Freddie Mac 2015 Annual Report Download - page 241

Financial Statements Notes to the Consolidated Financial Statements | Note 4
Freddie Mac 2015 Form 10-K 239
performance data, which includes a history of delinquency, foreclosures, foreclosure alternatives and
modifications. Our loan loss reserve estimate includes projections of:
• Loss mitigation activities, including loan modifications for troubled borrowers and the incidence of
redefault we have experienced on similar loans that have completed a loan modification;
• Recoveries through repurchases by seller/servicers of defaulted loans due to failure to follow
contractual underwriting requirements at the time of loan origination; and
• Defaults we believe are likely to occur as a result of loss events that have occurred through the
respective balance sheet date.
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. 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. In determining our loan loss reserves, we also consider
macroeconomic and other factors that affect 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.
Our single-family loan loss reserve severity is based on the repeat housing sales index and actual REO
dispositions, short sales and third-party sales that incorporate the most recent:
• Six months of sales experience realized on our distressed property dispositions; and
• 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 expectations about recoveries from primary
mortgage insurance or from seller/servicers due to repurchases. We use historical trends in home prices
in our single-family loan loss reserve process, primarily through the use of current 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.
For loans where foreclosure is probable, we measure impairment 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.
We apply proceeds from primary mortgage insurance 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 benefits related to most of our credit enhancements (e.g., primary
mortgage insurance and certain ACIS insurance policies) when realization of our claims is deemed
probable. We record benefits for certain of our other credit enhancements (e.g., certain STACR debt
notes and whole loan securities) when the realized loss event occurs. We generally record repurchase
recoveries on a cash basis due to the uncertainty of the timing and amount of collections of such