Freddie Mac 2004 Annual Report Download - page 196

NOTE 6: LOAN LOSS RESERVES
Freddie Mac maintains separate loan loss reserves for mortgage loans in the Retained portfolio that it
classiÑes as held-for-investment and for credit-related losses associated with certain mortgage loans that
underlie PCs held by third parties.
Table 6.1 summarizes loan loss reserve activity during 2004, 2003 and 2002.
Table 6.1 Ì Detail of Loan Loss Reserves Balance
December 31,
2004 2003 2002
Reserves related to: Reserves related to: Reserves related to:
Total Loan Total Loan Total Loan
Retained PCs Loss Retained PCs Loss Retained PCs Loss
Mortgages Outstanding Reserves Mortgages Outstanding Reserves Mortgages Outstanding Reserves
(dollars in millions)
Beginning balance ÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 174 $125 $ 299 $ 177 $ 88 $ 265 $ 103 $121 $ 224
Provision (beneÑt) for credit
losses(1) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 111 32 143 76 (81) (5) 146 (24) 122
Charge-oÅs(2) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (300) Ì (300) (224) Ì (224) (171) Ì (171)
Recoveries(1)(2) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 160 Ì 160 145 Ì 145 99 Ì 99
Adjustment for change in
accounting(3) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Ì Ì Ì Ì 110 110 Ì Ì Ì
Transfers-out during the
period(4)ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Ì (20) (20) Ì (11) (11) Ì (9) (9)
Other transfers, net, during the
period(5)ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (31) 13 (18) Ì 19 19 Ì Ì Ì
Ending balanceÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 114 $150 $ 264 $ 174 $125 $ 299 $ 177 $ 88 $ 265
(1) Freddie Mac reclassiÑed certain income for the full years ended December 31, 2003 and 2002 from REO operations income
(expense) to Provision (beneÑt) for credit losses to conform with the 2004 presentation. In addition, it 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 and a $6 million decrease in Provision
(beneÑt) for credit losses during 2003 and 2002, respectively. As a result of these reclassiÑcations, it increased recoveries by
$26 million and $15 million for the full years ended December 31, 2003 and 2002, respectively.
(2) It is Freddie Mac's practice to purchase mortgage loans from the pools that underlie PCs principally at the point the mortgage loan is
identiÑed as being 120 days past due. Upon repurchase, that portion of amounts classiÑed in Reserve for guarantee losses on
Participation CertiÑcates that relates to a purchased loan is reclassiÑed to Reserve for losses on mortgage loans held-for-investment.
since all credit losses related to oÅ-balance sheet PCs are preceded by the purchase of a delinquent mortgage loan from the PC pool,
all charge-oÅs or recoveries are presented in the Retained Mortgages columns above.
(3) 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.
(4) 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.
(5) 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.
Impaired Loans
Total loan loss reserves, as presented in ""Table 6.1 Ì Detail of Loan Loss Reserves Balance,'' consists of
a speciÑc valuation allowance related to impaired loans, which are presented in Table 6.2, and an additional
reserve for other probable incurred losses which equaled $261 million, $289 million and $240 million at
December 31, 2004, 2003 and 2002, respectively. The company's recorded investment in impaired loans and
the related valuation allowance are summarized in Table 6.2.
Freddie Mac
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