Freddie Mac 2010 Annual Report Download - page 165

value of the underlying collateral, as reduced by estimated disposition costs, as multifamily loans are generally collateral-
dependent and most multifamily loans are non-recourse to the borrower. Non-recourse means generally that the cash flows of
the underlying property (including any associated credit enhancements) serve as the source of funds for repayment of the
loan.
Combined Loan Loss Reserves
The processes for establishing the single-family and multifamily loan loss reserves rely on the use of models. We
regularly evaluate the underlying estimates and models we use when determining the loan loss reserves and update our
assumptions to reflect our historical experience and current view of economic factors. Inputs used by those models are
regularly updated for changes in the underlying data, assumptions, and market conditions. However, there are significant
risks associated with our use of models, especially in the current environment. See “RISK FACTORS — We face risks and
uncertainties associated with the internal models that we use for financial accounting and reporting purposes, to make
business decisions and to manage risks. Market conditions have raised these risks and uncertainties.”
We believe the level of our loan loss reserves is reasonable based on internal reviews of the factors and methodologies
used. No single statistic or measurement determines the adequacy of the loan loss reserves. Changes in one or more of the
estimates or assumptions used to calculate the loan loss reserves could have a material impact on the loan loss reserves and
provision for credit losses. For example, 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 delinquency rates that exceed our current projections could cause our losses on our single-family
loans to be significantly higher than those currently estimated.
Impairment Recognition on Investments in Securities
We recognize impairment losses on available-for-sale securities within our consolidated statements of operations as net
impairment of available-for-sale securities recognized in earnings when we conclude that a decrease in the fair value of a
security is other-than-temporary. We prospectively adopted an amendment to the accounting standards for investments in debt
and equity securities on April 1, 2009. This amendment changed the recognition, measurement and presentation of other-
than-temporary impairment for debt securities. See “NOTE 2: CHANGE IN ACCOUNTING PRINCIPLES — Other Changes
in Accounting Principles — Change in the Impairment Model for Debt Securities” for further information regarding the
impact of this amendment on our consolidated financial statements.
We conduct quarterly reviews to evaluate each available-for-sale security that has an unrealized loss for other-than-
temporary impairment. An unrealized loss exists when the current fair value of an individual security is less than its
amortized cost basis. We recognize other-than-temporary impairment in earnings if one of the following conditions exists:
(a) we have the intent to sell the security; (b) it is more likely than not that we will be required to sell the security before
recovery of its unrealized loss; or (c) we do not expect to recover the amortized cost basis of the security. If we do not
intend to sell the security and we believe it is not more likely than not that we will be required to sell prior to recovery of its
unrealized loss, we recognize only the credit component of other-than-temporary impairment in earnings and the amounts
attributable to all other factors are recognized, net of tax, in AOCI. The credit component represents the amount by which
the present value of cash flows expected to be collected from the security is less than the amortized cost basis of the
security.
The evaluation of whether unrealized losses on available-for-sale securities are other-than-temporary requires significant
management judgments and assumptions and consideration of numerous factors. We perform an evaluation on a
security-by-security basis considering all available information. The relative importance of this information varies based on
the facts and circumstances surrounding each security, as well as the economic environment at the time of assessment.
Important factors, judgments, and assumptions include, but are not limited to:
• whether we intend to sell the security and it is more likely than not that we will be required to sell the security before
sufficient time elapses to recover all unrealized losses;
• loan level default modeling for single-family residential mortgages that considers individual loan characteristics,
including current LTV ratio, FICO score, and delinquency status, requires assumptions about future home prices and
interest rates, and employs internal default and prepayment models. The modeling for CMBS employs third-party
models that require assumptions about the economic conditions in the areas surrounding each individual property;
• analysis of the performance of the underlying collateral relative to its credit enhancements using techniques that
require assumptions about future loss severity, default, prepayment, and other borrower behavior. Implicit in this
analysis is information relevant to expected cash flows (such as collateral performance and characteristics);
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