Freddie Mac 2006 Annual Report Download - page 119

Non-Performing Loans
Non-performing loans consist of: (a) loans whose terms have been modiÑed due to previous delinquency or risk of
delinquency and, therefore, are now considered part of our impaired loan population, referred to as ""troubled debt
restructurings,'' (b) serious delinquencies and (c) non-accrual loans. Serious delinquencies are those single-family loans that
are 90 days or more past due or in foreclosure, and multifamily loans that are more than 60 days but less than 90 days past
due. This category also includes multifamily loans that are 90 days or more past due but where principal and interest are
being paid to us under the terms of a credit enhancement agreement. Non-performing loans generally accrue interest in
accordance with their contractual terms unless they are in non-accrual status. Non-accrual loans are loans where interest
income is recognized on a cash basis, and only include multifamily loans 90 days or more past due. For non-accrual loans,
any existing accruals are reversed against interest income unless they are both well secured and in the process of collection.
For single-family retained and repurchased mortgage loans, interest income is accrued; however, we begin to fully reserve
for accrued interest on these loans after a mortgage becomes 90 days past due. For single-family loans underlying
outstanding PCs and Structured Securities held by third parties, we reserve for lost interest using a statistically based model.
Impaired loans include single-family loans, both performing and non-performing, that are troubled debt restructurings
and delinquent loans purchased from PC pools whose fair value was less than acquisition cost at the date of purchase.
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. Loans that are purchased from PC pools held by third parties are recorded on our
consolidated balance sheets at fair value at the date of purchase and are subsequently carried at amortized cost. Loans
purchased out of PC pools held in the Retained portfolio are recorded on our consolidated balance sheets at the adjusted cost
basis. Increases in market interest rates and declining market values for delinquent loans resulted in all loans purchased out
of PC pools during 2006 being classiÑed as impaired loans. We record realized losses on certain guaranteed loans when the
fair value is less than the unpaid principal balance, net of related reserves, as of the date of our repurchase. For loans that
later re-perform, a portion of the valuation discount applied when the loan was repurchased will be accreted back into
income over the estimated life of the loan.
Charge-OÅs
The loan loss reserves are reduced for charge-oÅs when a loss is speciÑcally identiÑed. 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
SFAS No. 133, ""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.
107 Freddie Mac