Freddie Mac · OTC:FMCC
Freddie Mac — Investor Day (April 2023)
139 slides from Freddie Mac's investor day presentation, Apr 20, 2023
Slide 1: Economic and Housing Research: Financial Stress, Affordability, Migration
Economic and Housing Research: Financial Stress, Affordability, Migration New research leveraging unique data that increases our understanding of housing market risk and opportunities Public Prepared by Freddie Mac © Freddie Mac
Slide 2: Today's Speaker
Today’s Speaker Leonard Kiefer Deputy Chief Economist, Economic and Housing Research Leonard (Len) Kiefer is an economist who helps people understand what’s going on in the economy, housing, mortgage markets. Len joined Freddie Mac in 2009 and has served as Deputy Chief Economist since December 2012
Slide 3: Our Agenda
Our 1. The U.S. Economy Under Stress Stress is building in the economy, inflation remains high, Agenda the growth outlook darkens, will resilient consumers power through? 2. Affordability Challenged by Higher Rates Even though higher rates price out millions, millions more potential first-time buyer
Slide 4: The U.S. Economy Under Stress
The U.S. Economy Under Stress Stress is building in the economy, inflation remains high, the growth outlook darkens, will resilient consumers power through? Public Prepared by Freddie Mac © Freddie Mac
Slide 5: The Probability of a Recession in the Next 12 Months is Ramping Up
The Probability of a Recession in the Next 12 months is Ramping Up Moody's Analytics New York Fed 100 100 86.5 75 75 57.8 50 50 25 25 0 0 Bloomberg Cleveland Fed 100 100 65 63.9 75 75 50 50 25 25 0 0 Source: Moody’s Analytics, NY Fed, Bloomberg, Cleveland Fed Public Investor Day – April 20, 2023 Pre
Slide 6: Measuring Mortgage Market Credit Conditions with Daily Conditional Mortgage Rate Spreads
Measuring Mortgage Market Credit Conditions with Daily Conditional Mortgage Rate Spreads Daily conditional mortgage rate spreads are a modified version of conditional mortgage rate spreads as originally defined in: Justiniano, A., Primiceri, G. E., & Tambalotti, A. (2022). The mortgage rate conundru
Slide 7: Financial Conditions Tightened Following SVB Failure, but Spreads have Normalized
Financial Conditions Tightened Following SVB Failure, but Spreads have Normalized in the Past Few Weeks Timeline of Recent Events (A) Pre-COVID in early 2020, financial market conditions were relatively loose (B) When COVID hit conditions rapidly tightened (C) But as the market stabilized conditions
Slide 8: Inflation has Started to Moderate…But A Long Way from Fed Target
Inflation has Started to Moderate…But A Long Way from Fed Target CPI by Frequency of Purchase (YoY%) Frequent Infrequent Contractual 16% 14% Frequent includes eggs: 12% up 36% YoY in March 2023 10% 8% 6% Infrequent includes airline fares: 4% up 18% YoY in March 2023 2% 0% -2% -4% Contractual include
Slide 9: Consumers have Significant Buffers to Deal with a Negative Hit to Incomes
Consumers have Significant Buffers to Deal with a Negative Hit to Incomes Personal Savings 600 Personal Savings 500 Excess Savings: $2.6 trillion Excess Savings 400 Excess Savings Spent 300 Billion 200 100 0 Excess Savings Spent: $0.7 trillion -100 Source: BEA, NY Fed Public Investor Day – April 20,
Slide 10: Economic Growth for 2022 Drops Back to Trend
Economic Growth for 2022 Drops Back to Trend and Economic Growth Expected to Remain Flat in 2023 U.S. Real Gross Domestic Product (GDP) Annualized Growth 5.9% 4.5% 3.2% 3.1% 3.2% 2.3% 2.1% 1.9% 1.9% 1.9% -2.8% Average by Decade 1960's 1970's 1980's 1990's 2000's 2010's 2020 2021 2022 2023F 2024F Not
Slide 11: Affordability Challenged by Higher Rates
Affordability Challenged by Higher Rates Even though higher rates price out millions, millions more potential first-time buyers compete with investors over what little inventory is available Public Prepared by Freddie Mac © Freddie Mac
Slide 12: Mortgage Rates in 2022 had the Largest Ever Annual Increase
Mortgage Rates in 2022 had the Largest Ever Annual Increase 30-Year Fixed Rate Mortgage Rate U.S. weekly average rate 1971-2023 (%) 20% 18% 16% 14% 12% 10% 8% 6.27 as of 4/13/2023 6% 4% 2% 0% Source: Freddie Mac Primary Mortgage Market Survey Public Investor Day – April 20, 2023 Prepared by Freddie
Slide 13: Historically Low Rates in Previous Years Means There is No Refi Incentive
Historically Low Rates in Previous Years Means There is No Refi Incentive Given Today’s Rates Outstanding 30-year Conforming Balance by Coupon ($T's) 1.94 Most homeowners with a mortgage have an outstanding rate well below market averages 1.65 (6.27% April 13, 2023). Mortgage rate lock in will freez
Slide 14: Home Sales Cooled Due to Rapidly Rising Rates
Home Sales Cooled Due to Rapidly Rising Rates Total Home Sales (Ths. #, SAAR) 9,000 8,000 7,000 6,000 5,000 4,000 3,000 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 Sources : National Association of Realtors (NAR); U.S. Census Bur
Slide 15: Softer Demand Has Led to a Rise in Inventory
Softer Demand Has Led to a Rise in Inventory and a Decrease in the Velocity of Transactions, but Supply Remains Near Record Lows Active Listings Inventory Total Homes For Sale Pct Under Contract Within 3 Days Pct Change from Year Ago Ths. #, SA 80% 20% 5,000 60% 40% 15% 4,000 20% 0% 3,000 10% -20% -
Slide 16: New Housing Completions Improved in 2022, but Still Below Pre-GFC Levels
New Housing Completions Improved in 2022, but Still Below Pre-GFC Levels… U.S. annual housing completions and manufactured home shipments (1000s) 3,000 3,000 2,500 2,500 2,000 2,000 1,500 1,500 1,000 1,000 500 500 0 0 68 69 70 71 72 73 74 75 76 77 78 79 80 81 82 83 84 85 86 87 88 89 90 91 92 93 94 9
Slide 17: Entry-Level Supply Had Been Declining for Decades
….and Entry-Level Supply Had Been Declining for Decades… Share of SF Construction that is 1,400 Square Feet or Less 80% 70% 60% 50% Public Records 40% Census 30% 20% 10% 0% Source: Census and CoreLogic Public Investor Day – April 20, 2023 Prepared by Freddie Mac © Freddie Mac
Slide 18: Modest Increase in Investor and Cash Share Since the Pandemic
There Has Been a Modest Increase in Investor and Cash Share Since the Pandemic Began and it Has Only Slightly Declined Overall Investor Share Total All-Cash Share 38% 38% 35% 35% 33% 32% 32% 31% 31% 31% 31% 29% 29% 30% 28% 28% 26% 27% 26% 27% 25% 24% 25% 25% 25% 25% 25% 22% Source: Corelogic Public
Slide 19: Individual Investors Are Largest Category of Real Estate Investors
They Receive Little Attention, but Individual Investors Are Largest Category of Real Estate Investors Investor Share of Total Home Sales By Type 25% 20% 15% Individual Investors: 1 property Small Investors: 2-9 properties Mid-Sized: 10-99 properties 10% Institutional Investors: 100 or more propertie
Slide 20: The Market's Mechanism for Providing Affordable Housing is 'Filtering'
The Market’s Mechanism for Providing Affordable Housing is ‘Filtering’ But Not Working in High Priced Markets Due to Demand/Supply Imbalance Older More Affordable Homes Are Filtering Up Due to Older Homes in High-Cost Markets Are Not Filtering Being Raided By Higher Income Households Down at All Due
Slide 21: Higher Rates and House Prices Reduced Number of Potential Homebuyers
Higher Mortgage Rates and House Prices have Dramatically Reduced the Number of Potential Homebuyers Number of "Mortgage Ready" Consumers Who Can Potentially Qualify for a Mortgage 45 Millions 40 $200K 35 mortgage 30 Interest rates going from 3% to 6% reduced the number of mortgage ready consumers 25
Slide 22: Chronic Supply Shortage Caused Entry-Level Prices to Soar
Chronic Supply Shortage and High Entry-Level Demand Caused Entry- Level Prices to Soar Entry-Level Home Prices Skyrocket Renters Scramble For Shrinking Inventory Affordability Gap Rapidly Rising Number of Renter Household Per Homes For Sale Cumulative Gap Between Entry Level and High End 40 Home Pri
Slide 23: House Prices Driven by Migration
House Prices Driven by Migration House prices may have turned the corner, buyers are moving for affordability but may be exposing themselves to other risks. Public Prepared by Freddie Mac © Freddie Mac
Slide 24: Home Price Growth Declines have Stabilized
Home Price Growth Declines have Stabilized and Preliminary February/March Data Suggests Modest Increases Freddie Mac House Price Index - January 2023 Freddie Mac House Price Index - January 2023 Percent Change from Year Ago, SA Percent Change from Month Ago, SA 20% 2.5% 15% 2.0% 10% 1.5% 5% 1.0% 2.4
Slide 25: Large Drop in Demand Has Led to a Decline in Home Prices
Despite Still Low Supply, Very Large Drop in Demand Has Led to a Decline in Home Prices Months' Supply vs House Price Appreciation 30% 25% 2021 Home Price Changes 3 Month Annualized % 20% 1999 to 2009 15% 2020 10% 5% 0% 2010 to 2019 -5% 2022 -10% Jan 2023 -15% -20% 0 2 4 6 8 10 12 Months' Supply of
Slide 26: Prices in Western Markets are Rapidly Declining
Prices in Western Markets are Rapidly Declining, and the Slowdown is Spreading to Majority of Markets, but Some Markets Remain Resilient United States: 1.1% Year-Over-Year Growth February 2023 1 The Freddie Mac House Price Index for the U.S. is a value-weighted average of the state indexes where the
Slide 27: Prices in Western Markets are Rapidly Declining
Prices in Western Markets are Rapidly Declining, and the Slowdown is Spreading to Majority of Markets, but Some Markets Remain Resilient Public Investor Day – April 20, 2023 Prepared by Freddie Mac © Freddie Mac
Slide 28: Increasing Share of Homebuyers Moving Out of Metro and State
Increasing Share of Homebuyers Moving Out of Metro and State Share of Homebuyers by Type of Move Share of Homebuyers by Type of Move Same county Same metro Same state Interstate 75% 20% 70% 15% 65% 10% 60% 5% 55% 0% Jan-00 Jan-01 Jan-02 Jan-03 Jan-04 Jan-05 Jan-06 Jan-07 Jan-08 Jan-09 Jan-10 Jan-11
Slide 29: Migration to More Affordable Markets is a Countervailing Force
Migration to More Affordable Markets is a Large Countervailing Force to Housing Affordability Pressures in Expensive Markets Monthly Net Migration by Metro Size 6,000 Midsize Metro Midsize Metro Pop 500K- 1M 4,000 Pop 250K-500K Small Metro 2,000 Pop Under 250k Micro Area - Monthly Net Migration Larg
Slide 30: Homebuyers are Flocking to Many Small and Medium Markets
Homebuyers are Flocking to Many Small and Medium Markets, Especially in Southeast and Interior Markets Public Investor Day – April 20, 2023 Prepared by Freddie Mac © Freddie Mac
Slide 31: Average Savings by Migrating to a More Affordable Location is $600
Average Savings by Migrating to a More Affordable Location is $600 Monthly Savings By Moving to the Top Affordable Metro Compared to Staying in the Same Metro San Francisco, CA Sacramento, CA, $1,300 New York, NY-NJ-PA Philadelphia, PA-NJ-DE-MD, $1,100 Austin, TX San Antonio, TX, $1,000 San Diego, C
Slide 32: Buyers Seeking Affordability are Moving to Areas with High Exposure to Climate Hazards
Buyers Seeking Affordability are Moving to Areas that have High Exposure to Wildfire, Drought and Hurricanes Average Net Migration* 140,000 (October 2021 through October 2022) 120,000 100,000 80,000 60,000 Net Migration 40,000 20,000 0 -20,000 -40,000 -60,000 Wildfire Drought Hurricane Coastal Flood
Slide 33: Summary
1. The U.S. Economy Under Stress Summary Stress is building in the economy, inflation remains high, the growth outlook darkens, will resilient consumers power through? 2. Affordability Challenged by Higher Rates Even though higher rates price out millions, millions more potential first-time buyers c
Slide 34: Disclaimer
Opinions, estimates, forecasts and other views contained in this document are those of Freddie Mac's Economic & Housing Research group, do not necessarily represent the views of Freddie Mac or its management, should not be construed as indicating Freddie Mac's business prospects or expected results,
Slide 35: Questions?
Questions? Public Prepared by Freddie Mac © Freddie Mac
Slide 36: Thank You
Thank You Public Prepared by Freddie Mac © Freddie Mac
Slide 37: Single-Family Credit Risk Management Overview
Single-Family Credit Risk Management Overview Public Prepared by Freddie Mac © Freddie Mac
Slide 38: Today's Speaker
Today’s Speaker Terri Merlino Senior Vice President & Chief Credit Officer, Single-Family Business As chief credit officer for the past three years, Terri Merlino leveraged her broad-based knowledge of mortgage operations, sales, processing, underwriting, quality control and secondary marketing acti
Slide 39: Our Agenda
Our 1. Remaining Mission & Risk Management Agenda Focused for 2023 2. Single-Family Credit Risk Management 3. The Three Cs 4. Notable Policy Actions 5. Affordable Program Concentration & Risk in 2023 Public Document Title & Date Goes Here Prepared by Freddie Mac © Freddie Mac
Slide 40: Remaining Mission & Risk Management Focused for 2023
Remaining Mission & Risk Management Focused for 2023 • A key strategic priority is delivering on our mission by providing sustainable and equitable access to affordable housing • One area of focus in supporting our mission is to practice risk management excellence; we must meet our affordable goals
Slide 41: Single-Family Credit Risk Management
Single-Family Credit Risk Management Automated Analytics, Seller / Servicer Credit Policy Underwriting Risk Reporting & Oversight Assessment Technology • Define, implement and • Use automation, • Provide single point of • Establish benchmarks for manage credit policy, insights and accountability for
Slide 42: The Three Cs and the Platform
The Cs The Platform Automated Underwriting Risk Assessment Pre-Qual/ Processing/ Credit refers to a borrower’s willingness to repay Pre-Closing Closing the loan, in this context. Factors that determine Application Underwriting Credit credit include: • Credit score • Risk Assessment • Foreclosures &
Slide 43: Funding Mix Shifted; but Quality Remains Strong
Funding Mix Shifted; but Quality Remains Strong • Rising rates in 2022 shifted the market toward purchases and refinances with lower origination volumes. Purchases made up 80% of Q4 and 58% of all 2022 funding, while 2022 volume was down nearly 60% from 2021. • Average TLTV increased during the year
Slide 44: Notable Policy Actions
Notable Policy Actions Credit Underwriting Affordable Refinance Mortgages: Accessory Dwelling Unit (ADU): • Added a requirement that when there is a change in borrowers between the new Expanded to allow the following flexibilities and clarifications: mortgage and the mortgage being refinanced, the n
Slide 45: Notable Policy Actions cont.
Notable Policy Actions cont. COVID-19 Related Underwriting Requirement Added in Seller/Servicer Guide Desktop Appraisals: • Due to success of desktop appraisals permitted for COVID-19, effective for new Loan Product Advisor submissions or resubmissions on or after March 6, 2022, Sellers were offered
Slide 46: Affordable Program Concentration & Risk to Increase in 2023
Affordable Program Concentration & Risk to Increase in 2023 • Affordable Program loans have higher concentration of risk tails and layered risks than non- Affordable Program loans. Borrowers are also much more likely to be first-time home buyers, qualifying on one borrower’s income, and below 80% of
Slide 47: Questions?
Questions? Public Prepared by Freddie Mac © Freddie Mac
Slide 48: Thank You
Thank You Public Prepared by Freddie Mac © Freddie Mac
Slide 49: Seller/Servicer Risk Management
Seller/Servicer Risk Management Public Prepared by Freddie Mac © Freddie Mac
Slide 50: Today's Speakers
Today’s Speakers Keith Jones Vice President, Credit Policy, Client Credit Risk Management & Quality Control Keith Jones is responsible for Seller/Servicer applications and annual recertifications, as well as holistic oversight of Seller/Servicer risk management activities for the Single-Family busin
Slide 51: Our Agenda
Our 1. Risk Management Life Cycle Overview Agenda 2. Seller/Servicers Oversight & Tiering Process 3. Update to FHFA Financial Requirements Public Document Title & Date Goes Here Prepared by Freddie Mac © Freddie Mac
Slide 52: Risk Management Life Cycle Overview
Risk Management Life Cycle Overview Third Party Lifecycle Third-Party Risk Management as outlined in FHFA Advisory Bulletins: risk assessment, due diligence, contracting, monitoring, issue Risk Assessment/Measurement/Planning – management and renewal/termination. Manage significant changes in third
Slide 53: Components of Seller/Servicer Oversight
Components of Seller/Servicer Oversight Financial Risk, Credit Risk and Ops Risk are weighted and combined to create comprehensive risk rating. • The Comprehensive Risk Rating comprises of Financial Risk Score Financial, Credit and Ops risk: • Financial Risk Score – Freddie Mac financial risk rating
Slide 54: Update to FHFA Financial Requirements
Update to FHFA Financial Requirements • The FHFA and Ginnie Mae jointly announced updated minimum financial eligibility requirements for Enterprise Seller/Servicers and Ginnie Mae Issuers that will be phased in starting September 30, 2023. • The core changes to the current FHFA requirements are rela
Slide 55: Update to FHFA Financial Requirements cont.
Update to FHFA Financial Requirements cont. Net Worth Requirement Current Eligibility 2.0 (Applies to non-bank and banks) Base: $2.5 million + Enterprise Servicing and All other Servicing 25 bps 25 bps Ginnie Mae Servicing 25 bps 35 bps Capital less Goodwill and Intangibles, Capital less Goodwill an
Slide 56: Counterparty Credit Risk Management
Counterparty Credit Risk Management (Counterparty Level Lifecyle) Evaluation: Assessment of counterparty financial strength • Annual Review • Risk Rating • Risk Appetite Reporting Evaluation Surveillance & Monitoring: On-going monitoring of risk profile • Market Indicators • Stress Testing (Capital
Slide 57: Questions?
Questions? Public Prepared by Freddie Mac © Freddie Mac
Slide 58: Thank You
Thank You Public Prepared by Freddie Mac © Freddie Mac
Slide 59: Modeling's Role in Risk Mitigation
Modeling’s Role in Risk Mitigation Public Prepared by Freddie Mac © Freddie Mac
Slide 60: Today's Speaker
Today’s Speaker Michael Bradley Senior Vice President, Single-Family Modeling and Analytics Michael Bradley is responsible for setting the modeling and analytics strategy and positioning Freddie Mac to become the best credit guarantor. This is a critical role, since Freddie Mac relies on data-driven
Slide 61: Our Agenda
Our Agenda 1. Background 2. Overvalued Markets: How to Identify and for How Long 3. Freddie Mac’s AI/ML Journey 4. Closing Thoughts Public Document Title & Date Goes Here Prepared by Freddie Mac © Freddie Mac
Slide 62: Contextual Background
Contextual Background • The Three C’s • Four Lines of Defense • Formal Theories of Default Public Investor Day – April 20, 2023 Prepared by Freddie Mac © Freddie Mac
Slide 63: The Three C's of Mortgage Performance
Contextual Background The Three C’s of Mortgage Performance Credit Capacity Collateral Public Investor Day – April 20, 2023 Prepared by Freddie Mac © Freddie Mac
Slide 64: Four Lines of Defense
Contextual Background Four Lines of Defense Borrower Collateral Mortgage Insurance Capital Public Investor Day – April 20, 2023 Prepared by Freddie Mac © Freddie Mac
Slide 65: Trigger Theory
Contextual Background Trigger Theory • A mortgage can be viewed as a collection of financial options. • Think of a default as similar to a put option. Borrowers Borrowers • Default requires the combination of negative equity and a ‘life with negative who suffered event’, (e.g., job loss, divorce, eq
Slide 66: Life Events Help Drive Delinquencies
Contextual Background A variety of life events help drive delinquencies Public Investor Day – April 20, 2023 Prepared by Freddie Mac © Freddie Mac
Slide 67: Home Price Drop Drives Credit Losses
Contextual Background Adding home price drop drives credit losses Public Investor Day – April 20, 2023 Prepared by Freddie Mac © Freddie Mac
Slide 68: Overvalued Markets: How to Identify & for How Long
Overvalued Markets: How to Identify & for How Long Public Prepared by Freddie Mac © Freddie Mac
Slide 69: Standard Industry House Price Forecasting Model
Standard Industry House Price Forecasting Model • Standard House Price Forecasting Model in the industry is a two-stage error-correction model that: Predict the local long-run sustainable house- price level that can be supported by long-run o Uses local house-price drivers to supply and demand facto
Slide 70: One Example for Some MSA
One Example for Some MSA Public Investor Day – April 20, 2023 Prepared by Freddie Mac © Freddie Mac
Slide 71: Challenges of Identifying an Overvalued Market
Challenges of identifying an overvalued market No definitive, universally accepted measure of market overvaluation; no observed equilibrium level of a market Different studies consider different factors: Even if one can determine the actual drivers of the • High price-to-income ratio equilibrium lev
Slide 72: Different Model Views on Select MSAs from 2022 Q2
Significant Variation - Different Model Views on Select MSAs from 2022 Q2 Metro Model A Model B Model C Model D Model E Model F Atlanta Austin Baltimore Birmingham Boston Buffalo Chicago Dallas Detroit 50+% Houston Los Angeles 25%~50% Miami 10%~25% New York 0%~10% Phoenix -10%~0% San Francisco -25~1
Slide 73: Monte Carlo Simulation
Monte Carlo Simulation US Paths - Production 4 3.5 3 2.5 2 1.5 1 0.5 0 2020 2025 2030 2035 2040 2045 Public Investor Day – April 20, 2023 Prepared by Freddie Mac © Freddie Mac
Slide 74: Determining When an Overvalued Market will Decline is a Challenge
Determining When an Overvalued Market will Decline is a Challenge Not all overvalued markets will decline. An “overvalued” market can stay overvalued for extended periods of time. For example, • Miami had been called 15% overvalued in 2014 Q1 by one of the industry models. • However, Miami grew 132+
Slide 75: Market Overvaluation: Summary
Market Overvaluation: Summary • Determining whether a housing market is overvalued based on statistical models can be a challenging task. • It is equally difficult to determine how long a market can remain overvalued. • Better to monitor key indicators and economic trends to get a sense of where a p
Slide 76: Freddie Mac's AI/ML Journey
Freddie Mac’s AI/ML Journey: The Rationale & Examples Public Prepared by Freddie Mac © Freddie Mac
Slide 77: Benefits of Machine Learning
Benefits of Machine Learning • Our major models allow us to scale massively • Others are using AI in an attempt to disrupt our business model • Humans predictably make mistakes — “Thinking Fast and Slow” Public Investor Day – April 20, 2023 Prepared by Freddie Mac © Freddie Mac
Slide 78: Why We Need AI
Why We Need AI • Captures nonlinearities and interactions better than traditional methods, which maps to improved business outcomes. • Has potential to greatly improve outcomes (including expanding access to credit) for consumers, businesses and other stakeholders across wide range of applications a
Slide 79: LPA and Fair Lending Testing
LPA and Fair Lending Testing Fair Lending testing of LPA uses innovative techniques to identify Less Discriminatory Alternatives Less Discriminatory Alternatives (LDA): • Alternative model specifications that lower impact on protected classes without a material degradation in performance. If found,
Slide 80: LDA Search Results from GAN – An Example
LDA Search Results from GAN – An Example Hypothetical Example – Actual Results Not Shown • The graph shows impact/accuracy tradeoff for alternatives created from the GAN process. • Currently in use for LPA fair lending testing. By greatly expanding the search relative to previous methods, the GAN al
Slide 81: Asset Income Modeler (AIM) Helps Manage Risks
Asset Income Modeler (AIM) Helps Manage Risks Using new auto-labeling techniques to build future versions of our models increases accuracy and speed. Continually Managing Risk: • Removes subjectivity & manual errors by applying consistent rules to all loans. • Receives data directly from the source
Slide 82: Condition & Quality Analysis
Condition & Quality Analysis Applying AI/MI algorithms to develop solution for property condition and quality assessment Understanding the type of characteristics to determine the overall property quality and condition are needed to understand market expectations and how that influences value. A Tal
Slide 83: Conclusion
Conclusion • Freddie Mac is harnessing the power of AI and ML to drive faster, more accurate decisioning, manage risk effectively and create value, liquidity and stability within the housing ecosystem. • Freddie Mac’s investment in AI/ML and research of new applications is enhancing our understandin
Slide 84: Questions?
Questions? Public Prepared by Freddie Mac © Freddie Mac
Slide 85: Thank You
Thank You Public Prepared by Freddie Mac © Freddie Mac
Slide 86: Quality Control & Operational Risk Management
Quality Control & Operational Risk Management Public Prepared by Freddie Mac © Freddie Mac
Slide 87: Today's Speaker
Today’s Speaker Jeffrey Smith Vice President, Quality Control & Operational Risk Management Jeff Smith is vice president of Single-Family quality control and operational risk management in the Freddie Mac Single-Family Acquisitions Division. He leads quality control (QC) activities associated with n
Slide 88: Our Agenda
Our Agenda 1. SF Acquisitions Operational Risk Management 2. Quality Control Holistic View 3. CORE Review Process 4. Third Party: Seller/Servicer Operational Risk Management Activities Public Document Title & Date Goes Here Prepared by Freddie Mac © Freddie Mac
Slide 89: SF Acquisitions Operational Risk Management
SF Acquisitions Operational Risk Management Assess quality of loans being Quality Control delivered to Freddie Mac. Compliance Operational Assess the regulatory Counterparty Assess the • Regulatory Risk Operational Risk operational control risk and fraud posed • Fraud by SF counterparties. Managemen
Slide 90: Quality Control Holistic View
Quality Control Holistic View Freddie Mac Single-Family manages risk at every step of the loan manufacturing process from pre-funding, at funding and post- funding through a combination of technology (Loan Advisor Suite of applications), process automation and loan documentation reviews. Preventive
Slide 91: CORE Review Process
CORE Review Process Counterparty Operational Risk Evaluation (CORE) is responsible for conducting Single-Family counterparty reviews to assess the design and operating effectiveness of operational controls, as well as identifying potential risks to Freddie Mac. • Review are conducted on a cyclical s
Slide 92: Third Party: Seller/Servicer Operational Risk Management Activities
Third Party: Seller/Servicer Operational Risk Management Activities Single-Family has multiple risk management program established to monitor and manage the operational risk of approved Seller/Servicers. These program ensure risk is identified and effectively managed to protect Freddie Mac. Ongoing
Slide 93: Third Party: SF Supplier Risk Management
Third Party: SF Supplier Risk Management • SF SRM is responsible for Risk oversight and execution of requirements from Federal Housing Finance Agency (FHFA), Freddie Mac’s Enterprise Third Party Office, and Freddie Mac’s Enterprise Supply Chain. • SF SRM performs activities throughout the Supplier T
Slide 94: Single-Family Fraud Risk Program
Single-Family Fraud Risk Program Freddie Mac’s Single-Family Fraud Risk (SFFR) manages a broad spectrum of fraud-related matters and risks through two teams. • One focuses on Detection and Compliance issues through Suspicious Activity Report filing, Key Risk Indicators, analytics, reporting, and tra
Slide 95: Questions?
Questions? Public Prepared by Freddie Mac © Freddie Mac
Slide 96: Thank You
Thank You Public Prepared by Freddie Mac © Freddie Mac
Slide 97: Single-Family Servicing and Loss Mitigation
Single-Family Servicing and Loss Mitigation Public Prepared by Freddie Mac © Freddie Mac
Slide 98: Today's Speaker
Today’s Speaker Benjamin Gottheim Vice President, Servicing Policy Ben and his team are responsible for creating policy regarding all aspects of mortgage servicing, including updates to the Freddie Mac Single-Family Seller/Servicer Guide and other terms of business. He has been with Freddie Mac for
Slide 99: Our Agenda
Our 1. Ongoing Servicing Agenda Oversight 2. COVID-19 Response & Servicing Performance 3. Reimagine Servicing® 4. Questions Public Document Title & Date Goes Here Prepared by Freddie Mac © Freddie Mac
Slide 100: Ongoing Servicing & Oversight
Ongoing Servicing & Oversight Public Prepared by Freddie Mac © Freddie Mac
Slide 101: Experienced Industry Leaders
Experienced Industry Leaders Single-Family servicing leaders have an average of 25+ years of industry experience and championed resiliency during the housing crisis. Bill Maguire Ben Gottheim Sujatha Viswanathan Bill Lyons Tricia McKitty Donna Spencer Vice President Sr. Director Sr. Director Directo
Slide 102: Our Teams Influence Positive Portfolio Outcomes
Our Teams Influence Positive Portfolio Outcomes Quality Servicing Superior Servicer Portfolio Performance Risk Management Sustainable Homeownership Servicer Success Scorecard and Quality Assurance and Loss reduction Policy and program data analytics Operational Reviews development Servicer Relations
Slide 103: What We Do…
What We Do… Servicing Policy Servicing Quality Servicing Capital Structured Servicing Relationship Assurance Transactions Management Supporting effective The SQA and Business Servicing Capital The Structured Well-rounded view of credit management by Mgmt. & Markets (SCM) supports Transactions Team h
Slide 104: How We Monitor Performance
How We Monitor Performance . . Public Prepared by Freddie Mac © Freddie Mac
Slide 105: Who Are Our Servicers?
Who Are Our Servicers? Overview Significant growth in subservicing with a few new players in the market 1424 active Servicers $2,944 B UPB (as of December 2022) 30 servicers added 32% Subservicing portfolio 46 terminated (voluntary/involuntary/acquired) Increasing concentration in non-banks 30% in 2
Slide 106: 2022 SHARP Award Winners
2022 SHARP Award Winners We Recognize Superior Servicing Our Servicer Honors and Rewards Program (SHARP)SM enables eligible servicing clients to receive rewards and recognition based on their Servicer Success Scorecard annual rank. The SHARP awards represent quality servicing, risk management and su
Slide 107: COVID-19 Response & Servicing Performance
COVID-19 Response & Servicing Performance Public Prepared by Freddie Mac © Freddie Mac
Slide 108: Responsive Policies to Support the Industry
Responsive Policies to Support the Industry Since the start of the pandemic, Freddie Mac has made ongoing changes to support COVID-19 impacted borrowers. With the end of the CARES Act near, we are reviewing policies to determine applicability. PRESENT 2020 2021 2022 JAN - MAR ‘23 Initial COVID-19 Mo
Slide 109: Servicing Policy Updates 2022 to Date
Servicing Policy Updates 2022 to Date To be responsive and support the dynamic servicing environment impacted by the pandemic, working together with Fannie Mae, FHFA and our Servicers, we developed and rolled out 9 new policies in 2022. 2022 2023 • 2022-4 This Bulletin announces updates to Total MI
Slide 110: SDQ Rate Resting Below Pre-Pandemic Levels
With an SDQ rate resting below pre- pandemic levels… In 2022, the overall market is still recovering from its peak in 2020, due to the continued loss mitigation efforts. Throughout time, our SDQ has remained lower compared to the market. 10.00 9.00 8.60 8.00 7.00 6.78 6.00 5.03 5.00 4.48 4.52 3.84 4
Slide 111: Supported by Results from Our Team and Servicers
Supported by results from our team and servicers… 2022 SDQ rate 1.12% Initiatives to reduce the SDQ rate Issued 8 Servicing Bulletins & 1 Industry Letter Hosted Servicer 9 webinars totaling 2,700+ attendees Held several advisory board meetings with Top 15 Servicers Helped homeowners with 77K Forbear
Slide 112: Resulting in Workouts for Homeowners
Resulting in workouts for homeowners… • Freddie Mac’s response (in alignment with Fannie Mae) to the crisis has remained swift and included the implementation of loss mitigation and servicing products designed to assist homeowners. • Recent months have seen the volume of Flex Mod Trial Period Plans
Slide 113: April 2023
April 2023 Public Prepared by Freddie Mac © Freddie Mac
Slide 114: We're Transforming the Servicing Lifecycle
We’re Transforming the Servicing Lifecycle Transforming the Improving efficiencies Bringing innovation Reducing costs client experience and speed to market Eliminating manual Providing a no-cost processes, improving data servicing and default tool quality and making access to Creating an easier path
Slide 115: Innovative Solutions Transforming Servicing
Innovative Solutions Transforming Servicing Resolve® PAID Total MISM (Mortgage Investor Reporting (Default Management) (Expense Reimbursement) Insurance) Risk Mitigation Cashflow Risk Mitigation Transparency Automation and rule-based eligibility Faster reimbursement supports Reduced risk and control
Slide 116: Key Reimagine Servicing Updates
Key Reimagine Servicing Updates Resolve (Default Management) • Completed Resolve API integration and adoption with a total of 24 servicers to date. • Mandate to adopt Workout Prospector/Bypass for Flex Mod and Payment Deferral submissions slated for 8/31. PAID (Expense Reimbursement) • Servicers c
Slide 117: Questions?
Questions? Public Prepared by Freddie Mac © Freddie Mac
Slide 118: Thank You
Thank You Public Prepared by Freddie Mac © Freddie Mac
Slide 119: Appendix
Appendix Public Prepared by Freddie Mac © Freddie Mac
Slide 120: Loss Mitigation Hierarchy
Loss Mitigation Hierarchy After forbearance, a borrower must be evaluated for a relief option or workout to bring the loan current. There are two evaluation hierarchy tracks – it depends if the hardship is related to COVID-19. Anytime 30 DD 60 DD 180 DD 12 MO 18 MO Foreclosure 1 1 Reinstatement 2 2
Slide 121: Loss Mitigation Hierarchy (cont.)
Loss Mitigation Hierarchy (cont.) 1. Forbearance: Relief option that provides a temporary reduction or suspension of payments to give Borrowers a period of time to improve their financial situation. 2. Repayment Plan: Borrowers that have had a short-term hardship, and now can begin making payments a
Slide 122: Portfolio Management & Analytics
Portfolio Management & Analytics Public Prepared by Freddie Mac © Freddie Mac
Slide 123: Today's Speaker
Today’s Speaker Sacha Rosenthal Vice President, Single-Family Servicing Portfolio Analytics Sacha Rosenthal is accountable for developing strategies and analytics related to portfolio management, climate change and natural disasters, loss mitigation, distressed collateral liquidation, servicing poli
Slide 124: Our Agenda
Our Agenda 1. Portfolio Delinquency Rates 2. Forbearance & Foreclosure Volumes 3. Natural Disasters 4. Climate Risk Public Document Title & Date Goes Here Prepared by Freddie Mac © Freddie Mac
Slide 125: Portfolio Delinquency Rates
Portfolio Delinquency Rates • Early delinquency rates have remained relatively consistent o D30 rates show volatility, which is normal • We ended 2022 with 0.66% Serious Delinquency rate • We are close to pre-pandemic levels (0.63% as of December 2019) https://www.freddiemac.com/investors/financials
Slide 126: Forbearance Volume and Workouts
Forbearance Volume and Workouts • Forbearances continue to decline to low levels • Payment Deferrals, designed for short-term/temporary hardship, continue to make up a large part of the loss mitigation activity • We have seen a transition to Flex Modifications (designed for permanent/long-term hards
Slide 127: Foreclosure Volume - National
Foreclosure Volume - National 2021 • Foreclosure referrals have begun and rising, yet are still below pre-pandemic levels • There is a time lag before we see foreclosure referrals go to sale o Not every loan that is referred ultimately goes to sale https://www.blackknightinc.com/wp-content/uploads/2
Slide 128: Things to Noodle
Things to Noodle Is borrower behavior different this time around vs. the 2007-2008 crisis? • Many borrowers have equity • Unemployment is very low • Are borrowers prioritizing mortgage payment over other debt as the house is their most valuable asset? Selling, moving and renting is expensive • Forbe
Slide 129: Natural Disasters
Natural Disasters Public Investor Day – April 20, 2023 Prepared by Freddie Mac © Freddie Mac
Slide 130: Natural Disasters
Natural Disasters • We have developed an application that checks FEMA’s declaration page daily and maps/tags every loan in the portfolio that is impacted by Individual Assistance • When large events strike (such as a hurricane), a full analysis on impacts is conducted o We leverage several external
Slide 131: Hurricane Delinquency Pattern – Example
1 Hurricane Delinquency Pattern – Example Public Investor Day – April 20, 2023 Prepared by Freddie Mac © Freddie Mac
Slide 132: Climate Risk
Climate Risk Public Investor Day – April 20, 2023 Prepared by Freddie Mac © Freddie Mac
Slide 133: Physical Risk
Physical Risk Physical risk stems from the direct and indirect effects of physical hazards whose frequency/intensity may be worsening with climate change • Hazards include: o Flood o Wind (including hurricanes) o Drought and water stress o Wildfire o Rising temperatures and heat waves • Physical ris
Slide 134: Transition Risk
Transition Risk Transition risk stems from the societal and economic transition to a low-carbon economy • Regulations that require energy efficiency can result in costly retrofits or fines Residential emissions make up • Carbon taxes or strained 15% of total U.S. emissions supply can lead to increas
Slide 135: Insurance
Insurance Increasing physical hazards make it a challenge for the insurance industry to offer sufficient and affordable coverage Cost • Premiums increase as a result of rising hazard risk • Rising premiums increase the overall costs of homeownership Coverage • Property owners may purchase only the m
Slide 136: Borrower Impacts
Borrower Impacts Impacts will fall disproportionately on low income and minority populations, making it increasingly difficult to sustain safe, affordable housing Affordability Property Value • Repair costs for uninsured damage from • Price adjustments for unrepaired physical hazards damages • Highe
Slide 137: Climate Scenario Analysis
Climate Scenario Analysis Climate scenario analysis is a method to assess physical and transition risks based on different climate pathways over time Climate scenario analysis can help us identify risks… • Properties and locations most vulnerable to climate risks • Circumstances that may lead to sig
Slide 138: Questions?
Questions? Public Prepared by Freddie Mac © Freddie Mac
Slide 139: Thank You
Thank You Public Prepared by Freddie Mac © Freddie Mac