FEDERAL HOME LOAN MORTGAGE CORP | 2013 | FY |

NOTE 5: INDIVIDUALLY IMPAIRED AND NON-PERFORMING LOANS

Individually Impaired Loans

Individually impaired single-family loans include performing and non-performing TDRs, as well as loans acquired under our financial guarantees with deteriorated credit quality. Individually impaired multifamily loans include performing and non-performing TDRs, loans three monthly payments or more past due, and loans that are impaired based on management judgment. For a discussion of our significant accounting policies regarding impaired and non-performing loans, which are applied consistently for multifamily loans and single-family loan classes, see “NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES.”

Total loan loss reserves consist of a specific valuation allowance related to individually impaired mortgage loans, and a general reserve for other probable incurred losses. Our recorded investment in individually impaired mortgage loans and the related specific valuation allowance are summarized in the table below by product class (for single-family loans).

Table 5.1 — Individually Impaired Loans



	Balance at December 31, 2013									For The Year Ended December 31, 2013
	UPB		Recorded Investment		Associated Allowance			Net Investment		Average Recorded Investment		Interest Income Recognized		Interest Income Recognized On Cash Basis⁽¹⁾
	(in millions)
Single-family —
With no specific allowance recorded⁽²⁾:
20 and 30-year or more, amortizing fixed-rate⁽³⁾	$	5,927	$	3,355	$	—		$	3,355	$	3,370	$	394	$	34
15-year amortizing fixed-rate⁽³⁾	62		34		—			34		31		6		1
Adjustable rate⁽⁴⁾	19		13		—			13		13		1		—
Alt-A, interest-only, and option ARM⁽⁵⁾	1,758		1,038		—			1,038		978		72		6
Total with no specific allowance recorded	7,766		4,440		—			4,440		4,392		473		41
With specific allowance recorded:⁽⁶⁾
20 and 30-year or more, amortizing fixed-rate⁽³⁾	75,633		74,554		(14,431		)	60,123		69,922		2,127		282
15-year amortizing fixed-rate⁽³⁾	1,324		1,324		(43		)	1,281		1,109		50		11
Adjustable rate⁽⁴⁾	967		962		(84		)	878		855		22		6
Alt-A, interest-only, and option ARM⁽⁵⁾	17,210		16,860		(3,996		)	12,864		16,526		369		69
Total with specific allowance recorded	95,134		93,700		(18,554		)	75,146		88,412		2,568		368
Combined single-family:
20 and 30-year or more, amortizing fixed-rate⁽³⁾	81,560		77,909		(14,431		)	63,478		73,292		2,521		316
15-year amortizing fixed-rate⁽³⁾	1,386		1,358		(43		)	1,315		1,140		56		12
Adjustable rate⁽⁴⁾	986		975		(84		)	891		868		23		6
Alt-A, interest-only, and option ARM⁽⁵⁾	18,968		17,898		(3,996		)	13,902		17,504		441		75
Total single-family⁽⁷⁾	$	102,900	$	98,140	$	(18,554	)	$	79,586	$	92,804	$	3,041	$	409
Multifamily —
With no specific allowance recorded⁽⁸⁾	$	694	$	681	$	—		$	681	$	1,108	$	48	$	20
With specific allowance recorded	608		595		(80		)	515		891		41		31
Total multifamily	$	1,302	$	1,276	$	(80	)	$	1,196	$	1,999	$	89	$	51
Total single-family and multifamily	$	104,202	$	99,416	$	(18,634	)	$	80,782	$	94,803	$	3,130	$	460



	Balance at December 31, 2012									For The Year Ended December 31, 2012
	UPB		Recorded Investment		Associated Allowance			Net Investment		Average Recorded Investment		Interest Income Recognized		Interest Income Recognized On Cash Basis⁽¹⁾
	(in millions)
Single-family —
With no specific allowance recorded⁽²⁾:
20 and 30-year or more, amortizing fixed-rate⁽³⁾	$	6,582	$	3,236	$	—		$	3,236	$	3,136	$	339	$	46
15-year amortizing fixed-rate⁽³⁾	64		30		—			30		25		6		1
Adjustable rate⁽⁴⁾	19		12		—			12		7		—		—
Alt-A, interest-only, and option ARM⁽⁵⁾	1,799		857		—			857		847		63		11
Total with no specific allowance recorded	8,464		4,135		—			4,135		4,015		408		58
With specific allowance recorded:⁽⁶⁾
20 and 30-year or more, amortizing fixed-rate⁽³⁾	67,473		66,501		(13,522		)	52,979		55,431		1,632		279
15-year amortizing fixed-rate⁽³⁾	1,134		1,125		(55		)	1,070		714		31		8
Adjustable rate⁽⁴⁾	883		874		(107		)	767		558		14		5
Alt-A, interest-only, and option ARM⁽⁵⁾	16,946		16,656		(4,251		)	12,405		14,278		326		82
Total with specific allowance recorded	86,436		85,156		(17,935		)	67,221		70,981		2,003		374
Combined single-family:
20 and 30-year or more, amortizing fixed-rate⁽³⁾	74,055		69,737		(13,522		)	56,215		58,567		1,971		325
15-year amortizing fixed-rate⁽³⁾	1,198		1,155		(55		)	1,100		739		37		9
Adjustable rate ⁽⁴⁾	902		886		(107		)	779		565		14		5
Alt-A, interest-only, and option ARM⁽⁵⁾	18,745		17,513		(4,251		)	13,262		15,125		389		93
Total single-family⁽⁷⁾	$	94,900	$	89,291	$	(17,935	)	$	71,356	$	74,996	$	2,411	$	432
Multifamily —
With no specific allowance recorded⁽⁸⁾	$	978	$	966	$	—		$	966	$	1,420	$	61	$	37
With specific allowance recorded	1,248		1,230		(205		)	1,025		1,470		68		51
Total multifamily	$	2,226	$	2,196	$	(205	)	$	1,991	$	2,890	$	129	$	88
Total single-family and multifamily	$	97,126	$	91,487	$	(18,140	)	$	73,347	$	77,886	$	2,540	$	520


(1)	Consists of income recognized during the period related to loans categorized as non-accrual.


(2)	Individually impaired loans with no specific related valuation allowance primarily represent mortgage loans removed from PC pools and accounted for in accordance with the accounting guidance for loans and debt securities acquired with deteriorated credit quality that have not experienced further deterioration.


(3)	See endnote (3) of “Table 4.2 — Recorded Investment of Held-For-Investment Mortgage Loans, by LTV Ratio.”


(4)	Includes balloon/reset mortgage loans and excludes option ARMs.


(5)	See endnote (5) of “Table 4.2 — Recorded Investment of Held-For-Investment Mortgage Loans, by LTV Ratio.”


(6)	Consists primarily of mortgage loans classified as TDRs.


(7)	As of December 31, 2013 and 2012 includes $95.1 billion and $86.4 billion, respectively, of UPB associated with loans for which we have recorded a specific allowance, and $7.8 billion and $8.5 billion, respectively, of UPB associated with loans that have no specific allowance recorded. See endnote (2) for additional information.


(8)	Individually impaired multifamily loans with no specific related valuation allowance primarily represent those loans for which the collateral value is sufficiently in excess of the loan balance to result in recovery of the entire recorded investment if the property were foreclosed upon or otherwise subject to disposition.

Interest income foregone on individually impaired loans was $2.7 billion, $2.3 billion and $1.6 billion for the years ended December 31, 2013, 2012 and 2011 respectively.

Mortgage Loan Performance

We do not accrue interest on loans three months or more past due.

The table below presents the recorded investment of our single-family and multifamily mortgage loans, held-for-investment, by payment status.

Table 5.2 — Payment Status of Mortgage Loans⁽¹⁾



	December 31, 2013
	Current		One Month Past Due		Two Months Past Due		Three Months or More Past Due, or in Foreclosure		Total		Non-accrual
	(in millions)
Single-family —
20 and 30-year or more, amortizing fixed-rate⁽²⁾	$	1,157,057	$	19,743	$	6,675	$	29,635	$	1,213,110	$	29,620
15-year amortizing fixed-rate⁽²⁾	293,286		1,196		271		864		295,617		863
Adjustable-rate⁽³⁾	62,987		495		147		871		64,500		871
Alt-A, interest-only, and option ARM⁽⁴⁾	62,356		2,898		1,157		10,169		76,580		10,162
Total single-family	1,575,686		24,332		8,250		41,539		1,649,807		41,516
Total multifamily	50,827		—		21		26		50,874		627
Total single-family and multifamily	$	1,626,513	$	24,332	$	8,271	$	41,565	$	1,700,681	$	42,143

	December 31, 2012
	Current		One Month Past Due		Two Months Past Due		Three Months or More Past Due, or in Foreclosure		Total		Non-accrual
	(in millions)
Single-family —
20 and 30-year or more, amortizing fixed-rate⁽²⁾	$	1,125,996	$	21,509	$	8,051	$	40,977	$	1,196,533	$	40,833
15-year amortizing fixed-rate⁽²⁾	270,730		1,320		338		1,184		273,572		1,177
Adjustable-rate⁽³⁾	63,736		614		212		1,388		65,950		1,383
Alt-A, interest-only, and option ARM⁽⁴⁾	82,438		3,439		1,582		16,270		103,729		16,237
Total single-family	1,542,900		26,882		10,183		59,819		1,639,784		59,630
Total multifamily	63,000		—		2		30		63,032		1,457
Total single-family and multifamily	$	1,605,900	$	26,882	$	10,185	$	59,849	$	1,702,816	$	61,087


(1)	Based on recorded investment in the loan. Mortgage loans that have been modified are not counted as past due as long as the borrower is current under the modified terms. The payment status of a loan may be affected by temporary timing differences, or lags, in the reporting of this information to us by our servicers.


(2)	See endnote (3) of “Table 4.2 — Recorded Investment of Held-For-Investment Mortgage Loans, by LTV Ratio.”


(3)	Includes balloon/reset mortgage loans and excludes option ARMs.


(4)	See endnote (5) of “Table 4.2 — Recorded Investment of Held-For-Investment Mortgage Loans, by LTV Ratio.”

We have the option under our PC agreements to remove mortgage loans that underlie our PCs under certain circumstances to resolve an existing or impending delinquency or default. Our practice generally has been to remove loans from PC trusts when the loans have been delinquent for 120 days or more. As of December 31, 2013, there were $1.1 billion in UPB of loans underlying our PCs that were 120 days or more delinquent, and that met our criteria for removing the loan from the PC trust. Generally, we remove these delinquent loans from the PC trust, and thereby extinguish the related PC debt at the next scheduled PC payment date, unless the loans proceed to foreclosure transfer, complete a foreclosure alternative or are paid in full by the borrower before such date.

When we remove mortgage loans from PC trusts, we reclassify the loans from mortgage loans held-for-investment by consolidated trusts to unsecuritized mortgage loans held-for-investment and record an extinguishment of the corresponding portion of the debt securities of the consolidated trusts. We removed $18.2 billion and $29.6 billion in UPB of loans from PC trusts (or purchased delinquent loans associated with other guarantee commitments) during the years ended December 31, 2013 and 2012.

The table below summarizes the delinquency rates of mortgage loans within our single-family credit guarantee and multifamily mortgage portfolios.

Table 5.3 — Delinquency Rates



	December 31, 2013			December 31, 2012
Single-family:⁽¹⁾
Non-credit-enhanced portfolio (excluding Other Guarantee Transactions):
Serious delinquency rate	1.99		%	2.62		%
Total number of seriously delinquent loans	183,822			244,533
Credit-enhanced portfolio (excluding Other Guarantee Transactions):
Serious delinquency rate	4.34		%	6.83		%
Total number of seriously delinquent loans	56,794			90,747
Other Guarantee Transactions:⁽²⁾
Serious delinquency rate	10.91		%	10.60		%
Total number of seriously delinquent loans	14,709			17,580
Total single-family:
Serious delinquency rate	2.39		%	3.25		%
Total number of seriously delinquent loans	255,325			352,860
Multifamily:⁽³⁾
Non-credit-enhanced portfolio:
Delinquency rate	0.07		%	0.10		%
UPB of delinquent loans (in millions)	$	46		$	76
Credit-enhanced portfolio:
Delinquency rate	0.11		%	0.36		%
UPB of delinquent loans (in millions)	$	75		$	172
Total Multifamily:
Delinquency rate	0.09		%	0.19		%
UPB of delinquent loans (in millions)	$	121		$	248

(1)

Single-family mortgage loans that have been modified are not counted as seriously delinquent if the borrower is less than three monthly payments past due under the modified terms. Serious delinquencies on single-family mortgage loans underlying certain REMICs and Other Structured Securities, Other Guarantee Transactions, and other guarantee commitments may be reported on a different schedule due to variances in industry practice.


(2)	Single-family Other Guarantee Transactions generally have underlying mortgage loans with higher risk characteristics, but some single-family Other Guarantee Transactions may provide inherent credit protections from losses due to underlying subordination, excess interest, overcollateralization and other features.


(3)	Multifamily delinquency performance is based on UPB of mortgage loans that are two monthly payments or more past due or those in the process of foreclosure and includes multifamily Other Guarantee Transactions (e.g., K Certificates). Excludes mortgage loans that have been modified as long as the borrower is less than two monthly payments past due under the modified contractual terms.

We continue to implement a number of initiatives to refinance and modify loans, including the MHA Program and the servicing alignment initiative. Our implementation of the MHA Program, for our loans, includes the following: (a) an initiative to allow mortgages currently owned or guaranteed by us to be refinanced without obtaining additional credit enhancement beyond that already in place for the loan (i.e., our relief refinance mortgage, which is our implementation of HARP); (b) an initiative to modify mortgages for both homeowners who are in default and those who are at risk of imminent default (i.e., HAMP); and (c) an initiative designed to permit borrowers who meet basic HAMP eligibility requirements to sell their homes in short sales or to complete a deed in lieu of foreclosure transaction. As part of accomplishing certain of these initiatives, we pay various incentives to servicers and borrowers. We bear the full costs associated with these loan workout and foreclosure alternatives on mortgages that we own or guarantee, including the cost of any monthly payment reductions, and do not receive any reimbursement from Treasury.

Troubled Debt Restructurings

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 programs designed to help them manage non-performing loans more effectively and to assist borrowers in maintaining home ownership where possible, or facilitate foreclosure alternatives when continued homeownership is not an option. 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.

For HAMP loan modifications, our servicers typically obtain information on income, assets, and other borrower obligations to consider eligibility for modification and 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. In July 2013, we implemented a streamlined (non-HAMP) modification initiative, which provides an additional modification opportunity to certain borrowers, and it is scheduled to end in December 2015. The modification that borrowers receive under this initiative will have the same mortgage terms as our non-HAMP standard modification. Borrowers are not required to apply for assistance or provide income or hardship documentation for this type of modification.

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 2013 approximately 56% of completed single-family loan modifications that were classified as TDRs involved interest rate reductions and term extensions and approximately 36% involved principal forbearance in addition to interest rate reductions and term extensions. During 2013, the average term extension was 161 months and the average interest rate reduction was 2.2% on completed single-family loan modifications classified as TDRs.

Multifamily TDRs

The assessment as to whether a multifamily loan restructuring is considered a TDR contemplates the unique facts and circumstances of each loan. This assessment considers qualitative factors such as whether the borrower’s modified interest rate is consistent with that of a borrower having a similar credit profile at the time of modification. In certain cases, for maturing loans we may provide short-term loan extensions of up to one year with no changes to the effective borrowing rate. In other cases, we may make more significant modifications of terms for borrowers experiencing financial difficulty, such as reducing the interest rate or extending the maturity for longer than one year. In cases where we do modify the contractual terms of the loan, the changes in terms may be similar to those of single-family loans, such as an extension of the term, reduction of contractual rate, principal forbearance, or some combination of these features.

TDR Activity and Performance

The table below presents the volume of single-family and multifamily loans that were newly classified as TDRs during the year ended December 31, 2013 and 2012, based on the original category of the loan before the loan was classified as a TDR. Loans classified as a TDR in one period may be subject to further action (such as a modification or remodification) in a subsequent period. In such cases, the subsequent action would not be reflected in the table below since the loan would already have been classified as a TDR.

Table 5.4 — TDR Activity, by Segment



	Year Ended December 31, 2013			Year Ended December 31, 2012
	# of Loans	Post-TDR Recorded Investment		# of Loans	Post-TDR Recorded Investment
	(dollars in millions)
Single-family⁽¹⁾
20 and 30-year or more, amortizing fixed-rate⁽²⁾	101,538	$	16,014	177,930	$	27,076
15-year amortizing fixed-rate	11,671	825		17,549	1,176
Adjustable-rate⁽³⁾	3,604	574		6,496	977
Alt-A, interest-only, and option ARM⁽⁴⁾	17,770	3,941		35,012	7,834
Total Single-family	134,583	21,354		236,987	37,063
Multifamily	8	98		20	202
Total	134,591	$	21,452	237,007	$	37,265

(1)

The pre-TDR recorded investment for single-family loans initially classified as TDR during the years ended December 31, 2013 and 2012, was $21.2 billion and $37.0 billion, respectively. During the third quarter of 2012, we changed the treatment of single-family loans discharged in Chapter 7 bankruptcy to classify these loans as TDRs, regardless of the borrowers’ payment status and when the loans were not already classified as TDRs for other reasons. As a result, the 2012 period reflects the initial classification of such loans as TDRs.


(2)	See endnote (3) of “Table 4.2 — Recorded Investment of Held-For-Investment Mortgage Loans, by LTV Ratio.”


(3)	Includes balloon/reset mortgage loans.


(4)	See endnote (5) of “Table 4.2 — Recorded Investment of Held-For-Investment Mortgage Loans, by LTV Ratio.”

The measurement of impairment for single-family TDRs is based on the excess of our recorded investment in the loan over the present value of the loan’s expected future cash flows. For multifamily loans, we use an estimate of the fair value of the loan’s collateral rather than the present value of expected future cash flows to determine the amount of impairment. Generally, restructurings of single-family loans that are TDRs have a higher allowance for loan losses than restructurings that are not considered TDRs because TDRs involve a concession being granted to the borrower. Our process for determining the appropriate allowance for loan losses for both single-family and multifamily loans considers the impact that our loss mitigation activities, such as loan restructurings, have on probabilities of default. For single-family loans evaluated individually and collectively for impairment that have been modified, the probability of default is affected by the incidence of redefault that we have experienced on similar loans that have completed a modification. For multifamily loans, the incidence of redefault on loans that have been modified does not directly affect the allowance for loan losses as our multifamily loans are generally evaluated individually for impairment based on the fair value of the underlying collateral. The process for determining the appropriate allowance for loan losses for multifamily loans evaluated collectively for impairment considers the incidence of redefault on loans that have completed a modification.

The table below presents the volume of payment defaults (i.e., loans that became two months delinquent or completed a loss event) of our TDR modifications based on the original category of the loan before modification and excludes loans subject to other loss mitigation activity that were classified as TDRs during the period. Substantially all of our completed single-family loan modifications classified as a TDR during 2013 resulted in a modified loan with a fixed interest rate.

Table 5.5 — Payment Defaults of Completed TDR Modifications, by Segment⁽¹⁾



	Year Ended December 31, 2013			Year Ended December 31, 2012
	# of Loans	Post-TDR Recorded Investment⁽²⁾		# of Loans	Post-TDR Recorded Investment⁽²⁾
	(dollars in millions)
Single-family
20 and 30-year or more, amortizing fixed-rate⁽³⁾	14,964	$	2,766	15,718	$	2,905
15-year amortizing fixed-rate	471	52		716	73
Adjustable-rate	237	50		331	71
Alt-A, interest-only, and option ARM⁽⁴⁾	2,256	587		3,042	805
Total single-family	17,928	$	3,455	19,807	$	3,854
Multifamily	—	$	—	6	$	82

(1)

Represents TDR loans that experienced a payment default during the period and had completed a modification during the year preceding the payment default. A payment default occurs when a borrower either: (a) became two or more months delinquent; or (b) completed a loss event, such as a short sale or foreclosure transfer. We only include payment defaults for a single loan once during each quarterly period within a year; however, a single loan will be reflected more than once if the borrower experienced another payment default in a subsequent quarterly period.


(2)	Represents the recorded investment at the end of the period in which the loan was modified and does not represent the recorded investment as of December 31.


(3)	See endnote (3) of “Table 4.2 — Recorded Investment of Held-For-Investment Mortgage Loans, by LTV Ratio.”


(4)	See endnote (5) of “Table 4.2 — Recorded Investment of Held-For-Investment Mortgage Loans, by LTV Ratio.”

In addition to modifications, loans may be initially classified as TDRs as a result of other loss mitigation activities (i.e., repayment plans, forbearance agreements, or trial period modifications). During the years ended December 31, 2013 and 2012, 8,473 and 5,220 of such loans, respectively, with a post-TDR recorded investment of $1.4 billion and $0.9 billion, respectively, experienced a payment default.

Loans may also be initially classified as TDRs because the borrowers’ debts were discharged in Chapter 7 bankruptcy (and the loan was not already classified as a TDR for other reasons). During the years ended December 31, 2013 and 2012, 17,225 and 9,390, respectively, of such loans (with a post-TDR recorded investment of $2.8 billion and $1.5 billion, respectively) experienced a payment default.

FEDERAL HOME LOAN MORTGAGE CORP | 2013 | FY |

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