Freddie Mac 2008 Annual Report Download - page 223

Loan Loss Reserves
We maintain an allowance for loan losses on mortgage loans that we classify as held-for-investment on our balance
sheet and a reserve for guarantee losses for mortgage loans that underlie guaranteed PCs and Structured Securities,
collectively referred to as loan loss reserves. Loan loss reserves are generally established to provide for credit losses when it
is probable that a loss has been incurred. For loans subject to SOP 03-3, loan loss reserves are only established when it is
probable that we will be unable to collect all cash flows which we expected to collect when we acquired the loan. The
amount of our total loan loss reserves that related to single-family and multifamily mortgage loans, including those
underlying our financial guarantees, was $15.3 billion and $0.3 billion, respectively, as of December 31, 2008.
Table 6.2 summarizes loan loss reserve activity:
Table 6.2 — Detail of Loan Loss Reserves
Allowance
for Loan
Losses
Reserve for
Guarantee
Losses on PCs
Total Loan
Loss
Reserves
Allowance
for Loan
Losses
Reserve for
Guarantee
Losses on PCs
Total Loan
Loss
Reserves
Allowance
for Loan
Losses
Reserve for
Guarantee
Losses on PCs
Total Loan
Loss
Reserves
2008 2007 2006
Year Ended December 31,
(in millions)
Beginning balance . . ........ $256 $ 2,566 $ 2,822 $ 69 $ 550 $ 619 $ 118 $430 $ 548
Provision for credit losses . . . 631 15,801 16,432 321 2,533 2,854 98 198 296
Charge-offs
(1)(2)
.......... (459) (2,613) (3,072) (373) (3) (376) (313) — (313)
Recoveries
(1)
............ 265 514 779 239 — 239 166 — 166
Transfers, net
(3)
.......... (3) (1,340) (1,343) — (514) (514) — (78) (78)
Ending balance ............ $690 $14,928 $15,618 $ 256 $2,566 $2,822 $ 69 $550 $ 619
(1) Charge-offs represent the amount of the unpaid principal balance of a loan that has been discharged to remove the loan from our mortgage-related
investments portfolio at the time of resolution. Charge-offs presented above exclude $377 million and $156 million for the years ended December 31,
2008 and 2007, respectively, related to certain loans purchased under financial guarantees and reflected within losses on loans purchased on our
consolidated statements of operations. Recoveries of charge-offs primarily result from foreclosure alternatives and REO acquisitions on loans where a
share of default risk has been assumed by mortgage insurers, servicers or other third parties through credit enhancements.
(2) Effective December 2007, we no longer automatically purchase loans from PC pools once they become 120 days delinquent. Consequently, the increase
in charge-offs in PCs and Structured Securities during the year ended December 31, 2008, as compared to 2007 and 2006 is due to this operational
change under which loans proceed to a loss event (such as a foreclosure sale) while in a PC pool.
(3) Consist primarily of: (a) the transfer of a proportional amount of the recognized reserves for guaranteed losses related to PC pools associated with
delinquent or modified loans purchased from mortgage pools underlying our PCs, Structured Securities and long-term standby agreements to establish
the initial recorded investment in these loans at the date of our purchase, and (b) amounts attributable to uncollectible interest.
Impaired Loans
Single-family impaired loans include performing and non-performing troubled debt restructurings, as well as delinquent
or modified loans that were purchased from mortgage pools underlying our PCs and Structured Securities and long-term
standby agreements. Multifamily impaired loans include certain loans whose contractual terms have previously been
modified due to credit concerns (including troubled debt restructurings), certain loans with observable collateral deficiencies,
and loans impaired based on management’s judgments concerning other known facts and circumstances associated with those
loans. Recorded investment on impaired loans includes the unpaid principal balance plus amortized basis adjustments, which
are modifications to the loan’s carrying value.
Total loan loss reserves, as presented in “Table 6.2 — Detail of Loan Loss Reserves,” consists of a specific valuation
allowance related to impaired mortgage loans, which is presented in Table 6.3, and an additional reserve for other probable
incurred losses, which totaled $15.5 billion, $2.8 billion and $0.6 billion at December 31, 2008, 2007 and 2006, respectively.
The specific allowance presented in Table 6.3 is determined using estimates of the fair value of the underlying collateral and
insurance or other recoveries, less estimated selling costs. Our recorded investment in impaired mortgage loans and the
related valuation allowance are summarized in the table below.
Table 6.3 — Impaired Loans
Recorded
Investment
Specific
Reserve
Net
Investment
Recorded
Investment
Specific
Reserve
Net
Investment
Recorded
Investment
Specific
Reserve
Net
Investment
2008 2007 2006
December 31,
(in millions)
Impaired loans having:
Related-valuation allowance ....... $1,126 $(125) $1,001 $ 155 $(13) $ 142 $ 86 $ (6) $ 80
No related-valuation allowance
(1)
. . . 8,528 — 8,528 8,579 — 8,579 5,818 — 5,818
Total . ....................... $9,654 $(125) $9,529 $8,734 $(13) $8,721 $5,904 $ (6) $5,898
(1) Impaired loans with no related valuation allowance primarily represent performing single-family troubled debt restructuring loans and those delinquent
loans purchased out of PC pools that have not experienced further deterioration.
For the years ended December 31, 2008, 2007 and 2006, the average recorded investment in impaired loans was
$8.4 billion, $7.5 billion and $4.4 billion, respectively. The increase in impaired loans in 2008 is attributed to an increase in
220 Freddie Mac