Freddie Mac 2010 Annual Report Download - page 217

We pay a $1,000 incentive fee to a seller/servicer when they modify a single-family loan under HAMP and an
additional $500 incentive fee if the loan was current when it entered the trial period (i.e., where default was imminent but
had not yet occurred). In addition, our seller/servicers will receive up to $1,000 for any modification that reduces a
borrower’s monthly payment by 6% or more, in each of the first three years after the modification, as long as the modified
loan remains current.
Borrowers whose loans are modified through HAMP accrue monthly incentive payments that will be applied annually to
reduce up to $1,000 of their principal, per year, for five years, as long as they are making timely payments under the
modified loan terms. HAMP applies to loans originated on or before January 1, 2009, and borrowers’ requests for such
modifications will be considered until December 31, 2012.
Non-HAMP modifications generally involve an extension of the term of the loan or a reduction of the interest rate,
depending on the borrower’s individual circumstances. All of our single-family loan modifications during 2010 resulted in
the modified loan containing a fixed interest rate or one that is fixed below market for five years and then gradually adjusts
to a market rate (determined at the time of modification) and remains fixed at that new rate for the remaining term.
NOTE 7: REAL ESTATE OWNED
We obtain REO properties when we are the highest bidder at foreclosure sales of properties that collateralize non-
performing single-family and multifamily mortgage loans owned by us or when a delinquent borrower chooses to transfer the
mortgaged property to us in lieu of going through the foreclosure process. Upon acquiring single-family properties, we
establish a marketing plan to sell the property as soon as practicable by either listing it with a sales broker or by other
means, such as arranging a real estate auction. Upon acquiring multifamily properties, we may operate them with third-party
property-management firms for a period to stabilize value and then sell the properties through commercial real estate brokers.
See “NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES,” for a discussion of our significant accounting
policies for REO.
For the periods presented below, the weighted average holding period for our disposed properties was less than one year.
Table 7.1 provides a summary of the change in the carrying value of our REO balances.
Table 7.1 — REO
REO,
Gross
Valuation
Allowance
REO,
Net
(in millions)
Balance, December 31, 2008 . . ...................................................... $ 4,216 $ (961) $ 3,255
Additions . ................................................................... 9,420 (611) 8,809
Dispositions and valuation allowance assessment ......................................... (8,511) 1,139 (7,372)
Balance, December 31, 2009 . . ...................................................... $ 5,125 $ (433) $ 4,692
Adjustments to beginning balance
(1)
.................................................. 158 (11) 147
Additions . ................................................................... 13,211 (1,016) 12,195
Dispositions and valuation allowance assessment ......................................... (10,586) 620 (9,966)
Balance, December 31, 2010 . . ...................................................... $ 7,908 $ (840) $ 7,068
(1) Adjustment to the beginning balance relates to the adoption of new accounting standards for transfers of financial assets and consolidation of VIEs. See
“NOTE 2: CHANGE IN ACCOUNTING PRINCIPLES” for further information.
The REO balance, net at December 31, 2010 and 2009 associated with single-family properties was $7.0 billion and
$4.7 billion, respectively, and the balance associated with multifamily properties was $107 million and $31 million,
respectively. The West region represented approximately 29% and 35% of our REO additions in 2010 and 2009, respectively,
based on the number of units, and the highest concentration in the West region is in California. At December 31, 2010, our
REO inventory in California represented approximately 11% of our total REO inventory based on the number of units. Our
REO inventory consisted of 72,093 units and 45,052 units at December 31, 2010 and 2009, respectively.
Our REO operations expenses included REO property expenses, net losses incurred on disposition of REO properties,
adjustments to the holding period allowance associated with REO properties to record them at the lower of their carrying
amount or fair value less the estimated costs to sell, and insurance reimbursements and other credit enhancement recoveries.
An allowance for estimated declines in the REO fair value during the period properties are held reduces the carrying value of
REO property. We recognized losses of $102 million and $749 million on REO dispositions during 2010 and 2009,
respectively. We increased our valuation allowance for REO by $211 million for the year ended December 31, 2010 to
account for declines in home prices during this period, and we reduced our valuation allowance for REO by $612 million for
the year ended December 31, 2009.
In the second half of 2010, several large seller/servicers announced issues relating to the improper preparation and
execution of certain documents used in foreclosure proceedings, including affidavits. A number of our seller/servicers,
including several of our largest, temporarily suspended foreclosure proceedings in certain states in which they do business
214 Freddie Mac