Freddie Mac 2008 Annual Report Download - page 86

estimate as of December 31, 2008, that these loans comprise more than 25% of our delinquent loans, based on unpaid
principal balances;
• increases in the average loss per loan, or severity as compared to the prior year. During 2008, there was a significant
increase in the average size of delinquent loans, primarily attributed to the increasing percentage of these loans in the
West region, which comprised approximately 32% and 23% of our total delinquent loans in the single-family
mortgage portfolio as of December 31, 2008 and 2007, respectively; and
• to a lesser extent, increases in counterparty exposure related to our estimates of recoveries through repurchases by
seller/servicers of defaulted loans due to failure to follow contractual underwriting requirements at origination and
under separate recourse agreements. During 2008, several of our seller/servicers were acquired by the FDIC, declared
bankruptcy or merged with other institutions. These and other events increase our counterparty exposure, or the
likelihood that we may bear the risk of mortgage credit losses without the benefit of recourse to our counterparty. See
“CREDIT RISKS — Institutional Credit Risk” for additional information.
We expect our provisions for credit losses to remain high in 2009. The likelihood that our credit losses will remain high
beyond 2009 will depend on a number of factors, including changes in property values, regional economic conditions, the
success of our loan modification and other loss mitigation efforts, third-party mortgage insurance coverage and recoveries
and the realized rate of seller/servicer repurchases. See “Table 6 — Credit Statistics, Single-Family Mortgage Portfolio” for a
presentation of the quarterly trend in the deterioration of our credit statistics, including REO disposition severity. We may
further increase our single-family loan loss reserves in future periods if home prices decline further than our expectations or
our loss severity estimates increase.
REO Operations Expense
The increase in REO operations expense in 2008, as compared to 2007, was primarily due to a significant increase in
our REO property inventory in 2008 and declining single-family REO property values. The decline in home prices during
2008 and 2007, combined with our higher REO inventory balances, resulted in increased market-based write-downs of REO,
which totaled $495 million, $129 million and $5 million in 2008, 2007 and 2006, respectively. We expect REO operations
expense to increase during 2009, if our single-family REO volume continues to rise and home prices continue to decline.
Our temporary suspension of foreclosures on occupied homes from November 26, 2008 through January 31, 2009
(subsequently extended from February 14, 2009 through March 6, 2009), reduced the growth of REO acquisitions and
inventory in December 2008. However, the expiration of this suspension will likely result in increased acquisitions of REO
properties in 2009. Beginning March 7, 2009, we will suspend foreclosure sales for those loans that are eligible for
modification under the HASP until our servicers determine that the borrower of such a loan is not responsive or that the loan
does not qualify for a modification under HASP or any of our other alternatives to foreclosure.
Losses on Certain Credit Guarantees
Losses on certain credit guarantees consist of losses recognized upon the issuance of certain PCs in guarantor swap
transactions. Prior to January 1, 2008, our recognition of losses on certain guarantee contracts occurred due to any one or a
combination of several factors, including long-term contract pricing for our flow business, the difference in overall
transaction pricing versus pool-level accounting measurements and, less significantly, efforts to support our affordable
housing mission. Upon adoption of SFAS 157, our losses on certain credit guarantees in subsequent periods, if any, will
generally relate to our efforts to meet our affordable housing goals.
Effective January 1, 2008, upon the adoption of SFAS 157, which amended FIN 45, we estimate the fair value of our
newly issued guarantee obligations as an amount equal to the fair value of compensation received, inclusive of all rights
related to the transaction, in exchange for our guarantee. As a result, we no longer record estimates of deferred gains or
immediate “day one” losses on most guarantees. This change had a significant positive impact on our financial results during
2008.
In 2008, 2007 and 2006 we recognized losses of $17 million, $2.0 billion and $406 million, respectively, on certain
guarantor transactions entered into during those periods. The decline in losses on certain guarantees in 2008 as compared to
2007 was due to the adoption of SFAS 157, discussed above. Increased losses on certain credit guarantees during 2007 as
compared to 2006, reflect expectations of higher defaults and severity in the credit market in 2007 which were not fully
offset by increases in guarantee and delivery fees due to competitive pressures and contractual fee arrangements.
Losses on Loans Purchased
Losses on delinquent and modified loans purchased from the mortgage pools underlying our PCs and Structured
Securities occur when the acquisition basis of the purchased loan exceeds the estimated fair value of the loan on the date of
purchase. Effective December 2007, we made certain operational changes for purchasing delinquent loans from PC pools,
which significantly reduced the volume of our delinquent loan purchases and consequently the amount of our losses on loans
purchased during 2008. Operationally, we no longer automatically purchase loans from PC pools once they become 120 days
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