Freddie Mac 2015 Annual Report Download - page 249

Financial Statements Notes to the Consolidated Financial Statements | Note 5
Freddie Mac 2015 Form 10-K 247
NOTE 5: REAL ESTATE OWNED
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.
Year Ended December 31,
(in millions) 2015 2014 2013
Beginning balance — REO $ 2,684 $4,602 $4,407
Additions 2,243 4,110 6,498
Dispositions (3,145) (6,028) (6,303)
Ending balance — REO 1,782 2,684 4,602
Beginning balance, valuation allowance (126)(51)(29)
Change in valuation allowance 69 (75)(22)
Ending balance, valuation allowance (57)(126)(51)
Ending balance — REO, net $ 1,725 $2,558 $4,551
We obtain REO properties when we are the highest bidder at foreclosure sales of properties that secure
single-family and multifamily loans owned by us or 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). 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. Upon acquiring multifamily properties,
we may operate them using third-party property management firms for a period of time to stabilize value
and then sell the properties through commercial real estate brokers.
REO is initially recorded at fair value less estimated costs to sell and is subsequently carried at the lower
of cost or fair value less estimated costs to sell. When we acquire REO, losses arise when the recorded
investment in the loan (including accrued interest) exceeds the fair value of the foreclosed property, net of
estimated costs to sell and expected recoveries through credit enhancements. Losses are charged off
against the allowance for loan losses at the time of REO acquisition. REO gains arise and are recognized
immediately in earnings when the fair value of the foreclosed property less estimated costs to sell plus
expected recoveries through credit enhancements exceeds the recorded investment in the loan (including
all amounts due from the borrower).
Benefits we expect to receive from most of our credit enhancements (e.g., primary mortgage insurance
and certain ACIS insurance policies) are recorded when realization of our claims is deemed probable.
Benefits we expect to receive from certain of our other credit enhancements (e.g., certain STACR debt
notes and whole loan securities) are recorded when the realized loss event occurs. We record benefits
related to repurchase recoveries on a cash basis due to uncertainty of the timing and amount of
collections.
Material development and improvement costs relating to REO are capitalized. Operating expenses
specifically identifiable with an REO property are included in REO operations (expense) income in our
consolidated statements of comprehensive income; all other expenses are recognized within other
administrative expenses in our consolidated statements of comprehensive income. Declines in the fair