Freddie Mac 2010 Annual Report Download - page 186

loans underlying these issuances on our consolidated balance sheets. These consolidated entities do not have the ability to
sell mortgage loans and generally are only permitted to hold such loans for the settlement of the corresponding obligations of
these entities. As such, loans we acquire and which we intend to securitize using an entity we will consolidate will generally
be classified as held-for-investment both prior to and subsequent to their securitization, in accordance with our intent and
ability to hold such loans for the foreseeable future.
Held-for-investment mortgage loans are reported in our consolidated balance sheets at their outstanding UPB, net of
deferred fees and other cost basis adjustments (including unamortized premiums and discounts, delivery fees and other
pricing adjustments). These deferred items are amortized into interest income over the contractual lives of the loans using the
effective interest method. We recognize interest income on an accrual basis except when we believe the collection of
principal or interest is not probable. If the collection of principal and interest is not probable, we cease the accrual of interest
income.
Mortgage loans not classified as held-for-investment are classified as held-for-sale. Held-for-sale loans are reported at
lower-of-cost-or-fair-value on our consolidated balance sheets. Any excess of a held-for-sale loan’s cost over its fair value is
recognized as a valuation allowance in other income on our consolidated statement of operations, with changes in this
valuation allowance also being recorded in other income. Premiums, discounts and other cost basis adjustments recognized
upon acquisition on single-family loans classified as held-for-sale are deferred and not amortized. We have elected the fair
value option for multifamily mortgage loans purchased through our CME initiative to reflect our strategy in this program.
See “NOTE 20: FAIR VALUE DISCLOSURES — Fair Value Election — Multifamily Held-For-Sale Mortgage Loans with
Fair Value Option Elected.” Thus, these multifamily mortgage loans are measured at fair value on a recurring basis, with
subsequent gains or losses related to sales or changes in fair value reported in other income in our consolidated statements of
operations.
Cash flows related to mortgage loans held by our consolidated trusts are classified as either investing activities (e.g.,
principal repayments) or operating activities (e.g., interest payments received from borrowers included within net income
(loss)). In addition, cash flows related to purchases of mortgage loans held-for-sale are classified in operating activities.
When mortgage loans held-for-sale are sold or securitized, proceeds from the sale or securitization and any related gain or
loss are classified in operating activities.
Allowance for Loan Losses and Reserve for Guarantee Losses
The allowance for loan losses and the reserve for guarantee losses represent estimates of incurred credit losses. The
allowance for loan losses pertains to all single-family and multifamily loans classified as held-for-investment on our
consolidated balance sheets whereas the reserve for guarantee losses relates to single-family and multifamily loans
underlying our non-consolidated Freddie Mac mortgage-related securities and other guarantee commitments. Total held-for-
investment mortgage loans, net are shown net of the allowance for loan losses on our consolidated balance sheets. The
reserve for guarantee losses is included within other liabilities on our consolidated balance sheets. We recognize incurred
losses by recording a charge to the provision for credit losses in our consolidated statements of operations. Determining the
adequacy of the loan loss reserves is a complex process that is subject to numerous estimates and assumptions requiring
significant judgment.
We estimate credit losses related to homogeneous pools of loans in accordance with the accounting standards for
contingencies. Accordingly, we maintain an allowance for loan losses on mortgage loans held-for-investment when it is
probable that a loss has been incurred and the amount of the loss can be reasonably estimated. Loans that we evaluate for
individual impairment are measured in accordance with the subsequent measurement requirements of the accounting
standards for receivables.
For both the single-family and multifamily portfolios, we charge off (in full or in part) our recorded investment in a
loan in the period it is determined that the loan (or a portion thereof) is uncollectible. This generally occurs at final
disposition of the loan; however, it may occur prior to final disposition. For example, a charge-off is recorded if a specific
loss is realized upon the modification of a loan in a TDR.
Single-Family Loans
We estimate loan loss reserves on homogeneous pools of single-family loans using a statistically based model that
evaluates a variety of factors. The homogeneous pools of single-family mortgage loans are determined based on common
underlying characteristics, including current LTV ratios and trends in home prices, loan product type and geographic region.
In determining the loan loss reserves for single-family loans at the balance sheet date, we evaluate factors including, but not
limited to:
• current LTV ratios and historical trends in home prices;
• loan product type;
183 Freddie Mac