Freddie Mac 2014 Annual Report Download - page 182

177 Freddie Mac
Loans may also be initially classified as TDRs because the borrowers’ debts were discharged in Chapter 7 bankruptcy
(and the loan was not already classified as a TDR for other reasons). During the years ended December 31, 2014 and 2013,
4,206 and 17,225, respectively, of such loans (with a post-TDR recorded investment of $0.6 billion and $2.8 billion,
respectively) experienced a payment default within a year after the borrowers' bankruptcy.
NOTE 6: REAL ESTATE OWNED
We obtain REO properties: (a) when we are the highest bidder at foreclosure sales of properties that collateralize single-
family and multifamily mortgage loans owned by us; or (b) when a delinquent borrower chooses to transfer the mortgaged
property to us in lieu of going through the foreclosure process (i.e., deed in lieu of foreclosure). Upon acquiring single-family
properties, we evaluate their marketability, including determining an estimated market value, and then select an appropriate
disposition path (e.g., listing for sale with a real estate broker, or auction). Upon acquiring multifamily properties, we may
operate them using third-party property management firms for a period to stabilize value and then sell the properties through
commercial real estate brokers. However, certain jurisdictions require a period of time after foreclosure during which the
borrower may reclaim the property. During the period when the borrower may reclaim the property, or we are completing the
eviction process, we are not able to market the property and this extends our holding period for these properties. See “NOTE 1:
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES” for a discussion of our significant accounting policies for REO.
The table below provides a summary of the change in the carrying value of our combined single-family and multifamily
REO balances. For the periods presented in the table below, the weighted average holding period for our disposed properties
was less than one year.
Table 6.1 — REO
Year Ended December 31,
2014 2013 2012
(in millions)
Beginning balance — REO $ 4,602 $ 4,407 $ 5,827
Additions 4,110 6,498 7,029
Dispositions (6,028) (6,303) (8,449)
Ending balance — REO 2,684 4,602 4,407
Beginning balance, valuation allowance (51) (29) (147)
Change in valuation allowance (75) (22) 118
Ending balance, valuation allowance (126) (51) (29)
Ending balance — REO, net $ 2,558 $ 4,551 $ 4,378
The REO balance, net at December 31, 2014 and 2013 associated with single-family properties was $2.6 billion and $4.5
billion, respectively, and the balance associated with multifamily properties was $0 and $10 million, respectively. The
Southeast region represented approximately 36% and 34% of our single-family REO additions during 2014 and 2013,
respectively, based on the number of properties, and the North Central region represented approximately 25% and 29% of our
single-family REO additions during these periods. Our single-family REO inventory consisted of 25,768 properties and 47,307
properties at December 31, 2014 and 2013, respectively. In recent years, the foreclosure process has been significantly slowed
in many geographic areas, particularly in states that require a judicial foreclosure process, which extends the time it takes for
loans to be foreclosed upon and the underlying property to transition to REO. See “NOTE 15: CONCENTRATION OF
CREDIT AND OTHER RISKS” for additional information about regional concentrations in our investments in mortgage loans.
Our REO operations expenses include: (a) REO property expenses; (b) net gains or losses incurred on disposition of REO
properties; (c) adjustments to the holding period allowance associated with REO properties to record them at the lower of their
carrying amount or fair value less the estimated costs to sell; and (d) recoveries from insurance and other credit enhancements.
An allowance for estimated declines in the REO fair value during the period properties are held reduces the carrying value of
REO property. Excluding holding period valuation adjustments and recoveries, we recognized gains of $461 million, $761
million, and $693 million on REO dispositions during 2014, 2013, and 2012, respectively. We increased (decreased) our
valuation allowance for properties in our REO inventory by $176 million, $58 million, and $(7) million in 2014, 2013, and
2012, respectively.
Non-cash Investing and Financing Activities
REO property acquisitions as a result of the derecognition of mortgage loans held on our consolidated balance sheets
upon foreclosure of the underlying collateral or deed in lieu of foreclosure represent non-cash transfers. During the years ended
December 31, 2014, 2013, and 2012, we had transfers of $3.8 billion, $6.1 billion, and $6.8 billion, respectively, from
mortgage loans to REO.
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