Freddie Mac 2010 Annual Report Download - page 91

A primary contributor to the change in Multifamily Segment Earnings in 2010 is the treatment of our LIHTC
investments. In 2009 and 2008, LIHTC partnership losses were recognized in the Multifamily Segment, negatively impacting
Segment Earnings in those years. At December 31, 2009, the LIHTC investments were written down to zero and resulted in
a favorable variance in 2010 Segment Earnings as partnership losses were no longer being recognized.
Net interest income increased $258 million, or 30%, for 2010 compared to 2009, primarily attributable to lower funding
costs on allocated debt in 2010, which declined principally due to the removal of the LIHTC investments from the
Multifamily segment in the fourth quarter of 2009. Net interest income was also positively impacted by an increase in
prepayment fees driven by an increase in refinancing in 2010, as compared to 2009. As a result, net interest yield was
77 basis points in 2010, an improvement of 17 basis points from 2009. Net interest income increased $84 million, or 11%,
for 2009 compared to 2008, driven by a 22% increase in the average balance of our multifamily loan portfolio and lower
interest rates, which decreased our cost of funding.
Segment Earnings non-interest income (loss) increased to $248 million in 2010 compared to $(536) million in 2009,
primarily attributable to the absence of LIHTC partnership losses in 2010. Multifamily Segment Earnings non-interest
income (loss) also increased, although to a much lesser extent, due to higher gains recognized on the sale of loans through
securitization. We recognized $267 million in net gains on sales of $6.6 billion in UPB of multifamily loans during the year
ended December 31, 2010. These gains were partially offset by $249 million in fair value losses recognized on mortgage
loans held-for-sale reflecting market volatility. Impairment on CMBS during 2010 and 2009 totaled $96 million and
$137 million, respectively. There were no impairments recognized for either GAAP or Segment Earnings on available-for-
sale CMBS during 2008.
Major national multifamily market fundamentals improved during 2010, with several consecutive quarters of positive
trends in vacancy rates and effective rents. Vacancy rates, which had climbed to record levels in early 2010, improved and
effective rents, the principal source of income for property owners, stabilized and began to improve on a national basis.
These improving fundamentals helped to stabilize property values in a number of markets. However, the multifamily market
continues to be negatively impacted by high unemployment and ongoing weakness in the economy. The multifamily
mortgage market differs from the residential single-family market in several respects. The likelihood that a multifamily
borrower will make scheduled payments on its mortgage is based on the ability of the property to generate sufficient cash
flow to make those payments, and is generally affected by rent levels, vacancy rates and property operating expenses. The
multifamily market is affected by the balance between the supply of, and demand for, rental housing (both multifamily and
single-family), which in turn is affected by unemployment rates, the number of new units added to the rental housing supply,
rates of household formation and the relative cost of owner-occupied housing alternatives. However, some local markets
continue to exhibit weaker than average fundamentals, particularly in the states of Nevada, Arizona, and Georgia, which may
increase our risk for future losses. For further information on delinquencies, including geographical and other concentrations
see “NOTE 19: CONCENTRATION OF CREDIT AND OTHER RISKS.”
Our Multifamily segment provision for credit losses decreased to $99 million in 2010 from $574 million in 2009,
reflecting improved fundamentals, as discussed above. This decrease was partially offset by an increase in the amount of
loans identified as impaired and the specific reserve recorded in connection with those loans. The increase in Multifamily
segment provision for credit losses in 2009, as compared to 2008, reflected significant deterioration in multifamily market
fundamentals including higher vacancy rates and declines in effective rental rates, which adversely affected our multifamily
borrowers. For loans we identify as having deteriorating underlying performance characteristics, such as estimated current
LTV ratio and DSCRs, we evaluate each individual property, using estimates of property value to determine if a specific
reserve is needed. Although we use the most recently available results of our multifamily borrowers to assess a property’s
value, there is a significant lag in reporting as they prepare their results in the normal course of business.
The delinquency rate for loans in the multifamily mortgage portfolio was 0.26% and 0.20% as of December 31, 2010
and 2009, respectively, and increased in 2010 due to weakness in certain markets. Our multifamily delinquent loans as of
December 31, 2010 are principally loans on properties located in Georgia and Texas. As of December 31, 2010, over one-
half of the multifamily loans, measured both in terms of number of loans and on a UPB basis, that were two monthly
payments or more past due had credit enhancements that we currently believe will mitigate our expected losses on those
loans. The multifamily delinquency rate of credit-enhanced loans as of December 31, 2010 and 2009, was 0.85% and 1.03%,
respectively, while the delinquency rate for non-credit-enhanced loans was 0.12% and 0.07%, respectively. See “RISK
MANAGEMENT — Credit Risk — Mortgage Credit Risk — Credit Performance — Delinquencies” for further information
about our reported delinquency rates.
We account for multifamily mortgages as TDRs where the original terms of the mortgage loan agreement are modified
due to the borrower’s financial difficulties, and we have granted a concession. Accounting for TDRs requires recognition in
the provision for credit losses for the excess of our recorded investment in the loan over the present value of the expected
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