Freddie Mac 2004 Annual Report Download - page 169

occurs within the context of property-speciÑc and market-level risk characteristics including apartment
vacancy rates, apartment rental rates, and property sales information, under several scenarios. Management
reviews the range of probable losses and selects the point within the range that represents the best estimate of
incurred losses. Loans individually evaluated for impairment include loans that become 60 days past due for
principal and interest, certain loans with observable collateral deÑciencies and loans whose contractual terms
were modiÑed due to credit concerns. When loan loss reserves for individual loans are established,
consideration is given to all available evidence such as present value of discounted expected future cash Öows,
fair value of collateral and credit enhancements.
Non-performing Loans
Non-performing loans consist of (a) loans that were previously delinquent whose terms have been
modiÑed and, therefore, are now considered part of Freddie Mac's impaired loan population (""troubled debt
restructurings'' or ""TDRs''), (b) serious delinquencies and (c) nonaccrual loans. Serious delinquencies are
those single-family loans that are 90 days or more past due, and multifamily loans that are more than 60 days
but less than 90 days past due. Also included in this category are multifamily loans greater than 90 days past
due but where principal and interest are being paid to Freddie Mac under the terms of a credit enhancement
agreement. Non-performing loans generally accrue interest in accordance with their contractual terms unless
they are in nonaccrual status. Nonaccrual loans are loans where interest income is recognized on a cash basis,
and only include multifamily loans greater than 90 days past due. For nonaccrual loans, any existing accruals
are reversed against interest income unless they are both well secured and in the process of collection. For
single-family loans greater than 90 days past due, interest income is accrued; however, reserves for
uncollectible interest on single-family loans are estimated using statistical models, which quantify accrued but
uncollectible interest. Freddie Mac reports this reserve as a reduction to the accrued loan interest balance in
Accounts and other receivables, net.
Impaired loans include single-family loans, both performing and non-performing, that are TDRs.
Multifamily impaired loans are deÑned as performing and non-performing TDRs, loans 60 days or more past
due (except for certain credit-enhanced loans) and certain mortgage loans with real estate collateral values
less than the outstanding unpaid principal balances. See ""Table 6.2 Ì Impaired Loans'' in ""NOTE 6: LOAN
LOSS RESERVES'' for further discussion.
Freddie Mac has the option to purchase mortgage loans out of PC pools under certain circumstances,
such as to resolve an existing or impending delinquency or default. Freddie Mac's general practice is to
purchase the mortgage loans out of pools when the loans are 120 days delinquent. These repurchased loans are
recorded on Freddie Mac's consolidated balance sheets at their purchase price (i.e., the mortgage loan's
unpaid principal balance), as adjusted for the eÅects of (a) the related amount of recognized GAs, PC
residuals and security premiums and discounts (where applicable) and (b) the extinguishment of a
proportionally related amount of recognized Buy-Downs, Credit Fees, GOs and Day One DiÅerences (where
applicable). Additionally, that portion of amounts classiÑed in Reserve for guarantee losses on Participation
CertiÑcates that relates to a purchased loan is reclassiÑed to Reserve for losses on mortgage loans held-for-
investment.
Charge-OÅs
The loan loss reserves are reduced for charge-oÅs when a loss is speciÑcally identiÑed and is virtually
certain of occurring. For both single-family and multifamily mortgages where the original terms of the
mortgage loan agreement are modiÑed for economic or legal reasons related to the borrower's Ñnancial
diÇculties, losses are recorded at the time of modiÑcation in accordance with SFAS 114 and the loans are
accounted for as TDRs. For mortgages that are foreclosed upon and thus transferred to Real estate owned, net
or involved in a pre-foreclosure sale, losses at the time of transfer or pre-foreclosure sale are charged-oÅ
against Reserve for losses on mortgage loans held-for-investment. In the case of real estate owned (""REO'')
transfers, losses arise when the carrying basis of the loan (including accrued interest) exceeds the fair value of
the foreclosed property (after deduction for estimated selling costs and consideration of third-party insurance
or other credit enhancements). REO gains arise and are recognized immediately in earnings when the fair
market value of the acquired asset (after deduction for estimated disposition costs) exceeds the carrying value
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