Freddie Mac 2010 Annual Report Download - page 265

In a related matter, both TBW and Bank of America, N.A., which is also a claimant in the TBW bankruptcy, have
sought discovery against Freddie Mac. While no actions against Freddie Mac related to TBW have been initiated in
bankruptcy court or elsewhere to recover assets, TBW and Bank of America, N.A. have indicated that they wish to determine
whether the bankruptcy estate of TBW has any potential rights to seek to recover assets transferred by TBW to Freddie Mac
prior to bankruptcy. TBW has indicated to us that it may file an action to recover certain funds paid to us prior to the
bankruptcy. At this time, we are unable to estimate our potential exposure, if any, to such claims. See “NOTE 21: LEGAL
CONTINGENCIES” for additional information on our claims arising from TBW’s bankruptcy.
In some cases, the ultimate amounts of recovery payments we received and may receive in the future from seller/
servicers were and may be significantly less than the amount of our estimates of potential exposure to losses related to their
obligations. Our estimate of probable incurred losses for exposure to seller/servicers for their repurchase obligations to us is
a component of our allowance for loan losses as of December 31, 2010 and 2009. See “NOTE 1: SUMMARY OF
SIGNIFICANT ACCOUNTING POLICIES — Allowance for Loan Losses and Reserve for Guarantee Losses” for further
information. We believe we have adequately provided for these exposures, based upon our estimates of incurred losses, in
our loan loss reserves at December 31, 2010 and 2009; however, our actual losses may exceed our estimates.
Our seller/servicers have an active role in our loss mitigation efforts, including under the MHA Program, and therefore
we also have exposure to them to the extent a decline in their performance results in a failure to realize the anticipated
benefits of our loss mitigation plans. A significant portion of our single-family mortgage loans are serviced by several large
seller/servicers. Our top five single-family loan servicers, Wells Fargo Bank N.A., Bank of America N.A., JPMorgan Chase
Bank, N.A., Citimortgage, Inc., and U.S. Bank, N.A., together serviced approximately 68% of our single-family mortgage
loans, the first three of which each serviced 10% or more of our single-family mortgage loans, as of December 31, 2010.
During the second half of 2010, a number of our seller/servicers, including several of our largest ones, temporarily
suspended foreclosure proceedings in some or all states in which they do business. These seller/servicers announced these
suspensions were necessary while they evaluated and addressed issues relating to the improper preparation and execution of
certain documents used in foreclosure proceedings, including affidavits. See “NOTE 7: REAL ESTATE OWNED” for
additional information.
As of December 31, 2010 our top four multifamily servicers, Berkadia Commercial Mortgage LLC, Wells Fargo
Bank, N.A., CBRE Capital Markets, Inc., and Deutsche Bank Berkshire Mortgage, each serviced more than 10% of our
multifamily mortgage portfolio and together serviced approximately 52% of our multifamily mortgage portfolio.
We are exposed to the risk that multifamily seller/servicers could come under financial pressure due to the current
stressful economic environment, which could potentially cause degradation in the quality of servicing they provide to us or,
in certain cases, reduce the likelihood that we could recover losses through lender repurchase or through recourse agreements
or other credit enhancements, where applicable. We continue to monitor the status of all our multifamily seller/servicers in
accordance with our counterparty credit risk management framework.
Mortgage Insurers
We have institutional credit risk relating to the potential insolvency of or non-performance by mortgage insurers that
insure single-family mortgages we purchase or guarantee. For our exposure to mortgage insurers, we evaluate the recovery
from insurance policies for mortgage loans that we hold for investment as well as loans underlying our non-consolidated
Freddie Mac mortgage-related securities and covered by other guarantee commitments as part of the estimate of our loan loss
reserves. See “NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES — Allowance for Loan Losses and
Reserve for Guarantee Losses” for additional information. As of December 31, 2010, these insurers provided coverage, with
maximum loss limits of $56.8 billion, for $274.7 billion of UPB in connection with our single-family credit guarantee
portfolio. Our top six mortgage insurer counterparties, Mortgage Guaranty Insurance Corporation (or MGIC), Radian
Guaranty Inc., Genworth Mortgage Insurance Corporation, PMI Mortgage Insurance Co., United Guaranty Residential
Insurance Co. and Republic Mortgage Insurance Co. each accounted for more than 10% and collectively represented
approximately 95% of our overall mortgage insurance coverage at December 31, 2010. All our mortgage insurance
counterparties are rated BBB or below as of December 31, 2010, based on the lower of the S&P or Moody’s rating scales
and stated in terms of the S&P equivalent.
During 2010, increases in default volumes and in the time period between claim filing and receipt of payment resulted
in an increase of our receivables for mortgage and pool insurance claims. Although the volume of rescissions of claims under
mortgage insurance coverage temporarily declined mid-year, the volume of rescissions returned to elevated levels by year
end. When an insurer rescinds coverage, the seller/servicer generally is in breach of representations and warranties made to
us when we purchased the affected mortgage. Consequently, we may require the seller/servicer to repurchase the mortgage or
to indemnify us for additional loss.
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