Freddie Mac 2015 Annual Report Download - page 244

Financial Statements Notes to the Consolidated Financial Statements | Note 4
Freddie Mac 2015 Form 10-K 242
recorded investment of $0.3 billion and $0.6 billion, respectively) experienced a payment default within a
year after the borrowers' Chapter 7 bankruptcy.
Single-Family Loans
Impairment of a single-family loan having undergone a TDR is generally measured as the excess of our
recorded investment in the loan over the present value of the expected future cash flows, discounted at
the loan’s original effective interest rate for fixed-rate loans, or at the loan’s effective interest rate prior to
the restructuring for ARM loans. Our expectation of future cash flows incorporates, among other items, an
estimated probability of default which is based on a number of market factors as well as the
characteristics of the loan, such as past due status. Subsequent to the restructuring date, interest income
is recognized at the modified interest rate, subject to our non-accrual policy as discussed in “Interest
Income” above, with all other changes in the present value of expected future cash flows being
recognized as a component of the provision for credit losses in our consolidated statements of
comprehensive income. If we determine that foreclosure on the underlying collateral is probable, we
measure impairment based upon the fair value of the collateral, as reduced by estimated disposition costs
and adjusted for estimated proceeds from insurance and similar sources.
During 2015, approximately 43% of completed single-family loan modifications that were classified as
TDRs involved interest rate reductions and, in certain cases, term extensions and approximately 16%
involved principal forbearance in addition to interest rate reductions and, in certain cases, term
extensions. During 2015, the average term extension was 189 months and the average interest rate
reduction was 0.9% on completed single-family loan modifications classified as TDRs.
Substantially all of our completed single-family loan modifications classified as a TDR during 2015
resulted in a modified loan with a fixed interest rate. However, many of these fixed-rate loans include
provisions for the reduced interest rates to remain fixed for the first five years of the modification and then
increase at a rate of up to one percent per year until the interest rate has been adjusted to the market rate
that was in effect at the time of the modification.
Multifamily Loans
Multifamily impaired loans include TDRs, loans three monthly payments or more past due, and loans that
are deemed impaired based on management judgment. Factors considered by management in
determining whether a loan is impaired include the underlying property’s operating performance as
represented by its current DSCR, available credit enhancements, current LTV ratio, management of the
underlying property, and the property’s geographic location.
Multifamily loans are generally measured individually for impairment based on the fair value of the
underlying collateral, as reduced by estimated disposition costs, as the repayment of these loans is
generally provided from the cash flows of the underlying collateral and any associated credit-
enhancement. Except for cases of fraud and certain other types of borrower defaults, most multifamily
loans are non-recourse to the borrower. As a result, the cash flows of the underlying property (including
any associated credit enhancements) serve as the source of funds for repayment of the loan. Interest
income recognition on multifamily impaired loans is subject to our non-accrual policy as discussed in
“Interest Income” above.
The assessment as to whether a multifamily loan restructuring is considered a TDR contemplates the
unique facts and circumstances of each loan. This assessment considers qualitative factors such as