Freddie Mac 2010 Annual Report Download - page 187

• geographic location;
• delinquency history;
• delinquency status;
• loan age;
• sourcing channel;
• occupancy type;
• UPB at origination;
• actual and estimated rates of loss severity for similar loans;
• default experience;
• expected ability to partially mitigate losses through loan modification or other alternatives to foreclosure;
• expected proceeds from mortgage insurance contracts that are contractually attached to a loan or other credit
enhancements that were entered into contemporaneous with and in contemplation of a guarantee or loan purchase
transaction;
• expected repurchases of mortgage loans by sellers under their obligations to repurchase loans that are inconsistent
with certain representations and warranties made at the time of sale;
• counterparty credit of mortgage insurers and seller/servicers;
• pre-foreclosure real estate taxes and insurance;
• estimated selling costs should the underlying property ultimately be sold; and
• trends in the timing of foreclosures.
Our loan loss reserves reflect our best current estimates of incurred losses. Our loan loss reserve estimate includes
projections related to strategic loss mitigation activities, including loan modifications for troubled borrowers, and projections
of recoveries through repurchases by seller/servicers of defaulted loans due to failure to follow contractual underwriting
requirements at the time of the loan origination. At an individual loan level, our estimate also considers the effect of home
price changes on borrower behavior and the impact of our loss mitigation actions, including our temporary suspensions of
foreclosure transfers and our loan modification efforts. We apply estimated proceeds from primary mortgage insurance that is
contractually attached to a loan and other credit enhancements entered into contemporaneous with and in contemplation of a
guarantee or loan purchase transaction as a recovery of our recorded investment in a charged-off loan, up to the amount of
loss recognized as a charge-off. Proceeds from credit enhancements received in excess of our recorded investment in
charged-off loans are recorded as a decrease to REO operations expense in our consolidated statements of operations when
received.
Our reserve estimate also reflects our best projection of delinquencies we believe are likely to occur as a result of loss
events that have occurred through December 31, 2010 and December 31, 2009, respectively. However, the continued
weakness in the national housing market, the uncertainty in other macroeconomic factors, and uncertainty of the success of
modification efforts under HAMP and other loan workout programs, make forecasting of delinquency rates inherently
imprecise. 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 would cause our losses to be significantly higher than
those currently estimated.
We validate and update the model and factors to capture changes in actual loss experience, as well as the effects of
changes in underwriting practices and in our loss mitigation strategies. We also consider macroeconomic and other factors
that impact the quality of the loans underlying our portfolio including regional housing trends, applicable home price indices,
unemployment and employment dislocation trends, consumer credit statistics and the extent of third party insurance. We
determine our loan loss reserves based on our assessment of these factors.
Multifamily Loans
We determine our loan loss reserves individually for multifamily loans identified as impaired. Refer to “Impaired
Loans” below for further discussion on individually impaired multifamily loans. The remaining multifamily loans are
evaluated collectively for incurred losses based on all available evidence, including but not limited to, operating cash flows
from the underlying property as represented by its current DSCR, evaluation of the repayment prospects, and the adequacy of
third-party credit enhancements. In determining our loan loss reserve estimate, we utilize available economic data related to
multifamily real estate, including apartment vacancy and rental rates, as well as estimates of loss severity and rates of
reperformance.
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