Freddie Mac 2010 Annual Report Download - page 188

Non-Performing Loans
We classify mortgage loans as non-performing and place them on non-accrual status when we believe collectibility of
interest and principal is not reasonably assured, which generally occurs when a loan is three monthly payments past due,
unless the loan is well secured and in the process of collection based upon an individual loan assessment. A loan is
considered past due if a full payment of principal and interest is not received within one month of its due date. When a loan
is placed on non-accrual status, any interest income accrued but uncollected is reversed. Thereafter, interest income is
recognized only upon receipt of cash payments.
A non-accrual mortgage loan may be returned to accrual status when the collectibility of principal and interest is
reasonably assured. Upon a loan’s return to accrual status, amortization of any basis adjustments into interest income is
resumed.
Impaired Loans
We consider a loan to be impaired when it is probable, based on current information, that we will not receive all
amounts due (including both principal and interest), in accordance with the contractual terms of the original loan agreement.
This assessment is made taking into consideration any more than insignificant delays in the timing of our expected receipt of
these amounts.
Single-Family
Individually impaired single-family loans include loans that have undergone a TDR. Impairment and interest income
recognition are discussed separately in the paragraphs that follow. All other single-family impaired loans are aggregated and
measured collectively for impairment based on similar risk characteristics. Collective impairment is measured as described
above in the “Allowance for Loan Losses and Reserve for Guarantee Losses — Single-Family Loans” section of this note. If
we determine that foreclosure on the underlying collateral is probable, we measure impairment based upon the fair value of
the collateral, as reduced by estimated disposition costs and adjusted for estimated proceeds from insurance and similar
sources.
Multifamily
Multifamily impaired loans include TDRs, loans three monthly payments or more past due, and loans that are deemed
impaired based on management judgment. Multifamily loans are measured individually for impairment based on the fair
value of the underlying collateral, as reduced by estimated disposition costs, as the repayment of these loans is generally
provided from the cash flows of the underlying collateral and any associated credit-enhancement. Except for cases of fraud
and certain other types of borrower defaults, most multifamily loans are non-recourse to the borrower so generally the cash
flows of the underlying property (including any associated credit enhancements) serve as the source of funds for repayment
of the loan. Interest income recognition on non-TDR multifamily impaired loans is subject to our non-accrual policy as
discussed in the Non-Performing Loans section above.
Troubled Debt Restructurings
Both single-family and multifamily loans which experience a modification to their contractual terms which results in a
concession being granted to a borrower experiencing financial difficulties are considered TDRs. A concession is deemed
granted if the borrower’s effective borrowing rate under the terms of the contractual modification is less than the effective
borrowing rate prior to the modification. In addition, for multifamily loans, we also consider other qualitative factors in
determining whether a concession is deemed granted, including whether the borrower’s modified interest rate is consistent
with that of a non-troubled enterprise. A concession typically includes one or more of the following being granted to the
borrower: (a) a reduction in the contractual interest rate; (b) interest forbearance for a period of time that is not insignificant
or forgiveness of accrued but uncollected interest amounts; and (c) a reduction in the principal amount of the loan. For loans
modified under the MHA Program, the TDR assessment is performed upon successful completion of the trial period at the
date the contractual terms of the modified loan become effective.
Impairment of a loan having undergone a TDR is measured as the excess of our recorded investment in the loan over
the present value of the expected future cash flows, discounted at the loan’s original effective interest rate for fixed-rate loans
or at the loan’s effective interest rate prior to modification for adjustable-rate loans. Our expectation of future cash flows
incorporates, among other items, an estimated probability of default which is based on a number of market factors as well as
the characteristics of the loan, such as past due status. Subsequent to the modification date, interest income is recognized at
the modified interest rate, subject to our non-accrual policy as discussed in the Non-Performing Loans section above, with all
other changes in the present value of expected future cash flows being recognized as a component of the provision for credit
losses in our consolidated statement of operations.
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