosure alternatives when a home retention solution is not possible. Our completed modification volume during the first half of was below what otherwise would be expected, as servicers completed the transition to the non-HAMP standard modification initiative; however, the volume of our non-HAMP standard modifications increased in the second half of compared to the first half of Short sale activity increased in compared to At the direction of FHFA, and as part of the servicing alignment initiative, we announced a new standard short sale process during the third quarter of designed to help more struggling borrowers use short sales to avoid foreclosure.
We believe this new process may lead to an increase in short sales in The table below presents our single-family loan workout activities for the last five quarters. Loan modifications. Repayment plans. Forbearance agreements 2. Short sales and deed in lieu of foreclosure transactions.
Total single-family loan workouts.
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Minimizing Our Credit Losses. To help minimize the credit losses related to our guarantee activities, we are focused on:. Table of Contents We establish guidelines for our servicers to follow and provide them default management tools to use, in part, in determining which type of loan workout would be expected to provide the best opportunity for minimizing our credit losses. During , we continued to implement the FHFA-directed servicing alignment initiative, under which we and Fannie Mae are aligning certain standards for servicing non-performing loans owned or guaranteed by the companies.
We have provided standards to our servicers under this initiative that require them to initiate earlier and more frequent communication with delinquent borrowers, employ consistent requirements for collecting documents from borrowers, and follow consistent timelines for responding to borrowers and for processing foreclosures.
Under these new servicing standards, we pay incentives to servicers that exceed certain performance standards with respect to servicing delinquent loans. We also assess compensatory fees from servicers if they do not achieve minimum performance benchmarks with respect to servicing delinquent loans, including foreclosure timelines. Our servicers pursue repayment plans and loan modifications for borrowers facing financial or other hardships since the level of recovery if a loan reperforms may often be much higher than with foreclosure or foreclosure alternatives.
In cases where these alternatives are not possible or successful, a short sale transaction typically provides us with a comparable or higher level of recovery than what we would receive through property sales from our REO inventory. In large part, the benefit of short sales arises from the avoidance of costs we would otherwise incur to complete the foreclosure and dispose of the property, including maintenance and other property expenses associated with holding REO property.
The foreclosure process is a lengthy one in many jurisdictions with significant associated costs to complete, including, in times of declining home values, foregone recovery we might receive from an earlier sale. In addition, our servicers represent and warrant to us that those loans will be serviced in accordance with our servicing contract. If we subsequently discover that the representations and warranties were breached i. Some of these requests also may be rescinded in the course of the contractual appeals process.
Historically, we have used a process of reviewing a sample of the loans we purchase to validate compliance with our standards. In addition, we review many delinquent loans and loans that have resulted in credit losses, such as through foreclosure or short sale. Beginning in , we made revisions to our selection approach for these loans that expanded the coverage of our loan reviews. Certain of these changes are designed to increase our loss recoveries. As a result, if we are unable to identify breaches in representations and warranties timely, we may face greater exposure to credit and other losses under this new framework, as our ability to seek recovery or repurchase from the seller is more limited.
The new framework also does not affect their obligation to service these loans in accordance with our servicing standards. Our credit loss exposure is also partially mitigated by mortgage insurance, which is a form of credit enhancement. As a result, we expect to receive substantially less than full payment of our claims from three of our mortgage insurance counterparties that are currently partially paying claims under orders of their state regulators.
We believe that certain other of our mortgage insurance counterparties lack sufficient ability to meet all their expected lifetime claims paying obligations to us as those claims emerge. We continue efforts that we believe will create value for the industry by building the infrastructure for a future housing finance system.
These efforts include the implementation of the UMDP, which provides us with the ability to collect additional data that we believe will improve our risk management practices. In the first quarter of , we completed a key milestone of the UMDP with the launch of the Uniform Collateral Data Portal for the electronic submission of appraisal reports for conventional mortgages. In the second quarter of , we implemented the ULDD, which provides for the efficient collection and use of consistent information about loan terms, collateral, and borrowers.
We are also working with FHFA and others to develop a plan for the design and development of a securitization platform that can be used in a future secondary mortgage market. In October , FHFA released a white paper for industry comment that described a proposed framework for a new securitization platform and a model pooling and servicing agreement.
FHFA has stated that it anticipates that Freddie Mac and Fannie Mae will each maintain its own distinct securitization operations and continue to issue its own securities. In October , we announced, pursuant to a directive by FHFA, changes to requirements in certain areas related to loan servicing, including a process and criteria for evaluating servicer performance. We continue to focus on maintaining credit policies, including our underwriting standards, that allow us to purchase and guarantee loans made to qualified borrowers that we believe will provide management and guarantee fee income excluding the amounts associated with the Temporary Payroll Tax Cut Continuation Act of , over the long-term, that exceeds our expected credit-related and administrative expenses on such loans.
The credit quality of the single-family loans we acquired beginning in excluding HARP and other relief refinance mortgages is significantly better than that of loans we acquired from to , as measured by original LTV ratios, FICO scores, and the proportion of loans underwritten with fully documented income. Underwriting procedures for relief refinance mortgages are limited in many cases, and such procedures generally do not include all of the changes in underwriting standards we have implemented since As a result, relief refinance mortgages.
Table of Contents generally reflect many of the credit risk attributes of the original loans. This increase was mainly due to the changes in HARP announced in the fourth quarter of , which allow borrowers whose loans we already hold in our single-family credit guarantee portfolio with higher LTV ratios to refinance. Over time, HARP loans may not perform as well as other refinance mortgages because the continued high LTV ratios and reduced underwriting standards of these loans increase the probability of default.
Relief refinance loans:. HARP loans. Other relief refinance loans. All other loans. Subtotal- to originations. We continue to take steps toward the goal of gradually shifting mortgage credit risk from Freddie Mac to private investors, while simplifying and shrinking certain of our operations. In the case of single-family credit guarantees, we are exploring several ways to accomplish this goal, including increasing guarantee fees and evaluating new risk-sharing transactions beyond the traditional charter-required mortgage insurance coverage.
This strategy is designed to reduce the portfolio and provide the best return to the taxpayer while minimizing market disruption. In the Multifamily segment, our primary business model is to purchase held-for-sale multifamily loans for aggregation and then securitization through multifamily K Certificates, which are considered Other Guarantee Transactions.
In substantially all of these transactions we guarantee only the most senior tranches of the securities. As a result, a significant portion of our expected credit risk associated with these loans is sold in subordinated tranches to third party investors. We are focusing our resources primarily on key projects, many of which are related to FHFA-mandated strategic initiatives that will likely take several years to fully implement. We continue to actively manage our general and administrative expenses, while also continuing to focus on retaining key talent. In the first half of , we introduced a new compensation program for employees to help mitigate the uncertainty surrounding compensation.
Under the program, the majority of employees have a more predictable income, as the program either reduces or eliminates the amount of compensation that is subject to variability. While employee turnover moderated in compared to , we are continuing to explore various strategic arrangements with outside firms to provide operational capability and staffing for key functions, as needed. Our general and administrative expenses increased in compared to , largely due to an increase in spending for FHFA-mandated strategic initiatives.
We believe the various FHFA-mandated strategic initiatives will likely continue to require significant resources and thus continue to affect our level of administrative expenses going forward. Single-Family Credit Guarantee Portfolio. The UPB of our single-family credit guarantee portfolio declined approximately 6.
We believe this is due, in part, to declines in the amount of single-family mortgage debt outstanding in the market and a decline in our single-family competitive position compared to other market participants primarily Fannie Mae and Ginnie Mae. The table below provides certain credit statistics for our single-family credit guarantee portfolio. One month past due. Two months past due. Seriously delinquent 1. Non-performing loans in millions 2.
Single-family loan loss reserve in millions 3. REO inventory in properties. REO assets, net carrying value in millions. Seriously delinquent loan additions 1. Loan modifications 4. REO acquisitions. REO disposition severity ratio: 5. Total U. Single-family provision benefit for credit losses in millions.
Single-family credit losses in millions. The majority of these losses are associated with loans originated in through Nevertheless, various factors, such as continued high unemployment rates or future declines in home prices, could require us to provide for losses on these loans beyond our current expectations. Our loan loss reserves declined in every quarter of , which reflects improvement in both borrower payment performance and lower severity ratios for both REO dispositions and short sale transactions due to the improvements in home prices in most areas during Our REO inventory also declined in every quarter of , which reflects that our sales of REO properties exceeded the volume of our REO acquisitions due to lower foreclosure activity as well as an increase in the volume of short sales prior to foreclosure.
Our average REO disposition severity ratio improved to Although this ratio improved for each quarter of , it remains high as compared to our experience in periods before Excluding relief refinance loans, the improvement in borrower payment performance during reflects an improved credit profile of borrowers with loans originated since However, several factors, including the lengthening of the foreclosure process, have resulted in loans remaining in serious delinquency for longer periods than experienced prior to , particularly in states that require a judicial foreclosure process.
Although we experienced improvement in the amount of our non-performing loans during the year, this balance remained high at the end of , compared to periods prior to The credit losses and loan loss reserves associated with our single-family credit guarantee portfolio remained elevated in , due, in part, to:. Losses associated with the continued high volume of foreclosures and foreclosure alternatives. These actions relate to the continued efforts of our servicers to resolve our large inventory of seriously delinquent loans.
Due to the length of time necessary for servicers either to complete the foreclosure process or pursue foreclosure alternatives on seriously delinquent loans in our portfolio, we expect our credit losses will continue to remain elevated even if the volume of new serious delinquencies declines.
These groups continue to be large contributors to our credit losses. Weak financial condition of many of our mortgage insurers, which has reduced our actual recoveries from these counterparties as well as our estimates of expected recoveries. Some of our loss mitigation activities create fluctuations in our delinquency statistics.
Key highlights of our financial results include:. The significant reduction in provision for credit losses in primarily reflects declines in the volume of newly delinquent loans largely due to a decline in the portion of our single-family credit guarantee portfolio originated in through , and lower estimates of incurred loss due to the positive impact of an increase in national home prices. The improvement was largely driven by a decrease in derivative losses during compared to Our Business. We conduct business in the U. The size of the U. The amount of residential mortgage debt available for us to purchase and the mix of available loan products are also affected by several factors, including the volume of mortgages meeting the requirements of our charter which is affected by changes in the conforming loan limit determined by FHFA , our own preference for credit risk reflected in our purchase standards and the mortgage purchase and securitization activity of other financial institutions.
We conduct our business operations solely in the U. Our charter also determines the types of mortgage loans that we are permitted to purchase. Our statutory mission as defined in our charter is to:. Our charter does not permit us to originate mortgage loans or lend money directly to consumers in the primary mortgage market.
We provide liquidity, stability and affordability to the U. We use mortgage securitization as an integral part of our activities. Mortgage securitization is a process by which we purchase mortgage loans that lenders originate, and pool these loans into guaranteed mortgage securities that are sold in global capital markets, generating proceeds that support future loan origination activity by lenders. The primary Freddie Mac guaranteed mortgage-related security is the single-class PC.
We also aggregate and resecuritize mortgage-related securities that are issued by us, other GSEs, HFAs, or private non-agency entities, and issue other single-class and multiclass mortgage-related securities to third-party investors. We also enter into certain other guarantee commitments for mortgage loans, HFA bonds under the HFA initiative, and multifamily housing revenue bonds held by third parties. Our charter limits our purchases of single-family loans to the conforming loan market. Higher limits also apply to two- to four-family residences and for mortgages secured by properties in Alaska, Guam, Hawaii, and the U.
Virgin Islands. Under our charter, our mortgage purchase operations are confined, so far as practicable, to mortgages that we deem to be of such quality, type and class as to meet generally the purchase standards of other private institutional mortgage investors. This is a general marketability standard. Our Business Segments. Certain activities that are not part of a reportable segment are included in the All Other category.
We evaluate segment performance and allocate resources based on a Segment Earnings approach. Single-Family Guarantee Segment. The Single-family Guarantee segment reflects results from our single-family credit guarantee activities. In most instances, we use the mortgage securitization process to package the mortgage loans into guaranteed mortgage-related securities. We guarantee the payment of principal and interest on the mortgage-related security in exchange for management and guarantee fees. Our Customers. Our customers are predominantly lenders in the primary mortgage market that originate mortgages for homeowners.
These lenders include mortgage banking companies, commercial banks, savings banks, community banks, credit unions, HFAs, and savings and loan associations. We acquire a significant portion of our mortgages from several large lenders. These lenders are among the largest mortgage loan originators in the U. Bank, N. As a result, we are acquiring an increasing portion of our business volume directly from smaller lenders. We are the master servicer for the loans we purchase, and delegate the primary servicing function to our customers.
A significant portion of our single-family mortgage loans are serviced by several of our large customers. If our servicers lack appropriate process controls, experience a failure in their controls, or experience an operating disruption in their ability to service mortgage loans, our business and financial results could be adversely affected. For additional information about our. Our Competition. Since , most of our competitors, other than Fannie Mae and Ginnie Mae, have ceased their activities in the residential mortgage securitization business or severely curtailed these activities relative to their previous levels.
We compete on the basis of price, products, the structure of our securities, and service. Competition to acquire single-family mortgages can also be significantly affected by changes in our credit standards. Ginnie Mae, which became a more significant competitor beginning in , guarantees the timely payment of principal and interest on mortgage-related securities backed by federally insured or guaranteed loans, primarily those insured by FHA or guaranteed by VA. The conservatorship, including direction provided to us by our Conservator, and the restrictions on our activities under the Purchase Agreement may affect our ability to compete.
FHFA, through its strategic plan activities, has required that we and Fannie Mae adopt uniform approaches in a number of areas. Through the servicing alignment initiative, we and Fannie Mae have aligned many of our policies and procedures with respect to the servicing of single-family loans. We are also aligning certain terms of the contracts we and Fannie Mae use with our respective single-family customers, and are working with Fannie Mae on a new securitization platform.
Mortgage securitization is a process by which we purchase mortgage loans that lenders originate, and pool these loans into mortgage securities that are sold in global capital markets. The following diagram illustrates how we support mortgage market liquidity when we create PCs through mortgage securitizations. These PCs can be sold to investors or held by us or our customers.
The U. We participate in the secondary mortgage market by purchasing mortgage loans and mortgage-related securities for investment and by issuing guaranteed mortgage-related securities. In the event a borrower defaults on the mortgage, our servicer works with the borrower to find a solution to help them stay in the home, or sell the property and avoid foreclosure, through our many different workout options. If this is not possible, we ultimately foreclose and sell the home. The terms of single-family mortgages that we purchase or guarantee allow borrowers to prepay these loans, thereby allowing borrowers to refinance their loans when mortgage rates decline.
Because of the nature of long-term, fixed-rate mortgages, borrowers with these mortgages are protected against rising interest rates, but are able to take advantage of. Table of Contents declining rates through refinancing. When a borrower prepays a mortgage that we have securitized, the outstanding balance of the security owned by investors is reduced by the amount of the prepayment.
Unscheduled reductions in loan principal, regardless of whether they are voluntary or involuntary, result in prepayments of security balances. Consequently, the owners of our guaranteed securities are subject to prepayment risk on the related mortgage loans, which is principally that the investor will receive an unscheduled return of the principal, and therefore may not earn the rate of return originally expected on the investment. We guarantee these mortgage-related securities in exchange for compensation, which consists primarily of a combination of management and guarantee fees paid on a monthly basis as a percentage of the UPB of the underlying loans referred to as base fees , and initial upfront payments referred to as delivery fees.
We may also make upfront payments to buy-up the monthly management and guarantee fee rate, or receive upfront payments to buy-down the monthly management and guarantee fee rate. These fees are paid in conjunction with the formation of a PC to provide for a uniform coupon rate for the mortgage pool underlying the issued PC. We enter into mortgage purchase volume commitments with many of our single-family customers. These commitments provide for the lenders to deliver to us a certain volume of mortgages during a specified period of time.
Some commitments may also provide for the lender to deliver to us a minimum percentage of their total sales of conforming loans. The purchase and securitization of mortgage loans from customers under these contracts have pricing schedules for our management and guarantee fees that are negotiated at the outset of the contract with initial terms that may range from one month to one year.
Mortgage purchase volumes from individual customers can fluctuate significantly. If a mortgage lender fails to meet its contractual commitment, we have a variety of contractual remedies, which may include the right to assess certain fees. Our mortgage purchase contracts contain no penalty or liquidated damages clauses based on our inability to take delivery of presented mortgage loans. However, if we were to fail to meet our contractual commitment, we could be deemed to be in breach of our contract and could be liable for damages in a lawsuit.
We seek to issue guarantees with fee terms that we believe will, over the long-term, provide management and guarantee fee income that exceeds our anticipated credit-related and administrative expenses on the underlying loans. To compensate us for higher levels of risk in some mortgage products, we charge upfront delivery fees above the base management and guarantee fee, which are calculated based on credit risk factors such as the mortgage product type, loan purpose, LTV ratio and other loan or borrower characteristics. Historically, we have varied our guarantee and delivery fee pricing for different customers, mortgage products, and mortgage or borrower underwriting characteristics based on our assessment of credit risk and loss mitigation related to single-family loans.
We implemented several increases in delivery fees in recent years that are applicable to single-family mortgages with certain higher-risk loan characteristics. We have established maximum limits on the amount of delivery fees that are imposed for relief refinance mortgages, regardless of the LTV ratio of the loan.
We also implemented two across-the-board increases in guarantee fees in Under the Temporary Payroll Tax Cut Continuation Act of , the proceeds from this increase are being remitted to Treasury to fund the payroll tax cut. We pay these fees to Treasury on a quarterly basis and refer to this fee increase as the legislated 10 basis point increase in guarantee fees. In announcing this increase, FHFA stated that the changes to the guarantee fee pricing represent a step toward encouraging greater participation in the mortgage market by private firms.
In September , FHFA also requested public comment on a proposed approach under which we and Fannie Mae would adjust our delivery fees charged on single-family mortgages in states where costs related to foreclosures are statistically higher than the national average. FHFA stated in its September announcement that it expects to direct us and Fannie Mae to implement the pricing adjustments in Table of Contents Securitization Activities. The types of mortgage-related securities we issue and guarantee include the following:.
Other Guarantee Transactions. Our PCs are single-class pass-through securities that represent undivided beneficial interests in trusts that hold pools of mortgages we have purchased. Holding investments in single-family loans in the form of PCs rather than as unsecuritized loans gives us greater flexibility in managing the composition of our mortgage-related investments portfolio, as it is generally easier to purchase and sell PCs than unsecuritized mortgage loans, and allows more cost effective interest-rate risk management. For our fixed-rate PCs, we guarantee the timely payment of principal and interest.
For our single-family ARM PCs, we guarantee the timely payment of the weighted average coupon interest rate for the underlying mortgage loans. We issue most of our single-family PCs in transactions in which our customers provide us with mortgage loans in exchange for PCs. We refer to these transactions as guarantor swaps. The following diagram illustrates a guarantor swap transaction:. Guarantor Swap. Table of Contents We also issue PCs in exchange for cash. Cash Auction of PCs. Institutional and other fixed-income investors, including pension funds, insurance companies, securities dealers, money managers, REITs, and commercial banks, purchase our PCs.
For the past several years, the Federal Reserve has purchased significant amounts of mortgage-related securities issued by us, Fannie Mae and Ginnie Mae. These purchases, which are ongoing, have affected mortgage spreads positively and, in some periods, negatively and the demand for and values of our PCs.
PCs differ from most other fixed-income securities in several ways.
For example, and most significantly, single-family PCs can be partially or fully prepaid at any time. Homeowners have the right to prepay their mortgage at any time known as the prepayment option , and homeowner mortgage prepayments are passed through to the PC holder. Consequently, mortgage-related securities implicitly have a call option that significantly reduces the average life of the security from the contractual loan maturity.
As a result, our PCs generally provide a higher nominal yield than certain other fixed-income products. In addition, in contrast to U. Treasury securities, PCs are not backed by the full faith and credit of the United States and are instead backed by interests in real estate, in addition to our own guarantee. From time to time we undertake actions in an effort to support the liquidity and the relative price performance of our PCs to comparable Fannie Mae securities through a variety of activities, including the resecuritization of PCs into REMICs and Other Structured Securities.
We issue single-class and multiclass securities. Single-class securities e. Multiclass securities divide all of the cash flows of the underlying mortgage-related assets into two or more classes designed to meet the investment criteria and portfolio needs of different investors by creating classes of securities with varying maturities, payment priorities and coupons, each of which represents a beneficial ownership interest in a separate portion of the cash flows of the underlying collateral.
Usually, the cash flows are divided to modify the relative exposure of different classes to interest-rate risk, or to create various coupon structures. The simplest division of cash flows is into principal-only and interest-only classes. Other securities we issue can involve the creation of sequential payment and planned or targeted amortization classes. In a sequential payment class structure, one or more classes receive all or a disproportionate percentage of the principal payments on the underlying mortgage assets for a period of time until that class or classes are retired, following which the principal payments are directed to other classes.
Planned or targeted amortization. Table of Contents classes involve the creation of classes that have relatively more predictable amortization schedules across different prepayment scenarios, thus reducing prepayment risk, extension risk, or both. We do not charge a management and guarantee fee for these securities if the underlying collateral is already guaranteed by us since no additional credit risk is introduced. Because the collateral underlying nearly all of our single-family REMICs and Other Structured Securities consists of other mortgage-related securities that we guarantee, there are no economic residual interests in the related securitization trust.
We do not issue tranches of securities in these transactions that have concentrations of credit risk beyond those embedded in the underlying assets. We issue many of our REMICs and Other Structured Securities in transactions in which securities dealers or investors sell us mortgage-related assets or we use our own mortgage-related assets e. The creation of REMICs and Other Structured Securities allows for setting differing terms for specific classes of investors, and our issuance of these securities can expand the range of investors in our mortgage-related securities to include those seeking specific security attributes.
This transaction fee is compensation for facilitating the transaction, as well as future administrative responsibilities. Table of Contents Other Guarantee Transactions. We also issue mortgage-related securities to third parties in exchange for non-Freddie Mac mortgage-related securities. We refer to these as Other Guarantee Transactions. The non-Freddie Mac mortgage-related securities are transferred to trusts that were specifically created for the purpose of issuing securities, or certificates, in the Other Guarantee Transactions.
The following diagram illustrates an example of an Other Guarantee Transaction:. Other Guarantee Transaction. Other Guarantee Transactions can generally be segregated into two different types. In one type, we purchase only senior tranches from a non-Freddie Mac senior-subordinated securitization, place the senior tranches into securitization trusts, and issue Other Guarantee Transaction certificates guaranteeing the principal and interest payments on those certificates. In this type of transaction, our credit risk is reduced by the structural credit protections from the related subordinated tranches, which we do not guarantee.
In the second type, we purchase single-class pass-through securities, place them in securitization trusts, and issue Other Guarantee Transaction certificates guaranteeing the principal and interest payments on those certificates. Our Other Guarantee Transactions backed by single-class pass-through securities do not benefit from structural or other credit enhancement protections. Although Other Guarantee Transactions generally have underlying mortgage loans with varying risk characteristics, we do not issue tranches that have concentrations of credit risk beyond those embedded in the underlying assets, as all cash flows of the underlying collateral are passed through to the holders of the securities and there are no economic residual interests in the securitization trusts.
Additionally, there may be other credit enhancements and structural features retained by the seller, such as excess interest or overcollateralization, that provide credit protection to our interests, and reduce the likelihood that we will have to perform under our guarantee of the senior tranches. In exchange for providing our guarantee, we may receive a management and guarantee fee or other delivery fees, if the underlying collateral is not already guaranteed by us. While we have not engaged in any of these transactions since , we continue to participate in and support this program and these guarantees remain outstanding.
We establish trusts for all of our issued PCs pursuant to our PC master trust agreement. To increase liquidity and stability in the mortgage market, Congress chartered the Federal Home Loan Mortgage Corporation, known as Freddie Mac, in , and authorized it to purchase and pool conventional mortgages. Freddie modeled its programs after those of Ginnie Mae. Fannie continued to hold all of the mortgages it purchased until , when it began to pool mortgages.
Among its responsibilities, OFHEO was authorized to place Freddie or Fannie into government conservatorship if it decided either agency was critically undercapitalized. Prior to the government takeover, Fannie Mae and Freddie Mac were funded with private capital and their debt securities were not guaranteed by the federal government. However, they were also government-sponsored enterprises GSEs owned by their shareholders, but regulated by government agencies. Mortgage markets are divided into primary and secondary markets. In primary markets, loans are originated by lending institutions often mortgage banks, savings and loan associations, commercial banks, or credit unions.
These lending institutions typically obtain the funds they loan from individual, business, or government deposits or mortgages sales in the secondary markets.
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Both Fannie Mae and Freddie Mac operate in the secondary mortgage markets. They provide liquidity to the market by borrowing money to purchase the loans originated by lending institutions. They then either hold the mortgages in their portfolio or pool the mortgages and sell securities backed by these pools referred to as mortgage-backed securities MBS by Fannie and participation certificates PC by Freddie to investors.
First, they are actively traded through a network of dealers. This provides investors with a mortgage alternative that is highly liquid. Second, Fannie Mae and Freddie Mac guarantee the timely payment of principal and interest on the mortgages they securitize. Investors pay a guarantee fee and eliminate credit risk.
Thus, these two mortgage giants increase the amount of funds available in the mortgage market, and provide an attractive mortgage alternative for investors. First, they were able to borrow at low interest rates because of the implicit government guarantee and purchase higher-yielding mortgages. This positive spread typically provided a nice profit. However, Fannie and Freddie faced certain risks, mainly interest rate, credit, and pre-payment risks. Interest rate risk is the risk that interest rates will rise, causing the value of a loan portfolio to fall.
Credit risk is the risk that borrowers will default on their mortgages. Pre-payment risk is the risk that the borrower will pay off a mortgage earlier than anticipated. Interest rate risk was of particular concern to Fannie and Freddie, given their high debt-to-equity ratios; a small drop in the value of their assets could wipe out their equity, making them insolvent. However, by pooling mortgages and selling securities backed by these pools, they were able to minimize this risk.
But even with pooling, credit risk remained as Freddie and Fannie guarantee the timely payment of interest and principals. This risk was minimized as their government mandate stated that they were only allowed to purchase mortgages from individuals offering down payments and possessing good credit ratings. Pre-payment risk exists for the buyer of an MBS, as its price is based on the anticipated life of the mortgages.
If borrowers pay off their mortgages early, the return to the investor is negatively impacted since the amount of interest generated by the mortgage is decreased. Interest is paid on outstanding principals no principals, no interest. During the late s, Freddie and Fannie modified their operations by buying MBSs issued by others, including those containing sub-prime mortgages.
To minimize credit risk, they purchased insurance; to minimize interest rate risk, they purchased derivative contracts. However, insurance firms are also suffering.
Mortgage Options for Seniors in Financial Trouble
Officially, the U. Unofficially, it had long been assumed that due to the size of their holdings and their importance to the mortgage market, these GSEs were too big to fail. They enjoyed the widespread perception of being federally-backed financial agencies. Vernon L. Critics have long argued that Fannie and Freddie did not adequately offset their financial risk because they were seriously undercapitalized.
As early as , The Wall Street Journal expressed concern about the size of the outstanding debt of these two GSEs, as well as their increasing dependence on derivatives. Both Fannie and Freddie were particularly hard hit by the current subprime mortgage crisis.
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As home prices continued to fall and delinquencies increased, the impact on their balance sheets became obvious. The share prices of both mortgage giants were buffeted by speculation that either they would have to issue additional stock to offset losses, leading to greater dilution of current shares, or the government would have to bail them out, causing current shares to become worthless.
To compound their problems, Lehman Brothers yes, the recently deceased Lehman Brothers announced on July 7, that a change in accounting rules would require them to raise billions of dollars in new capital. Secretary Paulson noted that without government intervention, the housing market could lose major players, the banking system could face new losses, and foreign investors could flee the country. The act had three purposes: to prevent foreclosures, increase home purchases, and aid Fannie Mae and Freddie Mac. Second, it authorized the Treasury Department to increase its lending to Fannie and Freddie, and to purchase stock in the two corporations if necessary.
However, the aid could not cause a breach in the federal debt ceiling, a constraint meant to limit taxpayer losses. Third, it authorized Treasury to restrict dividend payments to shareholders and approve the salaries of top executives. The lobbying efforts of these two quasi-government institutions appeared to have been successful. Not only did they benefit from the rescue package, but Congress did not impose any changes in their management, nor were there any penalties to be paid by shareholders. The lack of accountability for the executives of these two companies stands today. Republican Senator Jim DeMint proposed an amendment to the housing bill that would have banned Fannie and Freddie from making political contributions if they received a bailout.
However, the Democratic leadership refused to allow a vote on his proposal. The first market response to the housing act was positive. Fannie and Freddie saw the value of their shares increase and they were able to borrow at a reduced premium over Treasury securities. This provided access to loans, secured by their assets, until the end of In addition, Treasury assumed the role of buyer of last resort for bonds packaged by Fannie and Freddie, in case there was a slack in demand.