Freddie Mac 2010 Annual Report Download - page 76

our single-family credit guarantee portfolio, including credit performance, charge-offs, and growth in the balance of our non-
performing assets.
In 2010, we also experienced high volumes of loan modifications involving concessions to borrowers and consequently,
a rise in the number of loans categorized as TDRs. Impairment analysis for TDRs requires giving recognition in the
provision for credit losses to the excess of our recorded investment in the loan over the present value of the expected future
cash flows. This generally results in a higher allowance for loan losses than for loans that are not TDRs. We expect the
number of loan modifications to decline in 2011; however, we expect the percentage of modifications that qualify as TDRs
in 2011 will remain high, since the majority of our modifications are anticipated to include a significant reduction in the
contractual interest rate, which represents a concession to the borrower.
Our serious delinquencies have remained high due to the continued weakness in home prices and persistently high
unemployment, extended foreclosure timelines and foreclosure suspensions in many states, and challenges faced by servicers
in building capacity to process large volumes of problem loans. Our seller/servicers have an active role in our loan workout
activities, including under the MHA Program, and a decline in their performance could result in a failure to realize the
anticipated benefits of our loss mitigation plans. In an effort to help mitigate such risk, beginning in the fourth quarter of
2010, we are making significant investments in systems and personnel to help our seller/servicers manage their performance.
We believe this will help us to better realize the benefits of our loss mitigation plans, though it is too early to determine if
this will be successful.
Our allowance for loan losses and amount of charge-offs in the future will be affected by a number of factors,
including: (a) the actual level of mortgage defaults; (b) the impact of the MHA Program and our other loss mitigation
efforts; (c) any governmental actions or programs that impact the ability of troubled borrowers to obtain modifications,
including legislative changes to bankruptcy laws; (d) changes in property values; (e) regional economic conditions, including
unemployment rates; (f) delays in the foreclosure process, including those related to the concerns about deficiencies in
foreclosure documentation practices; (g) third-party mortgage insurance coverage and recoveries; and (h) the realized rate of
seller/servicer repurchases. See “RISK MANAGEMENT — Credit Risk — Institutional Credit Risk” for additional
information on seller/servicer repurchase obligations.
Our loan loss reserves associated with our multifamily mortgage portfolio were $828 million and $831 million as of
December 31, 2010 and 2009, respectively. The multifamily market improved on a national basis in 2010, with several
consecutive quarters of positive trends in vacancy rates and effective rents. However, some geographic areas in which we
have investments in multifamily mortgage loans, including the states of Nevada, Arizona, and Georgia, continue to exhibit
weaker than average fundamentals.
Non-Interest Income (Loss)
Gains (Losses) on Extinguishment of Debt Securities of Consolidated Trusts
Due to the change in accounting standards for consolidation of VIEs, beginning January 1, 2010, when we purchase PCs
that have been issued by consolidated PC trusts, we extinguish a pro rata portion of the outstanding debt securities of the
related consolidated trust. We recognize a gain (loss) on extinguishment of the debt securities to the extent the amount paid
to extinguish the debt security differs from its carrying value. During 2010, we extinguished debt securities of consolidated
trusts with a UPB of $33.5 billion (representing our purchase of single-family PCs with a corresponding UPB amount) and
our losses on extinguishment of these debt securities of consolidated trusts were $164 million. See “NOTE 2: CHANGE IN
ACCOUNTING PRINCIPLES” for additional information.
Gains (Losses) on Retirement of Other Debt
We repurchase or call our outstanding other debt securities from time to time to help support the liquidity of the market
for our other debt securities and to manage the mix of liabilities funding our assets. When we repurchase or call outstanding
debt securities, or holders put outstanding debt securities to us, we recognize a gain or loss to the extent the amount paid to
redeem the debt security differs from its carrying value. See “NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES” for information regarding our accounting policies related to debt retirements.
Gains (losses) on retirement of other debt were $(219) million, $(568) million, and $209 million during 2010, 2009, and
2008, respectively. We recognized fewer losses on debt retirement during 2010 compared to 2009 primarily due to decreased
losses on calls and puts in 2010 compared to 2009. A tender offer for our subordinated debt also contributed to losses during
2009. During 2008, we recognized gains due to an increased level of call activity, primarily involving our debt with coupon
levels that increase at predetermined intervals. For more information, see “LIQUIDITY AND CAPITAL RESOURCES —
Liquidity — Other Debt Securities — Other Debt Retirement Activities.”
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