Freddie Mac 2009 Annual Report Download - page 261

Interest income on multifamily impaired loans is recognized on an accrual basis for loans performing under the original
or restructured terms and on a cash basis for non-performing loans, and collectively totaled approximately $44 million,
$22 million and $22 million for the years ended December 31, 2009, 2008 and 2007, respectively. We recorded interest
income on impaired single-family loans that totaled $680 million, $507 million and $382 million for the years ended
December 31, 2009, 2008 and 2007, respectively. Interest income foregone on impaired loans approximated $266 million,
$84 million and $141 million in 2009, 2008 and 2007, respectively.
Loans Acquired under Financial Guarantees
We have the option under our PC agreements to purchase mortgage loans from the loan pools that underlie our
guarantees (and standby commitments) under certain circumstances to resolve an existing or impending delinquency or
default. Our practice is to purchase and effectively liquidate the loans from pools when: (a) the loans are modified;
(b) foreclosure transfers occur; (c) the loans have been delinquent for 24 months; or (d) the loans have been 120 days
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. Loans purchased from PC pools that underlie our guarantees (or
that are covered by our standby commitments) are recorded at the lesser of our acquisition cost or the loan’s fair value at the
date of purchase. Our estimate of the fair value of loans purchased from PC pools is determined by obtaining indicative
market prices from large, experienced dealers and using an average of these market prices to estimate the initial fair value.
We recognize losses on loans purchased in our consolidated statements of operations if our net investment in the acquired
loan is higher than its fair value. At December 31, 2009 and 2008, the unpaid principal balances of these loans were
$18.0 billion and $9.5 billion, respectively, while the carrying amounts of these loans were $9.4 billion and $6.3 billion,
respectively.
We account for loans acquired in accordance with accounting standards for loans and debt securities acquired with
deteriorated credit quality if, at acquisition, the loans had credit deterioration and we do not consider it probable that we will
collect all contractual cash flows from the borrower without significant delay. The excess of contractual principal and
interest over the undiscounted amount of cash flows we expect to collect represents a non-accretable difference that is
neither accreted to interest income nor displayed on the consolidated balance sheets. The amount that may be accreted into
interest income on such loans is limited to the excess of our estimate of undiscounted expected principal, interest and other
cash flows from the loan over our initial investment in the loan. We consider estimated prepayments when calculating the
accretable balance and the non-accretable difference. Table 7.4 provides details on loans acquired under financial guarantees
and accounted for in accordance with the standard referenced above.
Table 7.4 — Loans Acquired Under Financial Guarantees
2009 2008
Year Ended
December 31,
(in millions)
Contractual principal and interest payments at acquisition ........................................ $12,905 $ 6,708
Non-accretable difference .............................................................. (1,852) (508)
Cash flows expected to be collected at acquisition . . . .......................................... 11,053 6,200
Accretable balance................................................................... (6,847) (2,938)
Initial investment in acquired loans at acquisition .............................................. $ 4,206 $ 3,262
December 31,
2009
December 31,
2008
(in millions)
Contractual balance of outstanding loans . . . ................................................. $18,049 $ 9,522
Carrying amount of outstanding loans ...................................................... $ 9,367 $ 6,345
Our net investment in delinquent and modified loans purchased under financial guarantees increased approximately 48%
in 2009. During this period, we purchased approximately $10.8 billion in unpaid principal balances of these loans with a fair
value at acquisition of $4.2 billion. The $6.6 billion purchase discount consists of $1.8 billion previously recognized as loan
loss reserve or guarantee obligation and $4.8 billion of losses on loans purchased. The non-accretable difference associated
with new acquisitions during 2009 increased compared to 2008 due to significantly higher volumes of our purchases in the
2009 period combined with the lower expectations for recoveries on these loans.
While these loans are seriously delinquent, no amounts are accreted to interest income. Subsequent changes in estimated
future cash flows to be collected related to interest-rate changes are recognized prospectively in interest income over the
remaining contractual life of the loan. We increase our allowance for loan losses if there is a decline in estimates of future
cash collections due to further credit deterioration. Subsequent to acquisition, we recognized provision for credit losses
related to these loans of $36 million and $89 million for the years ended December 31, 2009 and 2008, respectively.
258 Freddie Mac