Freddie Mac 2014 Annual Report Download - page 118

113 Freddie Mac
We evaluate the condition of and market for newly acquired REO properties to determine pre-listing needs, such as: (a)
whether repairs are needed; (b) whether we need to consider occupancy (by tenant or owner), borrower redemption, or other
issues; and (c) the sale or disposition strategy. Often we will need to complete the eviction process or await tenant vacancy
before determining if repairs are needed. When we list a REO property for sale, we typically provide a first look opportunity,
which is an initial period where we consider offers on the property by owner occupants and non-profits dedicated to
neighborhood stabilization before we consider offers from investors. We may also consider alternative disposition processes,
such as REO auctions, bulk sales channels, and partnering with locally-based private entities to facilitate dispositions.
During the third quarter of 2014, we began to increase the number of auction sales of our occupied REO properties that
are unable to be marketed in a more traditional sales channel. We believe our REO disposition severity ratios in 2014 benefited
from improved market conditions as well as changes we have made to our process for evaluating the market value of impaired
loan collateral and determining the list price for our REO properties when we offer them for sale. In addition, we believe that
our REO disposition ratios have benefited from our efforts to repair a significant portion of these properties prior to listing them
for sale.
Risk Profile
Our REO inventory (measured in number of properties) declined 46% from December 31, 2013 to December 31, 2014
primarily due to: (a) REO dispositions exceeding our acquisitions; (b) a declining number of seriously delinquent loans; and (c)
a larger proportion of property sales to third parties at foreclosure. We continued to experience a relatively high volume of REO
dispositions during 2014, which we believe was driven by significant demand for single-family homes from both investors and
owner-occupant buyers. We expect our REO dispositions to remain at elevated levels in the near term, as we have a large REO
inventory and a significant number of seriously delinquent loans that are in the process of foreclosure. We expect our REO
acquisitions to continue to decline, due primarily to the continued improvement in the serious delinquency rate of loans in our
single-family credit guarantee portfolio.
Our single-family REO acquisition activity in the Southeast and North Central regions was high during 2014, in part
because a significant number of loans that had experienced significant delays within these regions completed the foreclosure
process. Our single-family REO acquisitions in 2014 were highest in Florida, Illinois, Ohio, and Michigan which collectively
represented 40% of total single-family REO acquisitions during that period, based on the number of properties, and comprised
39% of our total single-family REO property inventory at December 31, 2014.
Our REO acquisition activity is disproportionately high for certain types of loans, including loans with certain higher-
risk characteristics. For example, the percentage of interest-only and Alt-A loans in our single-family credit guarantee portfolio,
based on UPB, was approximately 2% and 3%, respectively, at December 31, 2014. The percentage of our REO acquisitions in
2014 that had been financed by either of these loan types represented approximately 22% of our total REO acquisitions, based
on loan amount prior to acquisition. In addition, loans from our 2005-2008 Legacy single-family book comprised
approximately 76% of our REO acquisition activity during 2014.
The North Central region comprised 30% and 33% of our single-family REO property inventory, based on the number of
properties, as of December 31, 2014 and 2013, respectively, and the Southeast region comprised 29% and 30%, respectively, at
those dates. The North Central region generally has experienced more challenging economic conditions, includes a number of
states with longer foreclosure timelines due to local laws and foreclosure processes, and has housing markets with generally
lower demand and lower home values than other regions. In the Southeast region, Florida comprised 17% of our total single-
family REO inventory at December 31, 2014 and has been one of the states with high REO severity rates in the last several
years. See "NOTE 6: REAL ESTATE OWNED" and "CONSOLIDATED BALANCE SHEET ANALYSIS — REO, Net" for
more information on our REO properties.
The table below provides information about the status of our REO properties at December 31, 2014 and 2013.
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