Freddie Mac 2008 Annual Report Download - page 157

Loans Purchased Under Financial Guarantees
As securities administrator, we are required to purchase a mortgage loan from a mortgage pool if a court of competent
jurisdiction or a duly authorized federal government agency determines that our purchase of the mortgage was unauthorized
and a cure is not practicable without unreasonable effort or expense, or if such a court or government agency requires us to
repurchase the mortgage. Additionally, we are required to purchase all convertible ARMs when the borrower exercises the
option to convert the interest rate from an adjustable rate to a fixed rate; and in the case of balloon/reset loans, shortly before
the mortgage reaches its scheduled balloon reset date. For the years ended December 31, 2008 and 2007, we repurchased
$2.0 billion and $593 million, respectively, of such convertible ARMs and balloon/reset loans. The increase in these
repurchases during 2008 was primarily due to higher volumes of convertible ARM loans we securitized during 2005 to 2007,
which was a period of generally declining mortgage interest rates.
As guarantor, we also have the right to purchase mortgages that back our PCs and Structured Securities (other than
Structured Transactions) from the underlying loan pools in certain circumstances, such as when they are significantly past
due. This right to repurchase collateral is known as our repurchase option. Effective December 2007, we made certain
operational changes for purchasing delinquent loans from PC pools, which significantly reduced the volume of our
delinquent loan purchases. See “BUSINESS — Our Business and Statutory Mission — Our Business Segments — Single-
Family Guarantee Segment — PC Trust Documents” for further information. We may consider further changes to our practice
concerning our election to repurchase single-family mortgage loans during 2009, in order to manage our capital and cash
flow or other factors. We record at fair value loans that we purchase in connection with our performance under our financial
guarantees and record losses on certain loans purchased on our consolidated statements of operations in order to reduce our
net investment in such loans to their fair value. The table below presents activities related to loans acquired under financial
guarantees and reduced to fair value during 2008 and 2007.
Table 63 — Changes in Loans Purchased Under Financial Guarantees
(1)
Unpaid
Principal Balance
Purchase
Discount
Loan Loss
Reserves Net Investment
2008
(in millions)
Beginning balance ................................................ $7,001 $(1,767) $ (2) $ 5,232
Purchases of loans................................................ 5,570 (2,308) — 3,262
Provision for credit losses . ......................................... — — (89) (89)
Principal repayments .............................................. (768) 263 2 (503)
Troubled debt restructurings
(2)
....................................... (175) 49 1 (125)
Foreclosures, transferred to REO . . . ................................... (2,106) 666 8 (1,432)
Ending balance
(3)
................................................ $9,522 $(3,097) $(80) $ 6,345
Unpaid
Principal Balance
Purchase
Discount
Loan Loss
Reserves Net Investment
2007
(in millions)
Beginning balance ................................................ $2,983 $ (220) $ — $ 2,763
Purchases of loans................................................ 8,833 (2,364) — 6,469
Provision for credit losses . ......................................... — — (12) (12)
Principal repayments .............................................. (1,486) 197 4 (1,285)
Troubled debt restructurings ......................................... (694) 129 — (565)
Foreclosures, transferred to REO . . . ................................... (2,635) 491 6 (2,138)
Ending balance
(3)
................................................ $7,001 $(1,767) $ (2) $ 5,232
(1) Consists of seriously delinquent or modified loans purchased at our option in performance of our financial guarantees and in accordance with Statement
of Position No. 03-3, “Accounting for Certain Loans or Debt Securities Acquired in a Transfer,” or SOP 03-3.
(2) Excludes modifications involving capitalization, or addition, of past due amounts to the balance of the loan to return to current status during 2008.
(3) Includes loans that have subsequently returned to current status under the original loan terms.
Our net investment in loans purchased under our financial guarantees with reductions to fair value increased
approximately 21% in 2008. We purchased approximately $5.6 billion in unpaid principal balances of these loans with a fair
value at acquisition of $3.3 billion during 2008. Loans acquired in 2008 added approximately $2.3 billion of purchase
discount, which is comprised of $0.7 billion that was previously recorded on our consolidated balance sheets as loan loss
reserve and $1.6 billion of losses on loans purchased. We expect repurchase activity to increase in 2009 because the volume
of our loan modifications is expected to significantly increase and many more of our delinquent loans will reach 24 months
of delinquency. We expect that we will continue to incur significant losses on the purchase of delinquent or modified loans
in 2009. However, the volume and severity of these losses is dependent on many factors, including the effects of our change
in practice for repurchases and changes in fair values of delinquent or modified loans, which are impacted by regional
changes in home prices.
As of December 31, 2008, the cure rates for delinquent or modified loans purchased out of PCs during 2008 and 2007
were approximately 67% and 40%, respectively. The cure rate is the percentage of loans purchased from PCs under our
154 Freddie Mac