Freddie Mac 2010 Annual Report Download - page 81

REO Operations Expense
The table below presents the components of our REO operations expense for 2010, 2009, and 2008, and REO inventory
and disposition information.
Table 15 — REO Operations Expense, REO Inventory and Dispositions
2010 2009 2008
Year Ended December 31,
(dollars in millions)
REO operations expense:
Single-family:
REO property expenses
(1)
......................................................... $ 1,163 $ 708 $ 372
Disposition (gains) losses, net
(2)
..................................................... 102 749 682
Change in holding period allowance
(3)
................................................. 211 (612) 495
Recoveries
(4)
.................................................................. (800) (558) (452)
Total single-family REO operations expense .............................................. 676 287 1,097
Multifamily REO operations (income) expense . . .......................................... (3) 20 —
Total REO operations expense . ....................................................... $ 673 $ 307 $ 1,097
REO inventory (in properties), at December 31:
Single-family ................................................................. 72,079 45,047 29,340
Multifamily ................................................................... 14 5 6
Total . ........................................................................ 72,093 45,052 29,346
REO property dispositions (in properties) ................................................ 101,215 69,406 35,579
(1) Consists of costs incurred to maintain or protect a property after foreclosure acquisition, such as legal fees, insurance, taxes, cleaning and other
maintenance charges.
(2) Represents the difference between the disposition proceeds, net of selling expenses, and the fair value of the property on the date of the foreclosure
transfer. Excludes holding period write-downs while in REO inventory.
(3) Includes both the increase (decrease) in the estimated fair value of properties that remain in inventory at the end of the year as well as any reductions
associated with dispositions during the year.
(4) Includes recoveries from primary mortgage insurance, pool insurance and seller/servicer repurchases.
Total REO operations expense was $673 million in 2010 as compared to $307 million in 2009 and $1.1 billion in 2008.
The increase in 2010 was primarily due to higher property expenses associated with larger REO inventories. We currently
expect REO property expenses to continue to increase due to expected continued high levels of REO acquisitions and
inventory in 2011. Net disposition losses declined in 2010, compared to the prior two years, as the pace of home value
declines slowed and sales proceeds were more closely aligned with acquisition values of our REO inventory. We also
experienced increases in recoveries associated with foreclosed loans during 2010 and 2009, primarily due to the increases in
those years in our REO acquisitions for which we had credit protection.
Our REO acquisition volume temporarily slowed in the fourth quarter of 2010 due to delays in the foreclosure process,
including delays related to concerns about deficiencies in foreclosure documentation practices. For more information on how
this could adversely affect our REO operations (income) expense, see “RISK FACTORS — Operational Risks — Our
expenses could increase and we may otherwise be adversely affected by deficiencies in foreclosure practices, as well as
related delays in the foreclosure process.”
Other Expenses
Other expenses were $0.7 billion, $5.2 billion, and $3.2 billion in 2010, 2009, and 2008, respectively. During 2009 and
2008, other expenses include significant losses on loans purchased. Our losses on loans purchased were $25 million,
$4.8 billion, and $1.6 billion in 2010, 2009, and 2008, respectively. When a loan underlying our PCs is seriously delinquent
and modified, we generally exercise our repurchase option and purchase the loan from the PC pool, recording the loan as an
unsecuritized mortgage loan, held-for-investment. We record losses on loans purchased when the acquisition basis of a loan
purchased from our non-consolidated securitization trusts exceeds the estimated fair value of the loan on the date of
purchase. Beginning January 1, 2010, our single-family PC trusts are consolidated as a result of the change in the accounting
standard for consolidation of VIEs. As a result, we no longer record losses on loans purchased when we purchase loans from
these consolidated entities since the loans are already recorded on our consolidated balance sheets. During 2010, losses on
loans purchased were associated solely with single-family loans purchased pursuant to other guarantee commitments. See
“Recoveries on Loans Impaired Upon Purchase” for additional information about the impacts of these loans on our financial
results. See “NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES — Impaired Loans” and “NOTE 23:
SELECTED FINANCIAL STATEMENT LINE ITEMS” for additional information.
Other expenses for 2008 also include a $1.1 billion securities administrator loss on investment activity, which was
related to losses incurred on short-term lending transactions with Lehman Brothers Holdings, Inc., or Lehman, executed prior
to Lehman’s bankruptcy in 2008. We had no securities administrator losses on investment activity during 2009 or 2010.
78 Freddie Mac