Freddie Mac 2010 Annual Report Download - page 57

operations as well. In addition, negative publicity could expose us to adverse legal and regulatory consequences, including
greater regulatory scrutiny or adverse regulatory or legislative changes, and could affect what changes may occur to our
business structure during or following conservatorship, including whether we will continue to exist. These adverse
consequences could result from perceptions concerning our activities and role in addressing the mortgage market crisis, the
concerns about deficiencies in foreclosure documentation practices or our actual or alleged action or failure to act in any
number of areas, including corporate governance, regulatory compliance, financial reporting and disclosure, purchases of
products perceived to be predatory, safeguarding or using nonpublic personal information, or from actions taken by
government regulators in response to our actual or alleged conduct.
The MHA Program and other efforts to reduce foreclosures, modify loan terms and refinance mortgages may fail to
mitigate our credit losses and may adversely affect our results of operations or financial condition.
The MHA Program and other loss mitigation activities are a key component of our strategy for managing and resolving
troubled assets and lowering credit losses. However, there can be no assurance that any of our loss mitigation strategies will
be successful and that credit losses will not continue to escalate. To the extent that borrowers participate in HAMP in large
numbers, it is likely that the costs we incur related to loan modifications and other activities under HAMP will be substantial
because we will bear the full cost of the monthly payment reductions related to modifications of loans we own or guarantee,
and all servicer and borrower incentive fees. We will not be reimbursed for these costs by Treasury.
FHFA has directed us to implement HAMP for troubled mortgages we own or guarantee. It is possible that Treasury
could make changes to HAMP that, to the extent we were required to or elected to implement them, could make the program
more costly to us, both in terms of credit expenses and the cost of implementing and operating the program. We could also
be required or elect to make changes to our implementation of our other loss mitigation activities that could make these
activities more costly to us. For example, we could be required to, or elect to, use principal reduction to achieve reduced
payments for borrowers. This could further increase our losses, as we could bear the full costs of such reductions.
In June 2010, Treasury announced an initiative under which servicers will be required to consider an alternative
modification approach that includes a possible reduction of principal for loans with LTV ratios over 115%. Mortgage
investors will receive incentives based on the amount of reduced principal. In October 2010, Treasury provided guidance
with respect to applying this alternative for borrowers who have already received permanent modifications or are in trial
plans. Holders of mortgages and mortgage-related securities are not required to agree to a reduction of principal, but
servicers must have a process for considering the approach. We do not currently have plans to apply these changes to
mortgages that we own or guarantee. However, it is possible that FHFA might direct us to implement some or all of these
changes. Our credit losses could increase to the extent we apply these changes.
A significant number of loans are in the trial period of HAMP. Although the ultimate completion rate remains uncertain,
a large number of loans have failed to complete the trial period or qualify for any of our other loan modification and loss
mitigation programs. It is possible that, in the future, additional loans will fail to complete the trial period or qualify for
these other programs. For these loans, HAMP will have effectively delayed the foreclosure process and could increase our
losses, to the extent the prices we ultimately receive for the foreclosed properties are less than the prices we could have
received had we foreclosed upon the properties earlier, due to continued home price declines. These delays in foreclosure
could also cause our REO operations expense to increase, perhaps substantially.
Our seller/servicers have a key role in the success of our loss mitigation activities. The continued increases in seriously
delinquent loan volume, the ongoing weak conditions of the mortgage market during 2009 and 2010, and the number and
variety of additions and changes to HAMP have placed a strain on the loss mitigation resources of many of our seller/
servicers. This has also increased the operational complexity of the servicing function, as well as the risk that errors will
occur. A decline in the performance of seller/servicers in mitigation efforts could result in missed opportunities for successful
loan modifications, an increase in our credit losses and damage to our reputation.
Mortgage modifications on the scale of HAMP, particularly any new focus on principal reductions, have the potential to
change borrower behavior and mortgage underwriting. This, coupled with the phenomenon of widespread underwater
mortgages, could significantly affect borrower attitudes towards homeownership, the commitment of borrowers to making
their mortgage payments, the way the market values residential mortgage assets, the way in which we conduct business and,
ultimately, our financial results.
Depending on the type of loss mitigation activities we pursue, those activities could result in accelerating or slowing
prepayments on our PCs and REMICs and Other Structured Securities, either of which could negatively affect the pricing of
such securities.
We are devoting significant internal resources to the implementation of the various initiatives under the MHA Program,
which has, and will continue to, increase our expenses. The size and scope of our effort under the MHA Program may also
limit our ability to pursue other business opportunities or corporate initiatives.
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