Freddie Mac 2010 Annual Report Download - page 75

expense on seriously delinquent mortgage loans. These factors were partially offset by: (a) lower funding costs; and (b) the
inclusion of amounts previously classified as management and guarantee income. Net interest yield declined substantially
during 2010 because the net interest yield of the assets held in our consolidated single-family trusts was lower than the net
interest yield of PCs previously included in net interest income and our balance of non-performing mortgage loans increased.
During the year ended December 31, 2010, spreads on our debt and our access to the debt markets remained favorable
relative to historical levels. For more information, see “LIQUIDITY AND CAPITAL RESOURCES — Liquidity.”
Net interest income and net interest yield during 2010 and 2009 also benefited, compared to prior years, from the funds
we received from Treasury under the Purchase Agreement. These funds are reinvested and generate net interest income while
the costs of such funds are not reflected in interest expense, but instead are reflected as dividends paid on senior preferred
stock.
Net interest income and net interest yield increased significantly during 2009 compared to 2008 primarily due to a
decrease in funding costs as a result of the replacement of some higher cost short- and long-term debt with new lower cost
debt; and an increase in the average balance of our investments in mortgage loans and mortgage-related securities, including
an increase in our holdings of fixed-rate assets. These items were partially offset by the impact of declining short-term
interest rates on floating-rate mortgage-related and non-mortgage-related securities.
Provision for Credit Losses
We maintain loan loss reserves at levels we deem adequate to absorb probable incurred losses on mortgage loans held-
for-investment and loans underlying our financial guarantees. Increases in our loan loss reserves are generally reflected in
earnings through the provision for credit losses. As discussed in “Net Interest Income,” our provision for credit losses in
2010 was positively impacted by the changes in accounting standards for transfers of financial assets and consolidation of
VIEs effective January 1, 2010, since we no longer account for forgone interest income on non-performing loans within our
provision for credit losses. See “NOTE 2: CHANGE IN ACCOUNTING PRINCIPLES” for further information.
Since the beginning of 2008, on an aggregate basis, we recorded provision for credit losses associated with single-
family loans of approximately $62.3 billion, and recorded an additional $4.7 billion in losses on loans purchased from our
PCs, net of recoveries. The majority of these losses are associated with loans originated in 2005 through 2008. While loans
we acquired in 2005 through 2008 will give rise to additional credit losses that we have not yet provisioned for, we believe,
as of December 31, 2010, that we have reserved for or charged-off the majority of the total expected credit losses for these
loans. Nevertheless, various factors, such as continued high unemployment rates or further declines in home prices, could
require us to provide for losses on these loans beyond our current expectations. See “Table 3 — Credit Statistics, Single-
Family Credit Guarantee Portfolio” for certain quarterly credit statistics for our single-family credit guarantee portfolio.
Our provision for credit losses decreased to $17.2 billion in 2010, compared to $29.5 billion in 2009, due to a
substantial slow down in the rate of growth in non-performing single-family loans. Loss severity rates on our single-family
mortgage loans increased only slightly in 2010, whereas severity rates increased steadily throughout the first half of 2009
before moderating in the second half of 2009. The adverse effect of a slight increase in loss severity rates during 2010 was
partially offset by higher recoveries from mortgage insurers and repurchases by seller/servicers. We also experienced an
increase in the number of single-family loans subject to individual impairment resulting from an increase in modifications
considered TDRs during 2010.
During the second quarter of 2010, we identified a backlog related to the processing of certain loan workout activities
reported to us by our servicers, principally loan modifications and short sales. This backlog resulted in erroneous loan data
within our loan reporting systems, thereby impacting our financial accounting and reporting systems. The resulting error
impacted our provision for credit losses, allowance for loan losses, and provision for income taxes and affected our
previously reported financial statements for the interim period ended March 31, 2010, the interim 2009 periods, and the full
year ended December 31, 2009. The cumulative effect of this error was recorded as a correction in the second quarter of
2010, which included a $1.0 billion pre-tax cumulative effect of this error associated with the year ended December 31,
2009. For additional information, see “NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES — Basis of
Presentation — Out-of-Period Accounting Adjustment.”
Our provision for credit losses exceeded the level of our charge-offs, net, by $4.3 billion during 2010, primarily as a
result of a continued increase in our non-performing single-family loans. While the quarterly amount of our provision for
credit losses declined for all four consecutive quarters in 2010, our quarterly amount of charge-offs, net of recoveries
remained elevated. We believe the level of our charge-offs will continue to increase in 2011 as more of our single-family
non-performing loans are resolved. As of December 31, 2010 and 2009, the UPB of our single-family non-performing loans
was $115.5 billion and $98.7 billion, respectively, and the UPB of multifamily non-performing loans was $2.9 billion and
$1.6 billion, respectively. Although still increasing, the rate of growth in the UPB of our non-performing loans slowed
substantially during 2010. See “RISK MANAGEMENT — Credit Risk — Mortgage Credit Risk” for further information on
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