Freddie Mac 2009 Annual Report Download - page 223

Our reserve estimate also reflects our best projection of defaults we believe are likely to occur as a result of loss events
that have occurred through December 31, 2009 and 2008, respectively. However, the continued deterioration in the national
housing market during 2009, the uncertainty in other macroeconomic factors, and uncertainty of the success of modification
efforts under HAMP and other loss mitigation programs makes forecasting of default rates increasingly imprecise. The
inability to realize the benefits of our loss mitigation plans, a lower realized rate of seller/servicer repurchases, further
declines in home prices, deterioration in the financial condition of our mortgage insurance counterparties, or default rates
that exceed our current projections would cause our losses to be higher than those currently estimated.
We validate and update the model and factors to capture changes in actual loss experience, as well as changes in
underwriting practices and in our loss mitigation strategies. We also consider macroeconomic and other factors that impact
the quality of the loans underlying our portfolio including regional housing trends, applicable home price indices,
unemployment and employment dislocation trends, consumer credit statistics and the extent of third party insurance. We
determine our loan loss reserves based on our assessment of these factors.
Multifamily Loan Portfolio
We estimate loan loss reserves on the multifamily loan portfolio based on available evidence, including but not limited
to, the fair value of collateral underlying the impaired loans, evaluation of the repayment prospects, and the adequacy of
third-party credit enhancements. We also consider the value of collateral underlying individual loans based on property-
specific and market-level risk characteristics including apartment vacancy and rental rates. In determining our loan loss
reserve estimate, we utilize available economic data related to commercial real estate as well as estimates of loss severity
and cure rates. The cure rate is the percent of delinquent loans that are able to return to a current payment status. For those
loans we identify as having deteriorating underlying characteristics such as LTV ratio and DSCRs, we then evaluate each
individual property, using estimates of property value to determine if a specific reserve is needed for each loan. Although we
use the most recently available results of our multifamily borrowers to assess a property’s values, there is a lag in reporting
as they prepare their results in the normal course of business.
Non-Performing Loans
We classify loans as non-performing and place them on nonaccrual status when we believe collectibility of interest and
principal on a loan is not reasonably assured. We consider non-performing loans as those: (a) loans whose contractual terms
have been modified due to the financial difficulties of the borrower (including troubled debt restructurings), and (b) loans
that are more than 90 days past due, and (c) multifamily loans at least 30 days past due that are deemed impaired based on
management judgment. Serious delinquencies are those single-family and multifamily loans that are 90 days or more past
due or in foreclosure.
Impaired Loans
A loan is considered impaired when it is probable to not receive all amounts due (principal and interest), in accordance
with the contractual terms of the original loan agreement. Impaired loans include single-family loans, both performing and
non-performing, that are troubled debt restructurings and delinquent or modified loans purchased from PC pools whose fair
value was less than acquisition cost at the date of purchase. Multifamily impaired loans include loans whose contractual
terms have previously been modified due to credit concerns (including troubled debt restructurings), loans that are at least
90 days past due, and loans at least 30 days past due that are deemed impaired based on management judgment. Single-
family loans are aggregated and measured for impairment based on similar risk characteristics. For impaired multifamily
loans, impairment is measured based on the fair value of the loan level underlying collateral as the repayment of these loans
is generally provided from the cash flows of the underlying collateral and any credit enhancements associated with the
impaired loan. Except for cases of fraud and other unusual circumstances, multifamily loans are non-recourse to the
borrower so only the cash flows of the underlying property serve as the source of funds for repayment of the loan.
We have the option to purchase mortgage loans out of PC pools under certain circumstances, such as to resolve an
existing or impending delinquency or default. From time to time, we reevaluate our delinquent loan purchase practices and
alter them if circumstances warrant. Through November 2007, our general practice was to automatically purchase the
mortgage loans out of pools after the loans were 120 days delinquent. Effective December 2007, we purchase loans from
pools when (a) loans are modified, (b) foreclosure sales occur, (c) the loans are delinquent for 24 months, or (d) the loans
are 120 days or more delinquent and the cost of guarantee payments to PC holders, including advances of interest at the PC
coupon, exceeds the expected cost of holding the non-performing mortgage loan. On February 10, 2010 we announced that
we will purchase substantially all of the single-family mortgage loans that are 120 days or more delinquent from our PCs
and Structured Securities. See “NOTE 22: SUBSEQUENT EVENTS” for additional information. According to the initial
measurement requirements in accounting standards for loans and debt securities acquired with deteriorated credit quality,
loans that are purchased from PC pools are recorded on our consolidated balance sheets at the lesser of our acquisition cost
220 Freddie Mac