Freddie Mac 2014 Annual Report Download - page 158

153 Freddie Mac
For additional information on estimated current LTV ratios and single-family loan loss reserves, see “NOTE 4:
MORTGAGE LOANS AND LOAN LOSS RESERVES — Credit Quality of Mortgage Loans.”
We rely upon third-parties to provide primary servicing for the performing and non-performing loan portfolios. At loan
delivery, the seller provides us with the loan data, which includes loan characteristics and underwriting information. Each
month, the servicers provide us with monthly loan level servicing data, including delinquency and loss information.
Certain loan servicing data is reported to us on a real-time basis, such as loan pay-offs and foreclosure events. However,
certain monthly servicing data, including delinquency status, is delivered on a one-month delay. For example, December loan
delinquency data delivered to us at the end of December or beginning of January reflects the loan delinquency status related to
the December 1 payment cycle. We incorporate the delinquency status data into our allowance for loan loss calculation
generally without adjustment for the one-month delay.
Our single-family loan loss reserve default models are estimated based on 12 months of actual loan performance data,
including loan status and delinquency data reported by our servicers. The loan performance data provides a loan level history of
delinquency, foreclosures, foreclosure alternatives and modifications. Our single-family loan loss reserve severity is based on
the repeat housing sales index and actual REO dispositions, short sale and third-party values that incorporates the most recent:
(a) six months of sales experience realized on our distressed property dispositions; and (b) twelve months of pre-foreclosure
expenses on our distressed properties including REO, short sales, and third-party sales. Our single-family loan loss severity
estimate also captures current business area practices and expectations about recoveries from mortgage insurance or due to
seller/servicer repurchases. We use historical trends in home prices in our single-family loan loss reserve process, primarily
through the use of estimated current total LTV ratios in our default models and through the use of recent home price sales
experience in our severity estimate. However, we do not use a forecast of trends in home prices in our single-family loan loss
reserve process. See endnote (1) to “Table 4.2 — Recorded Investment of Held-for-Investment Mortgage Loans, by LTV Ratio”
for more information about the repeat housing sales index.
Our loan loss reserves reflect our best current estimates of incurred losses. Our loan loss reserve estimate includes
projections related to loss mitigation activities, including loan modifications for troubled borrowers, and projections of
recoveries through repurchases by seller/servicers of defaulted loans due to failure to follow contractual underwriting
requirements at the time of the loan origination. These projections are based on our recent historical experience and current
business practices and require significant management judgment. We monitor our projections of recoveries through seller/
servicer repurchases to ensure that these projections are reasonable and consistent with our assessment of the credit capacity of
our seller/servicer counterparties. For loans where foreclosure is probable, impairment is measured based upon an estimate of
the fair value of the underlying collateral less estimated disposition costs. Our estimate also considers the effect of historical
home price changes on borrower behavior.
Our reserve estimate also reflects our best projection of defaults we believe are likely to occur as a result of loss events
that have occurred through December 31, 2014 and 2013, respectively. However, fluctuations in the U.S. housing market, the
uncertainty in other macroeconomic factors, and variations in success rates of modification efforts under HAMP and other loan
workout programs, make estimating loss events inherently imprecise.
We validate and update our models and factors to capture changes in actual loss experience, as well as the effects of
changes in underwriting practices and in our loss mitigation strategies. We also consider macroeconomic and other factors that
impact the quality of the loans underlying our portfolio including regional housing trends, applicable home price indices,
unemployment and employment dislocation trends, the effects of changes in government policies and programs, consumer
credit statistics, and the extent of third-party insurance. We consider our assessment of these factors in determining our loan
loss reserves.
We apply proceeds from primary mortgage insurance that is contractually attached to a loan and from other credit
enhancements, including repurchase recoveries, entered into contemporaneously with and in contemplation of a guarantee or
loan purchase transaction, as a recovery of our recorded investment in a charged-off loan, up to the amount of loss recognized
as a charge-off. Proceeds received in excess of our recorded investment in charged-off loans are recorded as a decrease to REO
operations expense in our consolidated statements of comprehensive income. We record receivables for proceeds from primary
mortgage insurance and other credit enhancements, including repurchase recoveries, when the proceeds are estimable and
collectability is reasonably assured. We generally accrue receivables for primary mortgage insurance, pool insurance, and most
other types of credit enhancements at the time of final disposition of the loan as we have a history of collection of these types
of recoveries and the amounts are estimable based on the contractual terms of the agreements. However, due to the uncertainty
of the timing and amount of collections of repurchase recoveries, we generally do not accrue receivables for repurchase
recoveries and instead record repurchase recoveries received on a cash basis.
Multifamily Loans
For multifamily loans identified as impaired, we individually determine the loan loss reserves. Refer to “Impaired Loans”
below for further discussion on individually impaired multifamily loans. Multifamily loans evaluated collectively for
impairment are aggregated into book year vintages and measured by benchmarking published historical commercial mortgage
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