Freddie Mac 2012 Annual Report Download - page 250

payment status. The majority of these TDR loans were not seriously delinquent at the time of this reclassification and, in
many cases, the borrowers were continuing to make timely payments.
Single-Family TDRs
We require our single-family servicers to contact borrowers who are in default and to evaluate loan workout options in
accordance with our requirements. We establish guidelines for our servicers to follow and provide them default management
tools to use, in part, in determining which type of loan workout would be expected to provide the best opportunity for
minimizing our credit losses. We require our single-family servicers to first evaluate problem loans for a repayment or
forbearance plan before considering modification. If a borrower is not eligible for a modification, our seller/servicers pursue
other workout options before considering foreclosure. We receive information related to loan workouts, such as completed
modifications and loans in a modification trial period, and other alternatives to foreclosure from our servicers at the loan
level on at least a monthly basis. For loans in a modification trial period, we do not receive the terms of the expected
completed modification until the modification is completed. For these loans, we only receive notification that they are in a
modification trial period. See “NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES — Allowance for
Loan Losses and Reserve for Guarantee Losses” for more detail.
Repayment plans are agreements with the borrower that give the borrower a defined period of time to reinstate the
mortgage by paying regular payments plus an additional agreed upon amount in repayment of the past due amount. These
agreements are considered TDRs if they result in a delay in payment that is considered to be more than insignificant.
Forbearance agreements are agreements between the servicer and the borrower where reduced payments or no payments
are required during a defined period. These agreements are considered TDRs if they result in a delay in payment that is
considered to be more than insignificant.
In the case of borrowers considered for modifications, our servicers typically obtain information on income, assets, and
other borrower obligations to determine modified loan terms. Under HAMP, the goal of a single-family loan modification is
to reduce the borrower’s monthly mortgage payments to a specified percentage of the borrower’s gross monthly income,
which may be achieved through a combination of methods, including: (a) interest rate reduction; (b) term extension; and
(c) principal forbearance. Principal forbearance is when a portion of the principal is made non-interest-bearing and non-
amortizing, but this does not represent principal forgiveness. Although HAMP contemplates that some servicers will also
make use of principal forgiveness to achieve reduced payments for borrowers, we have only used forbearance of principal
and have not used principal forgiveness in modifying our loans.
We implemented a non-HAMP standard loan modification initiative in late 2011, which replaced our previous non-
HAMP modification initiative beginning January 1, 2012. Our HAMP and non-HAMP modification initiatives are available
for borrowers experiencing what is generally expected to be a longer-term financial hardship. Both HAMP and our non-
HAMP standard modification require a three month trial period during which the borrower will make monthly payments
based on the estimated amount of the modification payments. After the final trial-period payment is received by our servicer,
the borrower and servicer enter into the modification. We consider restructurings under these initiatives as TDRs at the
inception of the trial period if the expected modification will result in a change in our expectation to collect all amounts due
at the original contract rate. Since we do not receive the terms of the modification until completion of the trial period, we
estimate the impairment for loans in a modification trial period that are considered TDRs using the average impairment
recorded for completed modifications and the estimated likelihood of completion of the trial period. If the borrower fails to
successfully complete the trial period, the impairment for the loan is then based on the original terms of the loan. If the
borrower successfully completes the trial period, the impairment for the loan is then based on the modified terms of the loan.
These subsequent adjustments to impairment are based on the success or failure of the borrower to complete the trial period
and are recorded through the provision for credit losses.
During 2012, approximately 57%, of completed modifications that were classified as TDRs involved interest rate
reductions and term extensions and approximately 37% involved principal forbearance in addition to interest rate reductions
and term extensions. During 2012, the average term extension was 130 months and the average interest rate reduction was
2.4% on completed modifications classified as TDRs. The aggregate recorded investment of single-family loans classified as
TDRs during 2012 and 2011 was higher post-modification than the aggregate recorded investment of the pre-modified loans
since past due amounts are added to the principal balance at the time of restructuring.
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