Freddie Mac 2008 Annual Report Download - page 199

Multifamily Loan Portfolio
We estimate loan loss reserves on the multifamily loan portfolio based on available evidence, including but not limited
to, adequacy of third-party credit enhancements, evaluation of the repayment prospects, and fair value of collateral
underlying the individual loans. We also consider macroeconomic and other factors that impact the quality of the portfolio
including regional housing trends as well as unemployment and employment dislocation trends. The review of the repayment
prospects and value of collateral underlying individual loans is based on property-specific and market-level risk
characteristics including apartment vacancy and rental rates.
Non-Performing Loans
Non-performing loans consist of: (a) loans whose contractual terms have been modified due to the financial difficulties
of the borrower (TDRs), and (b) serious delinquencies. Serious delinquencies are those single-family and multifamily loans
that are 90 days or more past due or in foreclosure. 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 includes single-family and multifamily loans 90 days or more past due.
Impaired Loans
A loan is considered impaired when it is probable to not receive all amounts due (principal and interest), in accordance
with the contractual terms of the original loan agreement. Impaired loans include single-family loans, both performing and
non-performing, that are TDRs and delinquent or modified loans purchased from PC pools whose fair value was less than
acquisition cost at the date of purchase that are subject to American Institute of Certified Public Accountants, or AICPA,
Statement of Position 03-3, “Accounting for Certain Loans or Debt Securities Acquired in a Transfer” or SOP 03-3.
Multifamily impaired loans include loans whose contractual terms have previously been modified due to credit concerns
(including TDRs), certain loans with observable collateral deficiencies and loans 90 days or more past due (except for certain
credit-enhanced loans). Single family impaired loans are aggregated based on similar risk characteristics and are measured
for impairment using the present value of the future expected cash flows. Multifamily loans are measured individually for
impairment based on the fair value of the underlying collateral as the repayment of these loans is generally provided from
the cash flows of the underlying collateral. Except for cases of fraud and other unusual circumstances, multifamily loans are
non-recourse to the borrower so only the cash flows of the underlying property serve as the source of funds for repayment of
the loan.
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. Through November 2007, our general practice was to automatically purchase
the mortgage loans out of pools after the loans were 120 days delinquent. Effective December 2007, our general practice is
to purchase loans from pools when (a) loans are modified, (b) foreclosure sales occur, (c) the loans have been delinquent for
24 months, or (d) the loans have been 120 days or more delinquent and the cost of guarantee payments to PC holders,
including advances of interest at the PC coupon, exceeds the expected cost of holding the nonperforming mortgage in our
mortgage-related investments portfolio. Loans that are purchased from PC pools are recorded on our consolidated balance
sheets at the lesser of our acquisition cost or the loan’s fair value at the date of purchase and are subsequently carried at
amortized cost. The initial investment includes the unpaid principal balance, accrued interest, and a proportional amount of
the recognized guarantee obligation and reserve for guarantee losses recognized for the PC pool from which the loan was
purchased. The proportion of the guarantee obligation is calculated based on the relative percentage of the unpaid principal
balance of the loan to the unpaid principal balance of the entire pool. The proportion of the reserve for guarantee losses is
calculated based on the relative percentage of the unpaid principal balance of the loan to the unpaid principal balance of the
loans in the respective reserving category for the loan (i.e., book year and delinquency status). We record realized losses on
loans purchased when, upon purchase, the fair value is less than the acquisition cost of the loan. Gains related to non-accrual
SOP 03-3 loans that are either repaid in full or that are collected in whole or in part when a loan goes to foreclosure are
reported in recoveries on loans impaired upon purchase. For impaired loans where the borrower has made required payments
that return to current status, the basis adjustments are recognized as interest income over time, as periodic payments are
received. Gains resulting from the prepayment of currently performing SOP 03-3 loans are also reported in mortgage loan
interest income.
Investments in Securities
Investments in securities consist primarily of mortgage-related securities. We classify securities as “available-for-sale” or
“trading.” On January 1, 2008, we elected the fair value option for certain available-for-sale mortgage-related securities,
including investments in securities identified as within the scope of Emerging Issues Task Force, or EITF, 99-20,
“Recognition of Interest Income and Impairment on Purchased Beneficial Interests and Beneficial Interests That Continue to
Be Held by a Transferor in Securitized Financial Assets.” Subsequent to our election, these securities were classified as
trading securities. See “Recently Adopted Accounting Standards” for further information. We currently have not classified
any securities as “held-to-maturity” although we may elect to do so in the future. Securities classified as available-for-sale
196 Freddie Mac