Freddie Mac 2004 Annual Report Download - page 75

The (Provision) beneÑt for credit losses may be expense or income, depending on whether the Loan Loss
Reserves balance needs to be increased or decreased based on the inherent losses associated with our portfolio
at any time. The (Provision) beneÑt for credit losses increased to ($143) million in 2004 compared to a
beneÑt of $5 million in 2003. The (Provision) beneÑt for credit losses was ($122) million in 2002. The
balance of the Loan Loss Reserves totaled $264 million and $299 million at December 31, 2004 and 2003,
respectively.
The (Provision) beneÑt for credit losses increased in 2004 due to increases in the estimated incurred
losses in the single-family portfolio at December 31, 2004 compared to December 31, 2003, driven by lower
REO fair values and resulting in higher estimated losses on a per property basis in certain areas. However, this
was partially oÅset by a decrease in the estimated incurred losses in the Multifamily mortgage portfolio, driven
primarily by an increase in the estimated fair value of multifamily properties in certain areas. The beneÑt for
credit losses in 2003, as compared to the expense in 2002, resulted from loss mitigation strategies, strong house
price appreciation and recoveries in the single-family portfolio. In addition, the 2002 provision reÖected an
increase in expected losses on multifamily mortgage loans.
REO operations income (expense) totaled $3 million, ($7) million, and $(4) million in 2004, 2003 and
2002, respectively. The 2004 increase in income was largely driven by a gain of $7 million on the sale of a
multifamily property.
Our total credit losses, deÑned as ""Real estate owned operations income (expense)'' plus ""net charge-
oÅs,'' rose slightly in 2004 but were still low, totaling approximately 1.1 basis points of the average Total
mortgage portfolio (after excluding non-Freddie Mac securities). In 2005 we expect credit losses to increase
from their recent levels, but to be low relative to historic levels.
Housing Tax Credit Partnerships
Housing tax credit partnerships represent our share of the losses generated from our investments in
partnerships that develop or rehabilitate low-income, multifamily rental properties. We generally hold
interests in individual partnerships for Ñfteen years. Although these partnerships generate losses, we realize a
return on our investment through reductions in Income tax expense that result from tax credits and the
deductibility of the losses. The tax credits related to our investments in these partnerships are generally
recognized over a ten-year period.
Our share of losses generated from our investment in Housing tax credit partnerships totaled ($281)
million, ($200) million and ($160) million in 2004, 2003 and 2002, respectively. The year-over-year increases
in this expense primarily reÖect our increased investment in such partnerships. The related tax beneÑts, which
are reported as a reduction in Income tax expense, totaled $378 million, $302 million and $220 million in
2004, 2003 and 2002, respectively.
Minority Interest in Earnings of Consolidated Subsidiaries
Minority interest in earnings of consolidated subsidiaries represents the earnings due to third party
investors in our consolidated subsidiaries.
Minority interest in earnings of consolidated subsidiaries totaled ($129) million, ($157) million and
($184) million in 2004, 2003 and 2002, respectively. The majority of this amount for each of 2004, 2003 and
2002 relates to dividends on the preferred stock issued by our two majority-owned real estate investment trust,
or REIT, subsidiaries. These dividends are recorded using an eÅective interest method and, therefore, will
continue to decline over time as our recorded investment in the REITs decreases.
Other Expenses
Other expenses generally include those non-administrative expenses that are direct and incremental to
revenue producing activities (e.g., Loan Prospector»Ì related expenses) or are otherwise not related to
operational support activities.
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