Freddie Mac 2014 Annual Report Download - page 122

117 Freddie Mac
Institutional Credit Risk Profile
Single-family Mortgage Seller/Servicers
We are exposed to institutional credit risk related to the potential insolvency of, or non-performance by, our sellers and
servicers. If our servicers lack appropriate controls, experience a failure in their controls, or experience an operating disruption,
including as a result of legal or regulatory actions or ratings downgrades, our business and financial results could be adversely
affected.
We have contractual arrangements with our sellers under which they agree to sell us mortgage loans, and represent and
warrant that those loans meet specified eligibility and underwriting standards. Our servicers represent and warrant to us that
those loans will be serviced in accordance with our servicing contract. In January 2015, FHFA proposed new minimum
financial eligibility requirements for Freddie Mac and Fannie Mae seller/servicers. For more information on these
requirements, see "BUSINESS — Regulation and Supervision — Federal Housing Finance Agency — Proposed Financial
Eligibility Requirements for Seller/Servicers."
Risk Management Framework
We maintain eligibility standards for our seller/servicers. These standards include having: (a) a demonstrated operating
history in residential mortgage origination and servicing (or use of an eligible servicing agent acceptable to us); (b) adequate
insurance coverage; (c) a quality control program that meets our standards; and (d) sufficient net worth, liquidity and funding
sources to support the operations of its business as well as its commitments to us. Seller/servicers approved to do business with
us are subject to our ongoing monitoring and review, which requires regular financial reporting to us.
Based on our monitoring procedures, we may disqualify or suspend a seller or servicer with or without cause at any time.
Once a seller is deemed ineligible, we no longer accept mortgages originated by that counterparty and we seek to terminate
outstanding commitments. Similarly, when a servicer is deemed ineligible, we no longer allow additional loans to be serviced
by that servicer and we seek to transfer pre-existing servicing contracts to eligible institutions.
We maintain a quality control process under which we review loans for compliance with our standards. If we discover
that representations and warranties were breached (i.e., that contractual standards were not followed), we can exercise certain
contractual remedies to mitigate our actual or potential credit losses. These contractual remedies may include the ability to
require the seller or the servicer to repurchase the loan at its current UPB, reimburse us for losses realized with respect to the
loan after consideration of any other recoveries, and/or indemnify us. For certain servicing violations, we typically first issue a
notice of defect and allow the servicer a period of time to correct the problem. If the servicing violation is not corrected, we
may issue a repurchase request. In recent years, we have required certain of our larger sellers to maintain ineligible loan rates
below a stated threshold, with financial consequences for non-compliance. In addition, for our largest sellers, we actively
manage the current quality of loan originations by providing monthly communications regarding loan defect rates and the
causes of those defects as identified in our performing loan quality control sampling reviews. If necessary, we work with seller/
servicers to develop an appropriate plan of corrective action.
For additional information about our single-family seller/servicers, see “BUSINESS — Our Business — Our Business
Segments — Single-Family Guarantee Segment,” "Single-Family Mortgage Credit Risk Framework and Profile — Managing
Problem Loans," "RISK FACTORS — Competitive and Market Risks — We face significant risks related to our delegated
underwriting process for single-family mortgages, including risks related to data accuracy and fraud. Recent changes to the
process could increase our risks," and "NOTE 15: CONCENTRATION OF CREDIT AND OTHER RISKS — Seller/
Servicers."
Risk Profile
We acquire a significant portion of our single-family mortgage purchase volume from several large lenders. Although our
business with our mortgage sellers is concentrated, a number of our largest single-family mortgage seller counterparties have
reduced or eliminated their purchases of mortgage loans from mortgage brokers and correspondent lenders. As a result, we are
acquiring a greater portion of our business volume directly from non-depository and smaller depository financial institutions
that may not have the same financial strength or operational capacity as our largest mortgage seller counterparties. We could be
required to absorb losses on defaulted loans that a failed mortgage seller is obligated to repurchase from us if we determine
there was an underwriting or eligibility breach. For more information about the risk of our reliance on larger mortgage sellers,
see "RISK FACTORS — Competitive and Market Risks — The loss of business volume could result in a decline in our market
share and revenues."
Our exposure to single-family mortgage seller/servicers for repurchase obligations declined in 2014. The UPB of loans
subject to open repurchase requests (both seller and servicer related) declined to $0.7 billion at December 31, 2014 from $2.2
billion at December 31, 2013 as we completed and resolved many of the requests related to pre-conservatorship loan purchases.
During 2014, we recovered amounts from seller/servicers with respect to $2.0 billion in UPB of loans subject to our repurchase
requests, including $0.4 billion in UPB related to settlement agreements to release specified loans from certain repurchase
obligations in exchange for one-time cash payments. The seller or servicer resolved the request by reimbursing us for losses
with respect to approximately 19% of the $2.0 billion in UPB (excluding amounts related to settlement agreements).
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