Freddie Mac 2008 Annual Report Download - page 198

a concession to the borrower experiencing financial difficulties, losses are recorded as charge-offs at the time of modification
and the loans are subsequently accounted for as troubled debt restructurings, or TDRs.
We estimate credit losses related to homogeneous pools of single-family and multifamily loans in accordance with
SFAS 5. In accordance with SFAS 5, we recognize a provision for credit losses when it is probable that a loss has been
incurred and the amount of the loss can be reasonably estimated. We also estimate credit losses in accordance with SFAS
No. 114,“Accounting by Creditors for Impairment of a Loan” or SFAS 114. Loans evaluated under SFAS 114, include
single-family loans and multifamily loans whose contractual terms have previously been modified due to credit concerns
(including TDRs), certain multifamily loans with observable collateral deficiencies or that become 90 days past due for
principal and interest. In accordance with SFAS 114, we consider available evidence, such as the present value of discounted
expected future cash flows, the fair value of collateral for collateral dependent loans, and third-party credit enhancements,
when establishing the loan loss reserves. Determining the adequacy of the loan loss reserves is a complex process that is
subject to numerous estimates and assumptions requiring significant judgment. Loans not deemed to be impaired under
SFAS 114 are grouped with other loans that share common characteristics for evaluation of impairment under SFAS 5.
Single-Family Loan Portfolio
We estimate loan loss reserves on homogeneous pools of single-family loans using statistically based models that
evaluate a variety of factors. The homogeneous pools of single-family mortgage loans are determined based on common
underlying characteristics, including year of origination, loan-to-value ratio and geographic region. In determining the loan
loss reserves for single-family loans at the balance sheet date, we evaluate factors including, but not limited to:
• the year of loan origination;
• geographic location;
• actual and estimated amounts for loss severity trends for similar loans;
• default experience;
• expected ability to partially mitigate losses through a level of estimated successful loan modification or other
alternatives to foreclosure;
• expected proceeds from mortgage insurance contracts that are contractually attached to a loan or other credit
enhancements that were entered into contemporaneous with and in contemplation of a guarantee or loan purchase
transaction;
• expected repurchases of mortgage loans by sellers under their obligations to repurchase loans that are inconsistent
with certain representations and warranties made at the time of sale;
• counterparty credit of mortgage insurers and seller/servicers;
• pre-foreclosure real estate taxes and insurance;
• estimated selling costs should the underlying property ultimately be sold; and
• trends in the timing of foreclosures.
Our loan loss reserves reflect our best estimates of incurred losses. Our loan loss reserve estimate includes projections
related to strategic loss mitigation activities, including a higher volume of loan modifications for troubled borrowers, and
projections of recoveries through repurchases by seller/servicers of defaulted loans due to failure to follow contractual
underwriting requirements at the time of the loan origination. We apply estimated proceeds from primary mortgage insurance
that is contractually attached to a loan and other credit enhancements entered into contemporaneous with and in
contemplation of a guarantee or loan purchase transaction as a recovery of our recorded investment in a charged-off loan, up
to the amount of loss recognized as a charge-off. Proceeds from credit enhancements received in excess of our recorded
investment in charged-off loans are recorded in real estate owned operations expense in the consolidated statements of
operations when received.
Our reserve estimate also reflects our best projection of defaults we believe are likely to occur as a result of loss events
that have occurred through December 31, 2008 and 2007, respectively. However, the substantial deterioration in the national
housing market and the uncertainty in other macroeconomic factors makes forecasting of default rates increasingly imprecise.
The inability to realize the benefits of our loss mitigation plans, a lower realized rate of seller/servicer repurchases, further
declines in home prices or default rates that exceed our current projections will cause our losses to be significantly higher
than those currently estimated.
We validate and update the models and factors to capture changes in actual loss experience, as well as changes in
underwriting practices and in our loss mitigation strategies. We also consider macroeconomic and other factors that impact
the quality of the loans underlying our portfolio including regional housing trends, applicable home price indices,
unemployment and employment dislocation trends, consumer credit statistics and the extent of third party insurance. We
determine our loan loss reserves based on our assessment of these factors.
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