Freddie Mac 2011 Annual Report Download - page 216

mortgage loans that we purchased to use as collateral for future PC and other mortgage-related security issuances as held-
for-sale because we intended to securitize the loans in transactions that qualified for derecognition from our consolidated
financial statements and did not have the intent to hold these loans for the foreseeable future. Effective January 1, 2010
we were required to consolidate our single-family PC trusts and certain Other Guarantee Transactions, and, therefore,
recognized the loans underlying these securities on our consolidated balance sheets. These consolidated entities do not
have the ability to sell mortgage loans and generally are only permitted to hold such loans for the settlement of the
corresponding obligations of these entities. As such, loans we acquire and which we intend to securitize using an entity
we will consolidate will generally be classified as held-for-investment both prior to and subsequent to their securitization,
in accordance with our intent and ability to hold such loans for the foreseeable future.
Held-for-investment mortgage loans are reported in our consolidated balance sheets at their outstanding UPB, net of
deferred fees and other cost basis adjustments (including unamortized premiums and discounts, delivery fees and other
pricing adjustments). These deferred items are amortized into interest income over the contractual lives of the loans using
the effective interest method. We recognize interest income on an accrual basis except when we believe the collection of
principal or interest is not probable. If the collection of principal and interest is not probable, we cease the accrual of
interest income.
Mortgage loans not classified as held-for-investment are classified as held-for-sale. Held-for-sale loans are reported at
lower-of-cost-or-fair-value on our consolidated balance sheets. Any excess of a held-for-sale loan’s cost over its fair value
is recognized as a valuation allowance in other income on our consolidated statement of income and comprehensive
income, with changes in this valuation allowance also being recorded in other income. Premiums, discounts, and other
cost basis adjustments recognized upon acquisition on single-family loans classified as held-for-sale are deferred and not
amortized. We have elected the fair value option for multifamily mortgage loans held for sale that we intend to securitize
and sell to investors. See “NOTE 17: FAIR VALUE DISCLOSURES — Fair Value Election — Multifamily Held-For-Sale
Mortgage Loans with Fair Value Option Elected.” Thus, these multifamily mortgage loans are measured at fair value on a
recurring basis, with subsequent gains or losses related to sales or changes in fair value reported in other income in our
consolidated statements of income and comprehensive income.
Cash flows related to mortgage loans held by our consolidated trusts are classified as either investing activities (e.g.,
principal repayments) or operating activities (e.g., interest payments received from borrowers included within net income
(loss)). In addition, cash flows related to purchases of mortgage loans held-for-sale are classified in operating activities.
When mortgage loans held-for-sale are sold or securitized, proceeds from the sale or securitization and any related gain or
loss are classified in operating activities.
Allowance for Loan Losses and Reserve for Guarantee Losses
The allowance for loan losses and the reserve for guarantee losses represent estimates of incurred credit losses. The
allowance for loan losses pertains to all single-family and multifamily loans classified as held-for-investment on our
consolidated balance sheets whereas the reserve for guarantee losses relates to single-family and multifamily loans
underlying our non-consolidated Freddie Mac mortgage-related securities and other guarantee commitments. Total held-
for-investment mortgage loans, net are shown net of the allowance for loan losses on our consolidated balance sheets. The
reserve for guarantee losses is included within other liabilities on our consolidated balance sheets. We recognize incurred
losses by recording a charge to the provision for credit losses in our consolidated statements of income and
comprehensive income. Determining the appropriateness of the loan loss reserves is a complex process that is subject to
numerous estimates and assumptions requiring significant judgment about matters that involve a high degree of
subjectivity.
We estimate credit losses related to homogeneous pools of loans in accordance with the accounting guidance for
contingencies. Accordingly, we maintain an allowance for loan losses on mortgage loans held-for-investment when it is
probable that a loss has been incurred and the amount of the loss can be reasonably estimated. Loans that we evaluate for
individual impairment are measured in accordance with the subsequent measurement requirements of the accounting
guidance for receivables.
For both the single-family and multifamily portfolios, we charge off (in full or in part) our recorded investment in a
loan in the period it is determined that the loan (or a portion thereof) is uncollectible, which generally occurs at final
disposition of the loan. However, if losses are evident prior to final disposition, earlier recognition of a charge-off is
required by our policies. We also consider charge-offs for certain very small balance loans and upon the occurrence of
certain events such as natural disasters. A charge-off is also recorded if we realize a specific credit loss upon the
modification of a loan in a TDR. We do not have any established threshold in terms of days past due beyond which we
partially or fully charge-off loans.
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