Freddie Mac 2014 Annual Report Download - page 62

57 Freddie Mac
various restrictions and limitations on our investment activity and our mortgage-related investments portfolio, see “BUSINESS
— Conservatorship and Related Matters — Limits on Investment Activity and Our Mortgage-Related Investments Portfolio.”
(Provision) Benefit for Credit Losses
We maintain loan loss reserves at levels we believe are appropriate to absorb probable incurred losses on mortgage loans
held-for-investment and loans underlying our financial guarantees. Our loan loss reserves are increased through the provision
for credit losses and reduced by a benefit for credit losses and by net charge-offs. The provision for credit losses primarily
reflects our estimate of incurred losses for newly impaired loans as well as changes in our estimates of incurred losses for
previously impaired loans. Assuming that all other factors remain the same, home price growth may reduce the likelihood that
loans will default and may also reduce the amount of credit losses on the loans that do default. Determining the loan loss
reserves is complex and requires significant management judgment about matters that involve a high degree of subjectivity. See
“NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES” for information on our accounting policies for
allowance for loan losses and reserve for guarantee losses and impaired loans.
Our (provision) benefit for credit losses was $(0.1) billion in 2014, $2.5 billion in 2013, and $(1.9) billion in 2012. These
amounts are predominantly related to single-family mortgage loans. The provision for credit losses in 2014 reflects an increase
in our loan loss reserve for newly impaired single-family loans that was substantially offset by benefits recognized for the
positive payment performance of TDR loans. The (provision) benefit for credit losses in 2013 and 2012 reflect: (a) declines in
the volume of newly delinquent single-family loans; (b) lower estimates of incurred loss due to the positive effect of an
increase in national home prices; and (c) benefits associated with the positive payment performance of TDR loans. The benefit
for credit losses in 2013 also reflects $1.7 billion related to settlement agreements with certain sellers to release specified loans
from certain repurchase obligations in exchange for one-time cash payments primarily associated with our Legacy single-
family books. We do not expect any future settlements of representation and warranty claims related to our pre-conservatorship
loan purchases to have a significant effect on our financial results.
Our provision for credit 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, including default rates among borrowers that participated in HARP and HAMP;
(b) the effect of the MHA Program, the servicing alignment initiative, and other current and future loss mitigation efforts;
(c) any government actions or programs that affect the ability of borrowers to refinance underwater mortgages or obtain
modifications; (d) changes in property values; (e) regional economic conditions, including unemployment rates; (f) additional
delays in the foreclosure process; and (g) third-party mortgage insurance coverage and recoveries.
The table below summarizes our loan loss reserves activity during the last five years.
Table 11 — Loan Loss Reserves Activity(1)
Year Ended December 31,
2014 2013 2012 2011 2010
(dollars in millions)
Total loan loss reserves:
Beginning balance $ 24,729 $ 30,890 $ 39,461 $ 39,926 $ 33,857
Adjustments to beginning balance(2) — — — — (186)
Provision (benefit) for credit losses 58 (2,465) 1,890 10,702 17,218
Charge-offs, gross (4,895) (9,002) (13,556) (14,810) (16,322)
Recoveries 1,259 4,314 2,264 2,765 3,363
Transfers, net(3) 736 992 831 878 1,996
Ending balance $ 21,887 $ 24,729 $ 30,890 $ 39,461 $ 39,926
Components of loan loss reserves:
Single-family $ 21,793 $ 24,578 $ 30,508 $ 38,916 $ 39,098
Multifamily $ 94 $ 151 $ 382 $ 545 $ 828
Total loan loss reserve, as a percentage of the total mortgage
portfolio, excluding non-Freddie Mac securities 1.20% 1.37% 1.71% 2.08% 2.03%
(1) Consists of reserves for loans held-for-investment and loans underlying Freddie Mac mortgage-related securities and other guarantee commitments.
(2) Adjustments relate to the adoption of amendments to the accounting guidance for transfers of financial assets and consolidation of VIEs.
(3) Consist primarily of net amounts attributable to recapitalization of past due interest on modified mortgage loans. Transfers in 2010 also include
approximately $0.8 billion related to settlement agreements with certain sellers to compensate us for previously incurred and recognized losses.
Our single-family loan loss reserves declined from $24.6 billion at December 31, 2013 to $21.8 billion at December 31,
2014, reflecting continued high levels of loan charge-offs and continued improvement in loan performance (e.g., fewer single-
family loans becoming seriously delinquent). For information about collectively evaluated and individually evaluated loans on
our consolidated balance sheets, see “Table 4.4 — Net Investment in Mortgage Loans.”
Our loan loss reserves reflect a significant amount of impairment associated with loans classified as TDRs. A TDR is a
loan where we have granted a concession to a borrower who is experiencing financial difficulties. A concession generally
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