Freddie Mac 2009 Annual Report Download - page 216

expectations related to these types of loans into our model. Several of the more significant characteristics include estimated
current loan-to-value ratios, original FICO scores, geographic region, loan product, delinquency status, loan age, sourcing
channel, occupancy type, and unpaid principal balance at origination. We estimate that these changes in methodology
decreased our provision for credit losses and increased net income by approximately $1.4 billion or $0.43 per diluted
common share for 2009. Because of the number of characteristics incorporated into the enhanced model, the
interdependencies in the calculations, and concurrent implementation of these enhancements, we are not able to attribute the
dollar impact of this change to the individual changes in the new model. See “NOTE 7: MORTGAGE LOANS AND LOAN
LOSS RESERVES” for additional information on our loan loss reserves.
Consolidation and Equity Method of Accounting
The consolidated financial statements include our accounts and those of our subsidiaries. The equity and net earnings
attributable to the noncontrolling interests in our consolidated subsidiaries are reported separately on our consolidated
balance sheets as noncontrolling interests in total equity (deficit) and in the consolidated statements of operations as net
(income) loss attributable to noncontrolling interests. All material intercompany transactions have been eliminated in
consolidation.
For each entity with which we are involved, we determine whether the entity should be considered a subsidiary and thus
consolidated in our financial statements. These subsidiaries include entities in which we hold more than 50% of the voting
rights or over which we have the ability to exercise control. Accordingly, we consolidate our two majority-owned REITs,
Home Ownership Funding Corporation and Home Ownership Funding Corporation II. Other subsidiaries consist of VIEs in
which we are the primary beneficiary.
A VIE is an entity (a) that has a total equity investment at risk that is not sufficient to finance its activities without
additional subordinated financial support provided by another party or (b) where the group of equity holders does not have
(i) the ability to make significant decisions about the entity’s activities, (ii) the obligation to absorb the entity’s expected
losses or (iii) the right to receive the entity’s expected residual returns. We consolidate entities that are VIEs when we are
the primary beneficiary. We are considered the primary beneficiary of a VIE when we absorb a majority of its expected
losses, receive a majority of its expected residual returns (unless another enterprise receives this majority), or both. We
determine if we are the primary beneficiary when we become involved in the VIE or when there is a change to the
governing documents. If we are the primary beneficiary, we also reconsider this decision when we sell or otherwise dispose
of all or part of our variable interests to unrelated parties or if the VIE issues new variable interests to parties other than us
or our related parties. Conversely, if we are not the primary beneficiary, we also reconsider this decision when we acquire
additional variable interests in these entities. Prior to 2008, we invested as a limited partner in qualified LIHTC partnerships
that are eligible for federal income tax credits and deductible operating losses and that mostly are VIEs. We are the primary
beneficiary for certain of these LIHTC partnerships and consolidate them on our consolidated balance sheets as discussed in
“NOTE 5: VARIABLE INTEREST ENTITIES.”
We use the equity method of accounting for entities over which we have the ability to exercise significant influence, but
not control, such as (a) entities that are not VIEs and (b) VIEs in which we have significant variable interests but are not the
primary beneficiary. We report our recorded investment as part of low-income housing tax credit partnership equity
investments on our consolidated balance sheets and recognize our share of the entity’s losses in the consolidated statements
of operations as non-interest income (loss), with an offset to the recorded investment. Our share of losses is recognized only
until the recorded investment is reduced to zero, unless we have guaranteed the obligations of or otherwise committed to
provide further financial support to these entities. We review these investments for impairment on a quarterly basis and
reduce them to fair value when a decline in fair value below the recorded investment is deemed to be other than temporary.
Our review considers a number of factors, including, but not limited to, the severity and duration of the decline in fair value,
remaining estimated tax credits and losses in relation to the recorded investment, our intent and ability to hold the
investment until a recovery can be reasonably estimated to occur, our ability to use the losses and credits to offset income,
and our ability to realize value via sales of our LIHTC investments.
In applying the equity method of accounting to the LIHTC partnerships where we are not the primary beneficiary, our
obligations to make delayed equity contributions that are unconditional and legally binding are recorded at their present
value in other liabilities on the consolidated balance sheets. In addition, to the extent our recorded investment in qualified
LIHTC partnerships differs from the book basis reflected at the partnership level, the difference is amortized over the life of
the tax credits and included in our consolidated statements of operations as part of non-interest income (loss) — low-income
housing tax credit partnerships. Impairment losses under the equity method for these LIHTC partnerships are also included
in our consolidated statements of operations as part of non-interest income (loss) — low-income housing tax credit
partnerships.
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