Freddie Mac 2006 Annual Report Download - page 90

Table 46 Ì Loan Loss Reserves Activity
Year Ended December 31,
2006 2005 2004 2003 2002
(dollars in millions)
Total loan loss reserves:(1)
Beginning balance ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 414 $ 264 $ 299 $ 265 $ 224
Provision (beneÑt) for credit losses ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 215 251 143 (5) 122
Charge-oÅs, grossÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (313) (294) (300) (224) (171)
Recoveries(2) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 166 185 160 145 99
Charge-oÅs, net ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (147) (109) (140) (79) (72)
Adjustment for change in accounting(3) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Ì Ì Ì 110 Ì
Transfers-outÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (71) (11) (20) (11) (9)
Other transfers, net(4) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 9 19 (18) 19 Ì
Ending balanceÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 420 $ 414 $ 264 $ 299 $ 265
Charge-oÅs, net to Total mortgage portfolio(5)ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 1.0 bps 0.8 bps 1.1 bps 0.7 bps 0.7 bps
Coverage ratio (reserves to charge-oÅs, net) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 2.9 3.8 1.9 3.8 3.7
(1) Includes Reserves for loans held-for-investment in the Retained portfolio and Reserves for guarantee losses on Participation CertiÑcates.
(2) Includes recoveries of charge-oÅs primarily resulting from foreclosure alternatives and REO acquisitions on loans where a share of default risk has been
assumed by mortgage insurers, servicers or third parties through credit enhancements. Recoveries of charge-oÅs through credit enhancements are
limited in some instances to amounts less than the full amount of the loss.
(3) On January 1, 2003, $110 million of recognized Guarantee obligation attributable to estimated incurred losses on outstanding PCs or Structured
Securities was reclassiÑed to Reserve for guarantee losses on Participation CertiÑcates.
(4) Represents the portion of the Guarantee obligation recognized through Guarantor Swap transactions or upon the sale of PCs and 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 amount includes an increase (reduction) of loan loss reserves of $9 million and $(31) million in 2005 and 2004,
respectively, related to prior period adjustments for which the related income was recorded in Other income.
(5) Calculated using the average Total mortgage portfolio, excluding non-Freddie Mac mortgage-related securities and that portion of Structured
Securities that is backed by Ginnie Mae CertiÑcates.
Our total loan loss reserves increased in 2006 as additional reserves we recorded to reÖect incurred losses related to our
single-family portfolio were partly oÅset by the reversal of $82 million of the Provision for credit losses recorded in 2005
associated with Hurricane Katrina. The increase in loan loss reserves during 2005 was primarily related to our estimate of
incurred losses associated with Hurricane Katrina which was $128 million at December 31, 2005. See ""CONSOLIDATED
RESULTS OF OPERATIONS Ì Non-Interest Expense Ì Provision for Credit Losses,'' for additional information.
Credit Risk Sensitivity. Our credit risk sensitivity analysis assesses the assumed increase in the present value of
expected single-family mortgage portfolio credit losses over ten years as the result of an estimated immediate 5 percent
decline in home prices nationwide, followed by a return to more normal growth in home prices based on historical
experience. We use an internally developed Monte Carlo simulation-based model to generate our credit risk sensitivity
analyses. The Monte Carlo model uses a simulation program to generate numerous potential interest-rate paths that, in
conjunction with a prepayment model, are used to estimate mortgage cash Öows along each path. In the credit risk sensitivity
analysis, we adjust the home-price assumption used in the base case to estimate the level and sensitivity of potential credit
costs resulting from a sudden decline in home prices. Our credit risk sensitivity results are presented in ""RISK
MANAGEMENT AND DISCLOSURE COMMITMENTS.''
Institutional Credit Risk
Our primary institutional credit risk exposure, other than counterparty credit risk exposure relating to derivatives, arises
from agreements with the following entities: mortgage loan insurers; mortgage seller/servicers; issuers, guarantors or third
party providers of credit enhancements on non-Freddie Mac mortgage-related securities held in our Retained portfolio;
mortgage investors and originators; and issuers, guarantors and insurers of investments held in our Cash and investments
portfolio. See ""RISK MANAGEMENT Ì Interest-Rate Risk and Other Market Risks Ì Use of Derivatives and Interest-
Rate Risk Management'' for information concerning counterparty credit risk exposure relating to derivatives.
Mortgage Loan Insurers. We have institutional credit risk relating to the potential insolvency or non-performance of
mortgage insurers that insure mortgages we purchase or guarantee. We manage this risk by establishing eligibility standards
for mortgage insurers and by regularly monitoring our exposure to individual mortgage insurers. We also monitor the
mortgage insurers' credit ratings, as provided by nationally recognized statistical rating organizations, and we periodically
review the methods used by the nationally recognized statistical rating organizations. We also perform periodic on-site
reviews of mortgage insurers to conÑrm compliance with our eligibility requirements and to evaluate their management and
control practices. In addition, state insurance authorities regulate mortgage insurers. See ""NOTE 17: CONCENTRATION
OF CREDIT AND OTHER RISKS'' to our consolidated Ñnancial statements for additional information.
Mortgage Seller/Servicers. We are exposed to institutional credit risk arising from the insolvency of or non-
performance by our mortgage seller/servicers, including non-performance of their repurchase obligations arising from the
representations and warranties made to us for loans they underwrote and sold to us. The servicing fee charged by mortgage
78 Freddie Mac