Freddie Mac 2004 Annual Report Download - page 168

are reÖected through either (a) charging-oÅ such balances (net of recoveries) where realized losses are
recorded or (b) a reduction in the (Provision) beneÑt for credit losses.
Loan loss reserves are also increased upon the sale of PCs and Structured Securities for which Freddie
Mac incurred losses on the underlying mortgage loans while such securities were held by Freddie Mac. From
an earnings perspective, such incurred losses are recognized as a component of Gains (losses) on investment
activity through, where applicable (a) the subsequent measurement of corresponding PC residuals that are
classiÑed as trading (and to which such PCs or Structured Securities relate), (b) the recognition of
impairment-related losses on such securities (i.e., to the extent that such securities do not have recognized PC
residual balances associated with them that are classiÑed as trading) or (c) as a component of gain (loss) on
sale of such securities. Upon the sale of such PCs or Structured Securities, incurred losses are classiÑed on the
consolidated balance sheets as Reserve for guarantee losses on Participation CertiÑcates.
Single-family loan portfolio
In accordance with SFAS 5, Freddie Mac estimates incurred credit losses on homogeneous pools of
single-family loans using statistically-based models that evaluate a variety of factors, resulting in a range of
probable losses related to impaired single-family mortgage loans at the balance sheet date. The homogeneous
pools of single-family mortgage loans are determined based on common underlying characteristics including
year of origination, loan-to-value ratio and geographic region. In determining the loan loss reserves for single-
family loans, Freddie Mac determines the point within the range of probable losses that represents the best
estimate of incurred losses.
The factors used to estimate incurred losses at period-end include:
‚ actual and estimated loss severity trends for similar loans;
‚ actual and estimated default experience;
‚ actual and estimated proceeds from PMI and other credit enhancements;
‚ actual and estimated pre-foreclosure real estate taxes and insurance;
‚ the year of the loan origination;
‚ geographic location; and
‚ estimated selling costs should the underlying property ultimately be foreclosed upon and sold.
Freddie Mac frequently validates and updates the models and factors to capture changes in actual loss
experience, as well as changes in underwriting practices and in its loss mitigation strategies. Freddie Mac also
considers macroeconomic and other factors including:
‚ regional housing trends;
‚ applicable home price indices;
‚ unemployment and employment dislocation trends;
‚ consumer credit statistics;
‚ recent changes in credit underwriting practices;
‚ extent of third party insurance; and
‚ other measurable factors that inÖuence the quality of the portfolio at the balance sheet date.
Favorable trends in these macroeconomic and other factors produce a reserve requirement toward the
lower end of the range; adverse trends in these factors produce a reserve requirement toward the higher end of
the range. Management then adjusts the level of loan loss reserves to the level required based on its best
assessment of these factors.
Multifamily loan portfolio
Freddie Mac also estimates a range of incurred credit losses on the multifamily loan portfolio.
Management considers all available evidence in determining this range including: adequacy of third-party
credit enhancements and an evaluation of the repayment prospects of, and fair value of collateral underlying
the individual loans. The review of the repayment prospects and value of collateral underlying individual loans
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