Freddie Mac 2010 Annual Report Download - page 59

evaluations of these issues and implement remedial actions. It is possible that different procedures will need to be developed
and implemented for individual states because of differences in applicable state laws. In addition, a number of parties
involved in residential real estate transactions as well as various federal, state and local regulatory authorities, may need to
agree to any remedial actions, which could further complicate and delay the process of resolving these issues. These parties
potentially include seller/servicers, Freddie Mac, Fannie Mae, FHFA, state or local authorities, mortgage insurers and title
insurance companies. In many cases, the remedial actions will require court approval. It is possible that courts in different
states, as well as individual courts within the same state, may come to different conclusions with respect to what remedial
actions are acceptable.
Any delays in the foreclosure process could cause properties awaiting foreclosure to deteriorate until we acquire
ownership of them through foreclosure. Such deterioration would increase our expenses to repair and maintain the properties
when we do acquire them. Delays in selling REO properties could cause our REO operations expense for current REO
properties to increase because those properties will stay in REO status for a longer period of time, which would increase the
ongoing costs we incur to maintain or protect them. In addition, our disposition losses, which are a component of REO
operations expense, could increase to the extent home prices decline during this period of delay and the prices we ultimately
receive for the REO properties are less than the prices we could have received had we acquired and sold them earlier.
Concerns about the impact of deficient foreclosure practices on title to REO properties may create additional uncertainty
among mortgage investors and potential home buyers about future trends in home prices. Over the long term, concerns about
foreclosure practices may adversely affect trends in home prices regionally or nationally, which could also adversely affect
our financial results. These concerns could increase both the uncertainty about the results of our models and the risk of
errors in the implementation, operation or use of our models, in part because greater management judgment will need to be
applied.
Any delays in the foreclosure process could also create fluctuations in our single-family credit statistics, including our
credit loss statistics and reported serious delinquency rates. Our realization of credit losses, which consists of REO
operations income (expense) plus charge-offs, net, could be delayed because we record charge-offs at the time we take
ownership of a property through foreclosure. Delays in the foreclosure process could reduce the rate at which delinquent
loans proceed to foreclosure, which could cause a temporary decline in our REO acquisitions and the rate of growth of our
REO inventory. This could also temporarily increase the number of seriously delinquent loans that remain in our single-
family mortgage portfolio, which could result in higher reported serious delinquency rates and a larger number of non-
performing loans than would otherwise have been the case.
It also is possible that mortgage insurance claims could be denied if delays caused by servicers’ deficient foreclosure
practices prevent servicers from completing foreclosures within required timelines defined by mortgage insurers.
We have incurred, and will continue to incur, expenses related to deficiencies in foreclosure documentation practices
and the costs of remediating them, which may be significant. These costs will include expenses to remediate issues relating
to practices of certain legal counsel that will increase our expenses in future periods. We may also incur costs if we become
involved in litigation or investigations relating to these issues. While we believe that our seller/servicers would be in
violation of their servicing contracts with us to the extent that they improperly executed documents in foreclosure or
bankruptcy proceedings, as such contracts require that foreclosure proceedings be conducted in accordance with applicable
law, it may be difficult, expensive, and time consuming for us to enforce our contractual rights. Our efforts to enforce our
contractual rights may negatively impact our relationships with these seller/servicers, some of which are among our largest
sources of mortgage loans.
We expect that remedying the document execution issues affecting the foreclosure process and related developments will
likely place further strain on the resources of our seller/servicers, possibly including seller/servicers where such issues have
not been identified to date. This could negatively affect their ability to service loans in our single-family mortgage portfolio
or the quality of service they provide to us. Since our seller/servicers have an active role in our loss mitigation efforts, this
could impact the overall quality of our credit performance and our ability to mitigate credit losses.
Delays in the foreclosure process may also adversely affect the values of, and our losses on, the non-agency mortgage-
related securities we hold. Foreclosure delays may increase the administrative expenses of the securitization trusts for the
non-agency mortgage-related securities, thereby reducing the amount of funds available for distribution to investors. In
addition, the subordinate classes of securities issued by the securitization trusts will continue to receive interest payments
while the defaulted loans remain in the trusts, rather than absorbing the default losses. This may reduce the amount of funds
available for the senior tranches we own. The prospect of losses due to these impacts could adversely affect the market value
of non-agency mortgage-related securities we own.
It has been difficult for us to determine the potential scope of these issues, in part because we must rely on our seller/
servicers for much of the pertinent information and these companies have not yet completed their assessments of these
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