Freddie Mac 2008 Annual Report Download - page 84

Recoveries on Loans Impaired upon Purchase
Recoveries on loans impaired upon purchase represent the recapture into income of previously recognized losses on
loans purchased and provision for credit losses associated with purchases of delinquent loans from our PCs and Structured
Securities in conjunction with our guarantee activities. Recoveries occur when a non-performing loan is repaid in full or
when at the time of foreclosure the estimated fair value of the acquired property, less costs to sell, exceeds the carrying value
of the loan. For impaired loans where the borrower has made required payments that return the loan to less than 90 days
delinquent, the recovery amounts are instead recognized as interest income over time as periodic payments are received. The
amount of impaired loans purchased into our mortgage-related investments portfolio increased significantly during 2007.
However, since December 2007, when we changed our practice for optional purchases of delinquent loans, the increase in
the carrying balances of these loans has slowed. See “CREDIT RISKS — Mortgage Credit Risk — Loans Purchased Under
Financial Guarantees” for more information. During 2008 and 2007 we recognized recoveries on loans impaired upon
purchase of $495 million and $505 million, respectively. Recoveries on impaired loans decreased in 2008 compared to 2007
because in 2008 a greater percentage of loans purchased from PC pools were modified instead of being repaid in full or
proceeding to foreclosure. Modifications on delinquent loans can delay the ultimate resolution of losses and consequently
extend the timeframe for the recognition of our recoveries. In addition, the amount of our average recoveries per property on
impaired loans began to decline during the second half of 2008 due to declining home prices. Our temporary suspension of
foreclosures on occupied homes that began during the fourth quarter of 2008 also may cause temporary declines in our
recoveries in the first half of 2009.
Foreign-Currency Gains (Losses), Net
We manage the foreign-currency exposure associated with our foreign-currency denominated debt through the use of
derivatives. We elected the fair value option for foreign-currency denominated debt effective January 1, 2008. Prior to this
election, gains and losses associated with the foreign-currency exposure of our foreign-currency denominated debt were
recorded as foreign-currency gains (losses), net in our consolidated statements of operations. With the adoption of SFAS 159,
foreign-currency exposure is now a component of gains (losses) on foreign-currency denominated debt recorded at fair value.
Because the fair value option is prospective, prior period amounts have not been reclassified. See “Derivative Gains
(Losses)” and “Gains (Losses) on Foreign-Currency Denominated Debt Recorded at Fair Value” and “NOTE 1: SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES” to our consolidated financial statements for additional information.
For 2007, we recognized net foreign-currency translation losses primarily related to our foreign-currency denominated
debt of $2.3 billion as the U.S. dollar weakened relative to the Euro during the period. During the same period, these losses
were offset by an increase of $2.3 billion in the fair value of foreign-currency-related derivatives recorded in derivative gains
(losses).
Other Income
Other income primarily consists of resecuritization fees, trust management income, net hedging gains and losses, fees
associated with servicing and technology-related programs, various fees related to multifamily loans (including application
and other fees) and various other fees received from mortgage originators and servicers. Other income decreased in 2008
compared to 2007 as a result of lower trust management income, lower resecuritization fees resulting from a decline in
REMIC volumes and, to a lesser extent, the losses in 2008 associated with the ineffective portion of cash flow hedge
transactions. Other income increased in 2007 compared to 2006 due to trust management income that was related to the
establishment of securitization trusts in December 2007 for the underlying assets of our PCs and Structured Securities. Prior
to December 2007, these amounts were presented as due to PC investors, a component of net interest income. Trust
management income (expense) was $(71) million, $18 million and $— million in 2008, 2007 and 2006, respectively.
Resecuritization activity has declined during 2008 and 2007 and to remain competitive we have reduced or eliminated fees
for certain transaction types. For 2008, 2007, and 2006, we recognized resecuritization fees of $44 million, $85 million and
$95 million, respectively, at the time of issuance. Trust management income represents the fees we earn as master servicer,
issuer, administrator, and trustee for our PCs and Structured Securities, net of related expenses. These fees are derived from
interest earned on principal and interest cash flows between the time they are remitted to the trust by servicers and the date
of distribution to our PC and Structured Securities holders, offset by interest expense we incur when a borrower prepays or
when a loan is purchased from a pool.
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