Freddie Mac 2011 Annual Report Download - page 219

If we determine that foreclosure on the underlying collateral is probable, we measure impairment based upon the fair
value of the collateral, as reduced by estimated disposition costs and adjusted for estimated proceeds from insurance and
similar sources.
Multifamily
Multifamily impaired loans include TDRs, loans three monthly payments or more past due, and loans that are
deemed impaired based on management judgment. Factors considered by management in determining whether a loan is
impaired include, but are not limited to, the underlying property’s operating performance as represented by its current
DSCR, available credit enhancements, current LTV ratio, management of the underlying property, and the property’s
geographic location. Multifamily loans are measured individually for impairment based on the fair value of the underlying
collateral, as reduced by estimated disposition costs, as the repayment of these loans is generally provided from the cash
flows of the underlying collateral and any associated credit-enhancement. Except for cases of fraud and certain other types
of borrower defaults, most multifamily loans are non-recourse to the borrower so generally the cash flows of the
underlying property (including any associated credit enhancements) serve as the source of funds for repayment of the
loan. Interest income recognition on non-TDR multifamily impaired loans is subject to our non-accrual policy as
discussed in “Non-Performing Loans.”
Troubled Debt Restructurings
Both single-family and multifamily loans which experience a modification to their contractual terms which results in
a concession being granted to a borrower experiencing financial difficulties are considered TDRs. A concession is deemed
granted when, as a result of the restructuring, we do not expect to collect all amounts due, including interest accrued, at
the original contractual interest rate. As appropriate, we also consider other qualitative factors in determining whether a
concession is deemed granted, including whether the borrower’s modified interest rate is consistent with that of a non-
troubled borrower. We do not consider restructurings that result in a delay in payment that is insignificant to be a
concession. We generally consider a delay in monthly amortizing payments of three months or less to be insignificant. We
generally consider all other delays in payment, including balloon payments, to be more than insignificant. A concession
typically includes one or more of the following being granted to the borrower: (a) loans in trial periods where the
expected permanent modification will change our expectation of collecting all amounts due at the original contract rate;
(b) a delay in payment that is more than insignificant; (c) a reduction in the contractual interest rate; (d) interest
forbearance for a period of time that is not insignificant or forgiveness of accrued but uncollected interest amounts; and
(e) a reduction in the principal amount of the loan. On July 1, 2011, we adopted an amendment to the accounting
guidance related to the classification of loans as TDRs. This amendment clarified when a restructuring such as a loan
modification is considered a TDR. For additional information, see “Recently Adopted Accounting Guidance — A
Creditor’s Determination of Whether a Restructuring is a Troubled Debt Restructuring,” below.
Impairment of a loan having undergone a TDR is measured as the excess of our recorded investment in the loan over
the present value of the expected future cash flows, discounted at the loan’s original effective interest rate for fixed-rate
loans or at the loan’s effective interest rate prior to modification for ARM loans. Our expectation of future cash flows
incorporates, among other items, an estimated probability of default which is based on a number of market factors as well
as the characteristics of the loan, such as past due status. Subsequent to the modification date, interest income is
recognized at the modified interest rate, subject to our non-accrual policy as discussed in “Non-Performing Loans” above,
with all other changes in the present value of expected future cash flows being recognized as a component of the
provision for credit losses in our consolidated statement of income and comprehensive income.
Investments in Securities
Investments in securities consist primarily of mortgage-related securities. We classify securities as “available-for-sale”
or “trading.” We currently do not classify any securities as “held-to-maturity,” although we may elect to do so in the
future. In addition, we elected the fair value option for certain available-for-sale mortgage-related securities, including
investments in securities that: (a) can contractually be prepaid or otherwise settled in such a way that we may not recover
substantially all of our initial recorded investment; or (b) are not of high credit quality at the acquisition date and are
identified as within the scope of the accounting guidance for investments in beneficial interests in securitized financial
assets. Subsequent to our election, these securities were classified as trading securities. Securities classified as available-
for-sale and trading are reported at fair value with changes in fair value included in AOCI and other gains (losses) on
investment securities, respectively. See “NOTE 17: FAIR VALUE DISCLOSURES” for more information on how we
determine the fair value of securities.
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