Freddie Mac 2005 Annual Report Download - page 121

all single-family accrued interest we deemed uncollectible using internal statistically based models, which estimated accrued
but uncollectible interest. We report this reserve as a reduction to the accrued loan interest balance in Accounts and other
receivables, net.
Impaired loans include single-family loans, both performing and non-performing, that are troubled debt restructurings.
Multifamily impaired loans are deÑned as performing and non-performing troubled debt restructurings, loans 60 days or
more past due (except for certain credit-enhanced loans) and certain mortgage loans with real estate collateral values less
than the outstanding unpaid principal balances. See ""Table 6.2 Ì Impaired Loans'' in ""NOTE 6: LOAN LOSS
RESERVES'' for further discussion.
We have the option to purchase mortgage loans out of PC pools under certain circumstances, such as to resolve an
existing or impending delinquency or default. Our general practice is to purchase the mortgage loans out of pools after the
loans are 120 days delinquent. These loans are recorded on our consolidated balance sheets at fair value.
Charge-OÅs
The loan loss reserves are reduced for charge-oÅs when a loss is speciÑcally identiÑed and is virtually certain of
occurring. For both single-family and multifamily mortgages where the original terms of the mortgage loan agreement are
modiÑed for economic or legal reasons related to the borrower's Ñnancial diÇculties, losses are recorded at the time of
modiÑcation and the loans are subsequently accounted for as troubled debt restructurings. For mortgages that are foreclosed
upon and thus transferred to Real estate owned, net, or REO, or are involved in a pre-foreclosure sale, losses at the time of
transfer or pre-foreclosure sale are charged-oÅ against Reserve for losses on mortgage loans held-for-investment. For
transfers to REO, losses arise when the carrying basis of the loan (including accrued interest) exceeds the fair value of the
foreclosed property (after deduction for estimated selling costs and consideration of third-party insurance or other credit
enhancements). REO gains arise and are recognized immediately in earnings when the fair market value of the acquired
asset (after deduction for estimated disposition costs) exceeds the carrying value of the mortgage (including accrued
interest). REO gains and losses subsequent to foreclosure are included in REO operations income (expense).
Investments in Securities
Investments in securities consist primarily of mortgage-related securities. We classify securities as ""available-for-sale''
or ""trading.'' We currently do not classify any securities as ""held-to-maturity'' although we may elect to do so in the future.
Securities classiÑed as available-for-sale and trading are reported at fair value with changes in fair value included in AOCI
and Gains (losses) on investment activity, respectively. See ""NOTE 16: FAIR VALUE DISCLOSURES'' for more
information on how we determine the fair value of securities.
We record forward purchases and sales of securities that are speciÑcally exempt from the requirements of ""Accounting
for Derivative Instruments and Hedging Activities,'' or SFAS 133, on a trade date basis. Securities underlying forward
purchases and sales contracts that are not exempt from the requirements of SFAS 133 are recorded on the contractual
settlement date with a corresponding commitment recorded on the trade date.
We often retain Structured Securities created through resecuritizations of mortgage-related securities held by us. The
new Structured Securities we acquire in these transactions are classiÑed as available-for-sale or trading based upon the
predominant classiÑcation of the mortgage-related security collateral we contributed.
For most of our investments in securities, interest income is recognized using the retrospective eÅective interest method.
Deferred items, including premiums, discounts and other basis adjustments, are amortized into interest income over the
estimated lives of the securities. We use actual prepayment experience and estimates of future prepayments to determine the
constant yield needed to apply the eÅective interest method. We recalculate the constant eÅective yield based on changes in
estimated prepayments as a result of changes in interest rates and other factors. When the constant eÅective yield changes,
an adjustment to interest income is made for the amount of amortization that would have been recorded if the new eÅective
yield had been applied since the mortgage assets were acquired.
For certain securities investments, interest income is recognized using the prospective eÅective interest method. We
speciÑcally apply this accounting to beneÑcial interests in securitized Ñnancial assets that (a) can contractually be prepaid or
otherwise settled in such a way that we may not recover substantially all of our recorded investment (such as interest-only
strips) or (b) are not of high credit quality at the acquisition date. We recognize as interest income (over the life of these
securities) the excess of all estimated cash Öows attributable to these interests over their principal amount using the
eÅective yield method. We update our estimates of expected cash Öows periodically and recognize changes in calculated
eÅective yield on a prospective basis.
We periodically review securities for potential impairment. We consider a number of factors, including whether the fair
value of a security is less than its amortized cost, the severity of the decline in fair value, credit ratings and the length of time
the investment has been in an unrealized loss position. We also recognize impairment when qualitative factors indicate that
105 Freddie Mac