Freddie Mac 2009 Annual Report Download - page 325

Identification and Remediation of Material Weakness — Provision for Credit Losses on Certain Structured Transactions
During the quarter ended December 31, 2009, we identified an error in our calculation of our provision for credit losses
related to certain of our Structured Transactions. For these Structured Transactions, one input into our process for
determining our provision for credit loss is an estimate of loss severity for underlying loans that have defaulted. Our
calculation to estimate loss severity for defaulted loans did not take into account that loss data and corresponding unpaid
principal on a single loan may be reported to us over multiple periods. This had the effect of understating the estimated loss
severity and, consequently, the provision for credit losses related to those Structured Transactions. We believe the cumulative
error, a $586 million understatement of our provision for credit losses from October 1, 2008 through September 30, 2009, is
not material to our financial statements in any reporting period. However, because of market volatility, the sensitivity of our
provision to small changes in loss severity rates and the likelihood that the impact of this defect in our process would have
increased in subsequent periods if left undetected and unremediated, we determined that this control deficiency represented a
material weakness in our internal control over financial reporting. See “QUARTERLY SELECTED FINANCIAL DATA” for
additional information regarding our revision of previously reported 2009 quarterly results in the fourth quarter of 2009.
Prior to December 31, 2009, we took the corrective actions necessary to remediate this material weakness, which
included updating our calculation of estimated loss severities for the relevant Structured Transactions to appropriately
consider losses reported to us over multiple periods. The new methodology was subjected to review and validation through
our internal governance process. Additionally, we implemented a new control and modified an existing control over these
Structured Transactions to ensure the reasonableness of loss severity estimates and to monitor the reasonableness of period-
to-period changes in loss severity rates. Based on these remediation activities and our testing of the new and modified
controls, we concluded that we remediated this material weakness as of December 31, 2009.
Management Change
On October 12, 2009, Ross J. Kari began serving as our Chief Financial Officer.
ITEM 9B. OTHER INFORMATION
None.
322 Freddie Mac