Freddie Mac 2009 Annual Report Download - page 178

Loan Loss Reserves
We maintain two mortgage-related loan loss reserves — allowance for losses on mortgage loans held-for-investment and
reserve for guarantee losses — at levels we deem adequate to absorb probable incurred losses on mortgage loans
held-for-investment and mortgages underlying our PCs, Structured Securities and other financial guarantees respectively.
Determining the loan loss reserves associated with our mortgage loans, PCs and Structured Securities is complex and
requires significant management judgment about matters that involve a high degree of subjectivity. This management
estimate was inherently more difficult to perform during 2009 due to the absence of historical precedents relative to the
current economic environment as well as uncertainty concerning the potential impacts of our temporary suspension of
foreclosure transfers of occupied homes and loan modification initiatives under the MHA Program. See “CRITICAL
ACCOUNTING POLICIES AND ESTIMATES — Allowance for Loan Losses and Reserve for Guarantee Losses” and
“NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES” to our consolidated financial statements for further
information.
Table 74 summarizes our loan loss reserves activity for mortgage loans recognized on our consolidated balance sheets
and for mortgages underlying our PCs and Structured Securities, in total.
Table 74 — Loan Loss Reserves Activity
2009 2008 2007 2006 2005
Year Ended December 31,
(dollars in millions)
Total Loan Loss Reserves:
(1)
Beginning balance . . .................................................. $15,618 $ 2,822 $ 619 $ 548 $ 355
Provision (benefit) for credit losses . . . ...................................... 29,530 16,432 2,854 296 307
Charge-offs, gross
(2)
................................................... (9,402) (3,072) (376) (313) (294)
Recoveries
(3)
........................................................ 2,088 779 239 166 185
Transfers, net
(4)
...................................................... (3,977) (1,343) (514) (78) (5)
Ending balance. . . . . .................................................. $33,857 $15,618 $2,822 $ 619 $ 548
Components of Loan Loss Reserves:
Single-family . . . . . . .................................................. $33,026 $15,341 $2,760 $ 592 $ 520
Multifamily . . . . . . . .................................................. $ 831 $ 277 $ 62 $ 27 $ 28
Total loan loss reserve, as a percentage of the total mortgage portfolio, excluding non-Freddie
Mac securities. . . . .................................................. 1.69% 0.81% 0.16% 0.04% 0.04%
(1) Include reserves for loans held-for-investment and reserves for guarantee losses on PCs.
(2) Charge-offs represent the amount of the unpaid principal balance of a loan that has been discharged to remove the loan from our consolidated balance
sheets at the time of resolution. Charge-offs presented above exclude $280 million, $377 million and $156 million for the years ended December 31,
2009, 2008 and 2007, respectively, related to loans purchased under financial guarantees and reflected within losses on loans purchased on our
consolidated statements of operations.
(3) Recoveries of charge-offs primarily result from foreclosure alternatives and REO acquisitions on loans where a share of default risk has been assumed
by mortgage insurers, servicers or other third parties through credit enhancements.
(4) Consist primarily of: (a) the transfer of an amount of the recognized reserves for guaranteed losses related to PC pools associated with loans purchased
from mortgage pools underlying our PCs, Structured Securities and long-term standby agreements to establish the initial recorded investment in these
loans at the date of our purchase; (b) approximately $375 million during 2009 related to agreements with seller/servicers where the transfer represents
recoveries received under these agreements to compensate us for previously incurred and recognized losses; and (c) amounts attributable to uncollectible
interest on mortgage loans recognized on our consolidated balance sheets and mortgages underlying our PCs and Structured Securities.
The amount of our total loan loss reserves that related to single-family mortgage loans was $33.0 billion and
$15.3 billion as of December 31, 2009 and 2008, respectively, and the amount that related to multifamily loans was
$831 million and $277 million, respectively. Our total loan loss reserves increased in both 2009 and 2008 as we recorded
additional reserves primarily to reflect continued deterioration in economic indicators and increases in estimates of incurred
losses based on higher delinquency rates and amounts of non-performing single-family and multifamily loans. We made a
change in our methodology for estimating loan loss reserves for single-family loans during the second quarter of 2009. See
“NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES — Estimates” to our consolidated financial
statements for information on this change. See “CONSOLIDATED RESULTS OF OPERATIONS — Non-Interest
Expense — Provision for Credit Losses,” for a discussion of our 2009 and 2008 provision for credit losses.
Credit Risk Sensitivity
Our credit risk sensitivity analysis assesses the estimated increase in the net present value of expected single-family
mortgage portfolio credit losses over a ten year period as the result of an immediate 5% decline in home prices nationwide,
followed by a stabilization period and return to the base case. Since we do not use this analysis for determination of our
reported results under GAAP, this sensitivity analysis is hypothetical and may not be indicative of our actual results. We use
an internally developed Monte Carlo simulation-based model to generate our credit risk sensitivity analysis. 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 flows along each path. In the credit risk sensitivity analysis, we
adjust the home price assumption used in the base case to estimate the amount of potential credit costs resulting from a
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