Freddie Mac 2012 Annual Report Download - page 16

The serious delinquency rate for our single-family credit guarantee portfolio improved at December 31, 2012, compared
to December 31, 2011. Excluding relief refinance loans, the improvement in borrower payment performance during 2012
reflects an improved credit profile of borrowers with loans originated since 2008. However, several factors, including the
lengthening of the foreclosure process, have resulted in loans remaining in serious delinquency for longer periods than
experienced prior to 2008, particularly in states that require a judicial foreclosure process. As of December 31, 2012 and
2011, the percentage of seriously delinquent loans that have been delinquent for more than six months was 72% and 70%,
respectively.
The balance of our non-performing loans increased during the third quarter of 2012, due to a change in the treatment of
single-family loans discharged in Chapter 7 bankruptcy to classify these loans as TDRs (unless they were already classified
as TDRs for other reasons), regardless of the borrowers’ payment status. Except for this change in classification, which
resulted in approximately $19.5 billion in UPB of loans being newly classified as TDRs in the third quarter of 2012, the
balance of our non-performing loans would have declined in every quarter of 2012. Although we experienced improvement
in the amount of our non-performing loans during the year, this balance remained high at the end of 2012, compared to
periods prior to 2009.
The credit losses and loan loss reserves associated with our single-family credit guarantee portfolio remained elevated in
2012, due, in part, to:
• Losses associated with the continued high volume of foreclosures and foreclosure alternatives. These actions relate to
the continued efforts of our servicers to resolve our large inventory of seriously delinquent loans. Due to the length of
time necessary for servicers either to complete the foreclosure process or pursue foreclosure alternatives on seriously
delinquent loans in our portfolio, we expect our credit losses will continue to remain elevated even if the volume of
new serious delinquencies declines.
• Continued negative effect of certain loan groups within the single-family credit guarantee portfolio, such as: (a) loans
originated in 2005 through 2008; and (b) loans with higher-risk characteristics (such as those underwritten with
certain lower documentation standards and interest-only loans), a significant portion of which were originated in 2005
through 2008. These groups continue to be large contributors to our credit losses.
• Cumulative decline in national home prices of 22% since June 2006, based on our own index. As a result of this price
decline, approximately 15% of loans in our single-family credit guarantee portfolio, based on UPB, had estimated
current LTV ratios in excess of 100% (i.e., underwater loans) as of December 31, 2012.
• Weak financial condition of many of our mortgage insurers, which has reduced our actual recoveries from these
counterparties as well as our estimates of expected recoveries.
Some of our loss mitigation activities create fluctuations in our delinquency statistics. See “MD&A — RISK
MANAGEMENT — Credit Risk — Mortgage Credit Risk — Single-family Mortgage Credit Risk —Credit Performance —
Delinquencies” for further information about factors affecting our reported delinquency rates.
Consolidated Financial Results — 2012 versus 2011
Net income was $11.0 billion for 2012 compared to net income (loss) of $(5.3) billion for 2011. Key highlights of our
financial results include:
• Net interest income for 2012 decreased to $17.6 billion from $18.4 billion for 2011, mainly due to the impact of a
reduction in the balance of our higher-yielding mortgage-related assets, partially offset by lower funding costs.
• Provision for credit losses for 2012 declined to $1.9 billion, compared to $10.7 billion for 2011. The significant
reduction in provision for credit losses in 2012 primarily reflects declines in the volume of newly delinquent loans
(largely due to a decline in the portion of our single-family credit guarantee portfolio originated in 2005 through
2008), and lower estimates of incurred loss due to the positive impact of an increase in national home prices.
• Non-interest income (loss) was $(4.1) billion for 2012, compared to $(10.9) billion for 2011. The improvement was
largely driven by a decrease in derivative losses during 2012 compared to 2011.
11 Freddie Mac