Freddie Mac 2008 Annual Report Download - page 95

and the relative cost of owner-occupied housing alternatives. Apartment market fundamentals began to deteriorate in the
second half of 2008, due to increased vacancy rates, declining rent levels and a weakening employment market in the
U.S. Given the significant weakness currently being experienced in the U.S. economy, it is likely that apartment
fundamentals in the U.S. will continue to deteriorate during 2009 which could cause us to provide for additional credit
losses. Multifamily capital market conditions also deteriorated significantly in the second half of 2008, with a dramatic
decline in available credit and more strict underwriting requirements by investors. As a result, the multifamily market slowed
during 2008, which reduced institutional investor activity and resulted in significantly lower lending activity for both
construction and refinancing. As a result of the continuing weakness in the apartment and capital markets, we expect
industry-wide loan demand in 2009 to decline by an additional 10% to 20% from 2008 levels.
We continued to be very active in the multifamily market in 2008 and 2007, by our purchase or guarantee of new loans
totaling approximately $24 billion and $22 billion, respectively. Our continued high level of purchase and guarantee activity
during 2008, despite declining industry fundamentals, reflects our acknowledged priority to continue providing support for
the U.S. mortgage market during this period of uncertainty, and our ability to adjust our underwriting standards and pricing
to reflect the heightened level of risk.
Our Multifamily segment provision for credit losses increased to $229 million in 2008 from $38 million in 2007. To
determine our estimate for incurred losses on our multifamily loan and guarantee portfolios, we evaluate each property based
on available financial or operational results and also incorporate available economic data to update these results and evaluate
the severity of expected losses. Although we use the most recently available results of our multifamily borrowers to assess
our estimate of reserves, there is a lag in reporting as they prepare their results in the normal course of business.
Consequently, our reserve estimate for 2008 reflects our best judgment of the severity associated with our probable incurred
losses and reflects deterioration in recent market conditions, particularly increases in unemployment rates, higher vacancy
rates and declines in average monthly rental rates during the second half of 2008. We acquired three REO properties during
the fourth quarter of 2008, bringing our total Multifamily REO inventory to six properties at December 31, 2008. We
increased our reserve estimates in 2008 to reflect the recent deterioration in market conditions, particularly in the fourth
quarter, which resulted in increased estimates of severities of incurred loss.
There were no purchases or sales of LIHTC investments in 2008. Tax benefits for LIHTC partnerships increased to
$589 million in 2008 from $534 million in 2007. Tax benefits from LIHTC partnerships are recognized in our Multifamily
Segment Earnings regardless of the ability to claim or use them at the corporate level. Our LIHTC benefits related to 2006
and 2007 were used at the corporate level; however, most of our 2008 credits were deferred and can be carried forward for
up to 20 years in the future.
CONSOLIDATED BALANCE SHEETS ANALYSIS
The following discussion of our consolidated balance sheets should be read in conjunction with our consolidated
financial statements, including the accompanying notes. Also see “CRITICAL ACCOUNTING POLICIES AND
ESTIMATES” for more information concerning our significant accounting policies and estimates applied in determining our
reported financial position.
Mortgage-Related Investments Portfolio
We are primarily a buy-and-hold investor in mortgage assets. We invest principally in mortgage loans and mortgage-
related securities, which consist of securities issued by us, Fannie Mae, Ginnie Mae and other financial institutions. We refer
to these investments that are recorded on our consolidated balance sheet as our mortgage-related investments portfolio.
Our mortgage-related securities are classified as either available-for-sale or trading. Upon the adoption of SFAS 159 on
January 1, 2008, we increased the number of securities categorized as trading in our mortgage-related investments portfolio.
See “NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES — Recently Adopted Accounting Standards —
The Fair Value Option for Financial Assets and Financial Liabilities” to our consolidated financial statements for more
information.
Under the Purchase Agreement with Treasury and FHFA regulation, our mortgage-related investments portfolio may not
exceed $900 billion as of December 31, 2009 and then must decline by 10% per year thereafter until it reaches $250 billion.
92 Freddie Mac