Freddie Mac 2009 Annual Report Download - page 222

reserves are reflected in earnings as the provision for credit losses, while decreases are reflected through charging-off such
balances (net of recoveries) when realized losses are recorded or as a reduction in the provision for credit losses. For both
single-family and multifamily mortgages where the original terms of the mortgage loan agreement are modified, resulting in
a concession to the borrower experiencing financial difficulties, losses are recorded as charge-offs at the time of modification
and the loans are subsequently accounted for as troubled debt restructurings.
We estimate credit losses related to homogeneous pools of single-family and multifamily loans when it is probable that
a loss has been incurred and the amount of the loss can be reasonably estimated in accordance with the accounting standards
for contingencies. We also estimate credit losses for impaired loans in accordance with the subsequent measurement
requirements in the accounting standards for receivables. The loans evaluated include single-family loans and multifamily
loans whose contractual terms have previously been modified due to credit concerns (including troubled debt restructurings),
and certain loans that were deemed impaired based on management judgment. When evaluating loan impairments and
establishing the loan loss reserves, we consider available evidence, such as the fair value of collateral for collateral
dependent loans, and third-party credit enhancements. Determining the adequacy of the loan loss reserves is a complex
process that is subject to numerous estimates and assumptions requiring significant judgment. Loans not deemed to be
impaired are grouped with other loans that share common characteristics for evaluation of impairment in accordance with the
accounting standards for contingencies.
Single-Family Loan Portfolio
We estimate loan loss reserves on homogeneous pools of single-family loans using a statistically based model that
evaluates a variety of factors. The homogeneous pools of single-family mortgage loans are determined based on common
underlying characteristics, including current LTV ratios and trends in house prices, loan product type and geographic region.
In determining the loan loss reserves for single-family loans at the balance sheet date, we evaluate factors including, but not
limited to:
• current LTV ratios and trends in house prices;
• loan product type;
• geographic location;
• delinquency status;
• loan age;
• sourcing channel;
• occupancy type;
• unpaid principal balance at origination;
• actual and estimated amounts for loss severity trends for similar loans;
• default experience;
• expected ability to partially mitigate losses through loan modification or other alternatives to foreclosure;
• expected proceeds from mortgage insurance contracts that are contractually attached to a loan or other credit
enhancements that were entered into contemporaneous with and in contemplation of a guarantee or loan purchase
transaction;
• expected repurchases of mortgage loans by sellers under their obligations to repurchase loans that are inconsistent
with certain representations and warranties made at the time of sale;
• counterparty credit of mortgage insurers and seller/servicers;
• pre-foreclosure real estate taxes and insurance;
• estimated selling costs should the underlying property ultimately be sold; and
• trends in the timing of foreclosures.
Our loan loss reserves reflect our best estimates of incurred losses. Our loan loss reserve estimate includes projections
related to strategic loss mitigation activities, including loan modifications for troubled borrowers, and projections of
recoveries through repurchases by seller/servicers of defaulted loans due to failure to follow contractual underwriting
requirements at the time of the loan origination. At an individual loan level, our estimate also considers the effect of home
price changes on borrower behavior and the impact of our loss mitigation actions, including our temporary suspensions of
foreclosure transfers and our loan modification efforts. We apply estimated proceeds from primary mortgage insurance that is
contractually attached to a loan and other credit enhancements entered into contemporaneous with and in contemplation of a
guarantee or loan purchase transaction as a recovery of our recorded investment in a charged-off loan, up to the amount of
loss recognized as a charge-off. Proceeds from credit enhancements received in excess of our recorded investment in
charged-off loans are recorded in REO operations expense in the consolidated statements of operations when received.
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