Freddie Mac 2008 Annual Report Download - page 85

Non-Interest Expense
Table 19 summarizes the components of non-interest expense.
Table 19 — Non-Interest Expense
2008 2007 2006
Year Ended December 31,
(in millions)
Administrative expenses:
Salaries and employee benefits ........................................................ $ 828 $ 828 $ 784
Professional services ............................................................... 262 392 399
Occupancy expense ................................................................ 67 64 61
Other administrative expenses ......................................................... 348 390 397
Total administrative expenses ....................................................... 1,505 1,674 1,641
Provision for credit losses . . . .......................................................... 16,432 2,854 296
REO operations expense .............................................................. 1,097 206 60
Losses on certain credit guarantees ....................................................... 17 1,988 406
Losses on loans purchased . . . .......................................................... 1,634 1,865 148
Securities administrator loss on investment activity ............................................ 1,082 — —
Minority interests in (earnings) loss of consolidated subsidiaries . . . ................................ 8 (8) 58
Other expenses..................................................................... 415 222 200
Total non-interest expense . . . .......................................................... $22,190 $8,801 $2,809
Administrative Expenses
Salaries and employee benefits expenses for 2008 reflect reductions in short-term performance compensation and
reductions in employee headcount that were offset by higher employee retention and severance compensation costs.
Professional services expense decreased in 2008 compared to 2007 as we continued to decrease our reliance on consultants
and relied more heavily on our employee base to complete certain financial initiatives and our control remediation activities.
Overall, administrative expenses declined in 2008 as compared to 2007 as we implemented these and other cost reduction
measures.
Provision for Credit Losses
Our reserves for mortgage loan and guarantee losses reflects our best projection of defaults we believe are likely as a
result of loss events that have occurred through December 31, 2008 and 2007, respectively. Our reserves also include the
impact of our projections of the results of strategic loss mitigation initiatives, 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.
Our reserve estimates also reflect our projections of defaults. However, the substantial deterioration in the national
housing market, the uncertainty in other macroeconomic factors and the uncertainty of the effect of any current or future
government actions to address the economic and housing crisis makes forecasting of default rates increasingly imprecise. An
inability to realize the benefits of our loss mitigation plans, a lower realized rate of seller/servicer repurchases or default
rates that exceed our current projections will cause our losses to be significantly higher than those currently estimated.
The provision for credit losses increased significantly in 2008 compared to 2007, as continued weakening in the housing
market and a rapid rise in unemployment affected our single-family mortgage portfolio. For more information regarding how
we derive our estimate for the provision for credit losses, see “CRITICAL ACCOUNTING POLICIES AND ESTIMATES.”
In 2008, and to a lesser extent in 2007, we recorded additional reserves for credit losses on loans within our mortgage-
related investments portfolio and mortgages underlying our PCs, Structured Securities and other financial guarantees as a
result of:
• increased estimates of incurred losses on both multifamily and single-family mortgage loans that are expected to
experience higher default rates. Our estimates of incurred losses are higher for single-family loans we purchased or
guaranteed in certain years, particularly those we purchased during 2006, 2007 and to a lesser extent 2005 and 2008.
Continued deterioration of macroeconomic factors, such as decreases in home prices and home sales during 2008 have
negatively impacted our estimates of the severity of loss on a per-property basis. Our estimates of incurred loss have
also increased, especially for certain product-types, such as Alt-A and interest-only mortgage products and for loans
on properties in certain states, such as California, Florida, Nevada and Arizona;
• an observed increase in delinquency rates and the percentage of single-family loans that transition from delinquency
to foreclosure, with more significant increases concentrated in certain regions of the U.S. and for loans with second
lien, third-party financing. For example, as of both December 31, 2008 and 2007, single-family mortgage loans in the
state of Florida comprised approximately 7% of our single-family mortgage portfolio; however, the loans in this state
made up approximately 21% and 15%, respectively, of the total delinquent loans in our single-family mortgage
portfolio, based on unpaid principal balances. Similarly, as of both December 31, 2008 and 2007, approximately 14%
of loans in our single-family mortgage portfolio had second lien, third-party financing at origination; however, we
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