Freddie Mac 2009 Annual Report Download - page 260

Table 7.2 summarizes loan loss reserve activity:
Table 7.2 — 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
2009 2008 2007
Year Ended December 31,
(in millions)
Beginning balance ........... $ 690 $14,928 $15,618 $ 256 $ 2,566 $ 2,822 $ 69 $ 550 $ 619
Provision for credit losses
(1)
. . . 1,057 28,473 29,530 631 15,801 16,432 321 2,533 2,854
Charge-offs
(2)
............. (528) (8,874) (9,402) (459) (2,613) (3,072) (373) (3) (376)
Recoveries
(2)
............. 222 1,866 2,088 265 514 779 239 — 239
Transfers, net
(3)
........... — (3,977) (3,977) (3) (1,340) (1,343) — (514) (514)
Ending balance ............. $1,441 $32,416 $33,857 $ 690 $14,928 $15,618 $ 256 $2,566 $2,822
Single-family . ............. $ 693 $32,333 $33,026 $ 454 $14,887 $15,341 $ 202 $2,558 $2,760
Multifamily . . . ............. 748 83 831 236 41 277 54 8 62
Total .................... $1,441 $32,416 $33,857 $ 690 $14,928 $15,618 $ 256 $2,566 $2,822
(1) During the period ended December 31, 2009, we enhanced our methodology for estimating our loan loss reserves for single-family loans to reduce the
number of adjustments required to be made in the previous process that arose as a result of dramatic changes in market conditions in recent periods.
The new process allows us to incorporate a greater number of loan characteristics by giving us the ability to better integrate into the modeling process
our understanding of home price changes at a more detailed level and assess their impact on incurred losses. Additionally, these changes allow us to
better assess incurred losses of modified loans by incorporating specific expectations related to these types of loans.
(2) Charge-offs represent the amount of the unpaid principal balance of a loan that has been discharged to remove the loan from our consolidated balance
sheets at the time of resolution. Charge-offs exclude $280 million, $377 million and $156 million for the years ended December 31, 2009, 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.
(3) Consist primarily of: (a) approximately $375 million during 2009 related to agreements with seller/servicers where the transfer represents recoveries
received under these agreements to compensate us for previously incurred and recognized losses, (b) 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 (c) amounts attributable to uncollectible interest on mortgage loans held for investment.
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 values.
Total loan loss reserves, as presented in “Table 7.2 — Detail of Loan Loss Reserves,” consists of a specific valuation
allowance related to impaired mortgage loans, which is presented in Table 7.3, and an additional reserve for other probable
incurred losses, which totaled $33.5 billion, $15.5 billion and $2.8 billion at December 31, 2009, 2008 and 2007,
respectively. The specific allowance presented in Table 7.3 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 Table 7.3.
Table 7.3 — Impaired Loans
Recorded
Investment
Specific
Reserve
Net
Investment
Recorded
Investment
Specific
Reserve
Net
Investment
Recorded
Investment
Specific
Reserve
Net
Investment
2009 2008 2007
December 31,
(in millions)
Impaired loans having:
Related-valuation allowance .......... $ 2,611 $(379) $ 2,232 $1,126 $(125) $1,001 $ 155 $(13) $ 142
No related-valuation allowance
(1)
...... 11,304 — 11,304 8,528 — 8,528 8,579 — 8,579
Total . . . ........................ $13,915 $(379) $13,536 $9,654 $(125) $9,529 $8,734 $(13) $8,721
(1) Impaired loans with no related valuation allowance primarily represent performing single-family troubled debt restructuring loans and those mortgage
loans purchased out of PC pools and accounted for in accordance with accounting standards for loans and debt securities acquired with deteriorated
credit quality that have not experienced further deterioration.
For the years ended December 31, 2009, 2008 and 2007, the average investment in impaired loans was $12.2 billion,
$8.4 billion and $7.5 billion, respectively. The increase in impaired loans in 2009 is attributed to an increase in troubled debt
restructurings and delinquent and modified loans purchased out of PC pools, in part due to our implementation of HAMP.
257 Freddie Mac