Freddie Mac 2004 Annual Report Download - page 144

Table 71 summarizes our loan loss reserves activity.
Table 71 Ì Loan Loss Reserves Activity
Year Ended December 31,
2004 2003 2002 2001 2000
(dollars in millions)
Total loan loss reserves(1):
Beginning balance ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 299 $ 265 $ 224 $ 229 $ 217
Provision (beneÑt) for credit losses(2) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 143 (5) 122 33 82
Charge-oÅs ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (300) (224) (171) (129) (124)
Recoveries(2)(3) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 160 145 99 101 62
Charge-oÅs, net(2) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (140) (79) (72) (28) (62)
Adjustment for change in accounting(4) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Ì 110ÌÌÌ
Transfers-out during the period(5) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (20) (11) (9) (10) (8)
Other transfers, net during the period(6) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (18) 19ÌÌÌ
Ending balance ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 264 $ 299 $ 265 $ 224 $ 229
Charge-oÅs, net to Total mortgage portfolio(7) ÏÏÏÏÏÏÏÏÏÏÏ 1.1bp 0.7bp 0.7bp 0.3bp 0.7bp
Coverage ratio (reserves to charge-oÅs, net) ÏÏÏÏÏÏÏÏÏÏÏÏ 1.9 3.8 3.7 8.0 3.7
(1) Includes Reserves for loans held-for-investment in the Retained portfolio and Reserves for guarantee losses on Participation
CertiÑcates. See ""NOTE 6: LOAN LOSS RESERVES'' to the consolidated Ñnancial statements for more details.
(2) We reclassiÑed certain income for the full years ended December 31, 2003, 2002, 2001 and 2000 from REO operations income
(expense) to (Provision) beneÑt for credit losses to conform with the 2004 presentation. In addition, we reclassiÑed certain expenses
related to uncollectible interest on PCs held by third parties from Management and guarantee income to (Provision) beneÑt for
credit losses to conform with the 2004 presentation. This resulted in a $15 million decrease, $6 million decrease, $1 million increase
and $3 million increase in (Provision) beneÑt for credit losses during 2003, 2002, 2001 and 2000, respectively. As a result of these
reclassiÑcations, we increased recoveries by $26 million, $15 million, $9 million and $5 million for the full years 2003, 2002, 2001 and
2000, respectively.
(3) Includes recoveries of charge-oÅs primarily resulting from foreclosure alternatives and REO acquisitions on loans where a share of
default risk has been assumed by servicers, mortgage insurers or third parties through credit enhancements. Recoveries of charge-oÅs
through credit enhancements are limited in many instances to amounts less than the full amount of the loss.
(4) On January 1, 2003, $110 million of recognized guarantee obligations that was attributable to estimated incurred losses on
outstanding PCs or Structured Securities was reclassiÑed to Reserve for guarantee losses on Participation CertiÑcates.
(5) Represents the reclassiÑcation of the reserve amount attributable to uncollectible interest on outstanding PCs and Structured
Securities, which is included as an oÅset to the related receivable balance within Accounts and other receivables, net on the
consolidated balance sheets.
(6) Represents the reclassiÑcation of the portions of guarantee obligations recognized upon the sale of PCs or Structured Securities that
corresponds to incurred credit losses reclassiÑed to Reserve for guarantee losses on Participation CertiÑcates upon initial recognition
of a guarantee obligation. In addition, the 2004 amount includes a reduction of loan loss reserves of $31 million related to prior period
adjustments for which the related income was recorded in Other income.
(7) Calculated using the average Total mortgage portfolio, excluding non-Freddie Mac mortgage-related securities and that portion of
Structured Securities that is backed by Ginnie Mae CertiÑcates.
We maintain two loan loss reserves Ì Reserve for losses on mortgage loans held-for-investment and
Reserve for guarantee losses on Participation CertiÑcates Ì at levels we deem adequate to absorb probable
incurred losses on mortgage loans held-for-investment in the Retained portfolio and certain mortgages
underlying PCs held by third parties. In certain circumstances, incurred losses related to PCs we hold are
captured as part of mark-to-market adjustments that are recognized in connection with PC residuals, which
represent the portion of the fair value of the PCs related to guarantee asset and guarantee obligation. See
""CRITICAL ACCOUNTING POLICIES AND ESTIMATES Ì Credit Losses'' and ""NOTE 1: SUM-
MARY OF SIGNIFICANT ACCOUNTING POLICIES'' to the consolidated Ñnancial statements for
further information.
Loan loss reserves are increased through periodic charges to the provision for credit losses and decreased
by charges-oÅs, net of recoveries. We record charge-oÅs to the loan loss reserves when the loss is speciÑcally
identiÑable and virtually certain. For mortgages that are transferred to REO or involved in a pre-foreclosure
sale, we record losses at the time of transfer or sale. For loans that have been modiÑed, losses are recorded at
the time of modiÑcation if the modiÑcation is a troubled debt restructuring.
As shown in ""Table 71 Ì Loan Loss Reserves Activity,'' total loan loss reserves decreased in 2004. This
decrease was primarily due to transfers out from the reserves related to uncollectible interest and a reduction
of reserves related to prior period adjustments for which the related income was recorded in Other income.
Credit Risk Sensitivity. As a part of our voluntary disclosure commitments made in October 2000, we
provide public disclosure of credit risk sensitivity results on a quarterly basis on our website. The credit risk
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