Freddie Mac 2005 Annual Report Download - page 85

Table 38 Ì Non-Performing Assets
December 31,
2005 2004 2003 2002 2001
(in millions)
Troubled debt restructurings(1) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $2,605 $2,297 $ 2,370 $2,164 $1,617
Serious delinquencies(2) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 6,438 6,318 7,470 6,830 5,070
Non-accrual loans(3) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 1 27 21 47 44
Subtotal(4) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 9,044 8,642 9,861 9,041 6,731
REO, net(5) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 629 741 795 594 447
TotalÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $9,673 $9,383 $10,656 $9,635 $7,178
(1) Includes previously delinquent loans whose terms have been modiÑed. Some of these loans may be performing as a result of the modiÑed terms.
Troubled debt restructurings are considered part of our impaired loan population. Figures presented are based on unpaid principal balances of mortgage
loans. See ""NOTE 6: LOAN LOSS RESERVES'' to the consolidated Ñnancial statements for additional information on impaired loans.
(2) Includes single-family loans 90 days or more delinquent. For multifamily loans, the population includes all loans 60 days or more delinquent, but less
than 90 days delinquent. Also included within this population are multifamily loans greater than 90 days past due but where principal and interest are
being paid to us under the terms of a credit enhancement agreement. Also includes seriously delinquent loans in alternative collateral deals, which
totaled $1,449 million, $2,234 million, $2,793 million, $2,290 million and $1,052 million at December 31, 2005, 2004, 2003, 2002 and 2001,
respectively. For more information about delinquency rates, see ""NOTE 6: LOAN LOSS RESERVES Ì Table 6.3 Ì Delinquency Performance'' to
the consolidated Ñnancial statements.
(3) Non-accrual mortgage loans are loans for which interest income is recognized only on a cash basis and only includes multifamily loans that are 90 days
or more delinquent. No single-family mortgage loans are classiÑed as non-accrual.
(4) For the year ended December 31, 2005, $481 million was included in net interest income and management and guarantee income related to these
mortgage loans (excluding interest income related to alternative collateral deals). The amount of forgone net interest income and additional
management and guarantee income that we would have recorded had these loans been current is $140 million for the year ended December 31, 2005.
(5) For more information about REO balances, see ""NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES'' and ""NOTE 7: REAL
ESTATE OWNED'' to the consolidated Ñnancial statements.
Loss mitigation activities are a key component of our strategy for managing and resolving troubled assets and lowering
credit losses. Our loss mitigation strategy emphasizes early intervention in delinquent mortgages and alternatives to
foreclosure. Other single-family loss mitigation activities include providing our single-family servicers with default
management tools designed to help them manage non-performing loans more eÅectively. Foreclosure alternatives are
intended to reduce the number of delinquent mortgages that proceed to foreclosure and, ultimately, mitigate our total credit
losses by eliminating a portion of the costs related to foreclosed properties. Repayment plans, the most common type of
foreclosure alternative, mitigate our credit losses because they assist borrowers in returning to compliance with the original
terms of their mortgages. Loan modiÑcations, the second most common type of foreclosure alternative, involve changing the
terms of a mortgage and therefore are a more favorable alternative to the borrower during a declining interest-rate
environment. Forbearance agreements, the third most common type of foreclosure alternative, provide a temporary
suspension of the foreclosure process to allow additional time for the borrower to return to compliance with the original terms
of the borrower's mortgage or to implement another foreclosure alternative. The total number of loans with foreclosure
alternatives was approximately 60,000, 48,300 and 46,900 for the years ended December 31, 2005, 2004 and 2003,
respectively. The increase in foreclosure alternatives in 2005 was primarily driven by forbearance agreements related to
single-family loans aÅected by Hurricane Katrina.
We require multifamily servicers to closely manage mortgage loans they have sold us in order to mitigate potential
losses. Generally, on an annual basis, for loans over $1 million, servicers must submit an assessment of the mortgaged
property to us based on the servicer's analysis of Ñnancial and other information about the property and, except for certain
higher performing loans, an inspection of the property. We evaluate these assessments internally and may direct the servicer
to take speciÑc actions to reduce the likelihood of delinquency or default. If a loan defaults despite this intervention, we
may oÅer a foreclosure alternative to the borrower. For example, we may modify the terms of a multifamily mortgage loan,
which gives the borrower an opportunity to bring the loan current and allows the borrower to retain ownership of the
property. Since multifamily seller/servicers are an important part of our loss mitigation process, we rate their performance
regularly and conduct on-site reviews of their servicing operations to conÑrm compliance with our standards.
Other Credit Risk Management Activities. We purchase a broad range of mortgage products with diÅering degrees of
default risk. To compensate us for unusual levels of risk in some mortgage products we may charge incremental fees above a
base guarantee fee calculated based on credit risk factors such as the mortgage product type, loan purpose, loan-to-value
ratio, and other loan or borrower attributes. In addition, we occasionally use Ñnancial incentives and credit derivatives, as
described below, in situations where we believe they will beneÑt our credit risk management strategy. These arrangements
are intended to reduce our credit-related expenses and to help us manage purchase quality, thereby improving our overall
returns.
In some cases, we provide Ñnancial incentives in the form of lump sum payments to selected seller/servicers if they
deliver a speciÑed volume or percentage of mortgage loans meeting speciÑed credit risk standards over a deÑned period of
69 Freddie Mac