Freddie Mac 2009 Annual Report Download - page 93

Within These Consolidated Financial Statements” to our consolidated financial statements for further information about the
impact of adoption of these amendments.
Losses on loans purchased decreased from $1.9 billion in 2007 to $1.6 billion in 2008 due to the decline in the volume
of our purchases resulting from the operational changes discussed below. Although the volume of our purchases of
delinquent loans declined, the number of loans purchased due to modification increased, particularly in the second half of
2008. The reduction in losses due to the decline in volume of our purchases during 2008 was significantly offset by declines
in the fair values of impaired and delinquent loans. The fair values of impaired and delinquent loans declined throughout
2008, with the most severe declines occurring during the fourth quarter.
Losses on delinquent and modified loans purchased from the mortgage pools underlying our PCs and Structured
Securities occur when the acquisition basis of the purchased loan exceeds the estimated fair value of the loan on the date of
purchase. In December 2007, we made certain operational changes for purchasing delinquent loans from PC pools, which
significantly reduced the volume of our delinquent loan purchases, and consequently the amount of our losses on loans
purchased, during 2008 and 2009, as compared to the amount of purchases we would have made in those years had we not
made these changes. Prior to December 2007, we purchased loans from PC pools once they became 120 days delinquent.
Effective December 2007, we purchase loans from pools when (a) the 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. The decision to effect these purchases
was made based on a determination that the cost of guarantee payments to the security holders will exceed the cost of
holding non-performing loans on our consolidated balance sheets. The cost of holding non-performing loans on our
consolidated balance sheets was significantly affected by the required adoption of new amendments to accounting standards
and changing economics. Due to our January 1, 2010 adoption of new accounting standards for transfers of financial assets
and the consolidation of VIEs, the cost of purchasing most delinquent loans from PCs will be less than the cost of continued
guarantee payments to security holders. As of December 31, 2009, the total unpaid principal balance of such mortgages was
approximately $70.2 billion. We will continue to review the economics of purchasing loans 120 days or more delinquent in
the future and may reevaluate our delinquent loans purchase practices and alter them if circumstances warrant.
Our December 2007 operational changes for purchasing delinquent loans from PC pools did not impact our process or
timing of modifying the loans, including our efforts under the MHA Program, and thus had no effect on the existing loss
mitigation alternatives that are available to us or our servicers. This change in practice did not have an impact on our credit
losses, as measured by the amount of charge-offs, nor on the cure rates of modified loans. However, when viewed in
isolation, this change in practice resulted in a higher provision for credit losses associated with our PCs and Structured
Securities and a reduction in our losses on loans purchased, particularly in 2008, since this was the first full year in which
our change in practice was effective. We recover a portion of these losses over time since the market-based valuations imply
losses that are higher than our historical experience. See “Recoveries on Loans Impaired upon Purchase” for discussion of
recoveries on previously purchased impaired loans.
The total number of loans we purchase from PC pools is dependent on a number of factors, including management
decisions about the timing of repurchases, our assessment of the cost of guarantee payments to PC holders compared to the
expected costs of holding the non-performing mortgage loan and the success of our loan modification efforts, including those
under HAMP.
Securities Administrator Loss on Investment Activity
In August 2008, acting as the security administrator for a trust that holds mortgage loan pools backing our PCs, we
invested in $1.2 billion of short-term, unsecured loans which we made to Lehman on the trust’s behalf. We refer to these
transactions as the Lehman short-term transactions. These transactions were due to mature on September 15, 2008; however,
Lehman failed to repay these loans and the accrued interest. On September 15, 2008, Lehman filed a chapter 11 bankruptcy
petition in the Bankruptcy Court for the Southern District of New York. To the extent there is a loss related to an eligible
investment for the trust, we, as the administrator, are responsible for making up that shortfall. During 2008, we recorded a
$1.1 billion loss to reduce the carrying amount of this asset to our estimate of the net realizable amount on these
transactions.
Income Tax Benefit (Expense)
For 2009, 2008 and 2007, we reported income tax benefit (expense) of $0.8 billion, $(5.6) billion and $2.9 billion,
respectively, resulting in effective tax rates of 4%, (12)% and 48%, respectively. In 2008 and 2009, our effective tax rate
differed from the federal statutory tax rate of 35% primarily due to the establishment of a partial valuation allowance against
our net deferred tax assets in the third quarter of 2008. The tax benefit recognized in 2009 represents primarily the current
90 Freddie Mac