Freddie Mac 2005 Annual Report Download - page 90

Table 44 summarizes our loan loss reserves activity.
Table 44 Ì Loan Loss Reserves Activity
Year Ended December 31,
2005 2004 2003 2002 2001
(dollars in millions)
Total loan loss reserves(1):
Beginning balance ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 264 $ 299 $ 265 $ 224 $ 229
Provision for credit losses ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 251 143 (5) 122 33
Charge-oÅs, gross ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (294) (300) (224) (171) (129)
Recoveries(2) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 185 160 145 99 101
Charge-oÅs, net ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (109) (140) (79) (72) (28)
Adjustment for change in accounting(3) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Ì Ì 110 Ì Ì
Transfers-out during the period(4) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (11) (20) (11) (9) (10)
Other transfers, net, during the period(5) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 19 (18) 19 Ì Ì
Ending balance ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 414 $ 264 $ 299 $ 265 $ 224
Charge-oÅs, net to Total mortgage portfolio(6) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 0.8bp 1.1bp 0.7bp 0.7bp 0.3bp
Coverage ratio (reserves to charge-oÅs, net) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 3.8 1.9 3.8 3.7 8.0
(1) Includes Reserves for loans held-for-investment in the Retained portfolio and Reserves for guarantee losses on Participation CertiÑcates. See
""NOTE 6: LOAN LOSS RESERVES'' to the consolidated Ñnancial statements for more details.
(2) Includes recoveries of charge-oÅs primarily resulting from foreclosure alternatives and REO acquisitions on loans where a share of default risk has been
assumed by mortgage insurers, servicers or third parties through credit enhancements. Recoveries of charge-oÅs through credit enhancements are
limited in some instances to amounts less than the full amount of the loss.
(3) On January 1, 2003, $110 million of recognized Guarantee obligation attributable to estimated incurred losses on outstanding PCs or Structured
Securities was reclassiÑed to Reserve for guarantee losses on Participation CertiÑcates.
(4) Represents the reclassiÑcation of the reserve amount attributable to uncollectible interest on outstanding PCs and Structured Securities, which is
included as an oÅset to the related receivable balance within Accounts and other receivables, net on the consolidated balance sheets.
(5) Represents the portion of the Guarantee obligation recognized upon the sale of PCs or Structured Securities that correspond to incurred credit losses
reclassiÑed to Reserve for guarantee losses on Participation CertiÑcates upon initial recognition of a Guarantee obligation. In addition, the amount
includes an increase (reduction) of loan loss reserves of $9 million and $(31) million in 2005 and 2004, respectively, related to prior period
adjustments for which the related income was recorded in Other income.
(6) Calculated using the average Total mortgage portfolio, excluding non-Freddie Mac mortgage-related securities and that portion of Structured
Securities that is backed by Ginnie Mae CertiÑcates.
We maintain two loan loss reserves Ì Reserve for losses on mortgage loans held-for-investment and Reserve for
guarantee losses on Participation CertiÑcates Ì at levels we deem adequate to absorb probable incurred losses on mortgage
loans held-for-investment in the Retained portfolio and certain mortgages underlying PCs held by third parties. In certain
circumstances, incurred losses related to PCs we hold in the Retained portfolio are captured as part of mark-to-market
adjustments that are recognized in connection with PC residuals, which represent the portion of the fair value of the PCs
related to the Guarantee asset and Guarantee obligation. See ""CRITICAL ACCOUNTING POLICIES AND ESTI-
MATES Ì Credit Losses'' and ""NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES'' to the
consolidated Ñnancial statements for further information.
As shown in ""Table 44 Ì Loan Loss Reserves Activity,'' total loan loss reserves increased in 2005. The increase in loan
loss reserves in 2005 is primarily related to our estimate of our incurred losses as a result of Hurricane Katrina. The 2005
provision also includes additions related to the single-family portfolio as we anticipate an increase in the severity of losses
on a per-property basis driven, in part, by the expectation of low or slower home price appreciation in certain areas and
increased incurred losses as delinquencies occur for loans that are experiencing higher default rates based on their year of
origination.
Credit Risk Sensitivity. Our credit risk sensitivity analysis assesses the assumed increase in the present value of
expected single-family mortgage portfolio losses over ten years as the result of an estimated immediate Ñve percent decline in
house prices nationwide, followed by a return to more normal growth in house prices based on historical experience. We use
an internally developed Monte Carlo simulation-based model to generate our credit risk sensitivity analyses. The Monte
Carlo model uses a simulation program to generate numerous potential interest-rate paths that, in conjunction with a
prepayment model, are used to estimate mortgage cash Öows along each path. In the credit rate sensitivity analysis, we adjust
the house-price assumption used in the base case to estimate the level and sensitivity of potential credit costs resulting from
a sudden decline in house prices.
74 Freddie Mac