Freddie Mac 2012 Annual Report Download - page 95

Provision for Credit Losses
We maintain loan loss reserves at levels we believe are appropriate to absorb probable incurred losses on mortgage
loans held-for-investment and loans underlying our financial guarantees. Our loan loss reserves are increased through the
provision for credit losses and are reduced by net charge-offs. The provision for credit losses primarily reflects our estimate
of incurred losses for newly impaired loans as well as changes in our estimates of incurred losses for previously impaired
loans.
Our provision for credit losses declined to $1.9 billion in 2012 compared to $10.7 billion in 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. Assuming that all other factors
remain the same, an increase in home prices can reduce the likelihood that loans will default and may also reduce the amount
of credit loss on the loans that do default. The provision for credit losses declined to $10.7 billion in 2011 compared to $17.2
billion in 2010, and reflected a decline in the rate at which single-family loans were expected to transition into serious
delinquency or were expected to be modified, but was partially offset by our lower expectations for mortgage insurance
recoveries, reflecting the further deterioration in the financial condition of certain counterparties.
During 2012, our charge-offs, net of recoveries for single-family loans, exceeded the amount of our provision for credit
losses. Our charges-offs in 2012 remained elevated, but reflect continued suppression of loan and collateral resolution
activity due to the length of the foreclosure process. We believe the level of our charge-offs will continue to remain elevated
for 2013.
The total number of single-family seriously delinquent loans declined approximately 15% and 10% during 2012 and
2011, respectively. However, our serious delinquency rates remain high compared to the rates we experienced in years prior
to 2009. We also continued to experience a high volume of completed loan modifications classified as TDRs during 2012. As
of December 31, 2012 and 2011, the UPB of our single-family non-performing loans was $128.6 billion and $120.5 billion,
respectively. These amounts include $65.8 billion and $44.4 billion, respectively, of single-family TDRs that are less than
three months past due. However, modified loans that have been classified as TDRs remain categorized as non-performing
throughout the remaining life of the loan regardless of the payment status. See “RISK MANAGEMENT — Credit Risk —
Mortgage Credit Risk” for further information on our single-family credit guarantee portfolio, including credit performance,
serious delinquency rates, charge-offs, our loan loss reserves balance, and our non-performing assets.
Since the beginning of 2008, on an aggregate basis, we have recorded provision for credit losses associated with single-
family loans of approximately $75.2 billion, and have recorded an additional $3.9 billion in losses on loans purchased from
our PCs, net of recoveries. The majority of these losses are associated with loans originated in 2005 through 2008. While
loans originated in 2005 through 2008 will give rise to additional credit losses that have not yet been incurred, and thus have
not been provisioned for, we believe that, as of December 31, 2012, we have reserved for or charged-off the majority of the
total expected credit losses for these loans. Nevertheless, various factors, such as continued high unemployment rates or
future declines in home prices, could require us to provide for losses on these loans beyond our current expectations. See
“Table 3 — Credit Statistics, Single-Family Credit Guarantee Portfolio” for certain quarterly credit statistics for our single-
family credit guarantee portfolio.
Our provision for credit losses and amount of charge-offs in the future will be affected by a number of factors. These
factors include: (a) the actual level of mortgage defaults; (b) the effect of the MHA Program, the servicing alignment
initiative, and other current and future loss mitigation efforts; (c) any government actions or programs that affect the ability
of troubled borrowers to obtain modifications, including legislative changes to bankruptcy laws; (d) changes in property
values; (e) regional economic conditions, including unemployment rates; (f) additional delays in the foreclosure process;
(g) third-party mortgage insurance coverage and recoveries; and (h) the realized rate of seller/servicer repurchases.
We recognized a benefit for credit losses associated with our multifamily mortgage portfolio of $123 million and $196
million for 2012 and 2011, respectively, compared to a provision for credit losses of $99 million in 2010. Our loan loss
reserves associated with our multifamily mortgage portfolio were $382 million, $545 million, and $828 million as of
December 31, 2012, 2011, and 2010, respectively. The decline in loan loss reserves for multifamily loans in 2012 and 2011
was primarily driven by an improvement in the expected performance of the underlying loans.
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