Freddie Mac 2014 Annual Report Download - page 19

14 Freddie Mac
exposure and liability on future sales of loans to us. It is possible that FHFA will require us to make further changes to the
framework.
We do not have our own mortgage loan servicing operation. Instead, our customers perform the primary servicing
function on our behalf. Our servicers are required to service loans in accordance with our standards. Under these standards, we
pay various incentives to servicers for completing workouts of problem loans. We also assess compensatory fees if servicers do
not achieve certain benchmarks with respect to servicing delinquent loans. Similar to seller violations, we can require servicers
to repurchase loans or provide alternative remedies in the case of servicing violations. 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. For breaches of servicing violations related to loans that have proceeded
through foreclosure and REO sale or other workouts (e.g., short sales), we will accept reimbursement for realized credit losses
in lieu of repurchase.
For more information, see “MD&A — RISK MANAGEMENT — Credit Risk Overview — Single-Family Mortgage
Credit Risk Framework and Profile,” “ — Institutional Credit Risk Profile — Single-Family Mortgage Seller/Servicers” and
“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.”
Credit Enhancements
Our charter requires that single-family mortgages with LTV ratios above 80% at the time of purchase be covered by
specified credit enhancements or participation interests. Primary mortgage insurance is the most prevalent type of credit
enhancement protecting our single-family credit guarantee portfolio, and is typically provided on a loan-level basis. Generally,
an insured loan must be in default and the borrower’s interest in the underlying property must have been extinguished, such as
through a short sale or foreclosure, before a claim can be filed under a primary mortgage insurance policy. The mortgage
insurer has a prescribed period of time within which to process a claim and make a determination as to its validity and amount.
For some mortgage loans, we transfer a portion of the credit risk to various third parties in STACR and ACIS transactions,
or other credit enhancements, including:
• lender recourse, where we may require a lender to repurchase a loan upon default;
• indemnification agreements, where we may require a lender to reimburse us for realized credit losses; and
• collateral pledged by lenders, and subordinated security structures.
Lender recourse and indemnification agreements are typically entered into contemporaneously with the purchase of a
mortgage loan as an alternative to requiring primary mortgage insurance or in exchange for a lower guarantee fee.
STACR and ACIS transactions are new types of credit risk transfer transactions we introduced in 2013. We have used
these risk transfer transactions to transfer a portion of credit losses that could occur under adverse home price scenarios
(through a mezzanine credit loss position) on certain groups of loans in our New single-family book from us to third-party
investors. In the STACR debt note transactions, we issue unsecured debt securities that reduce our exposure to credit risk, as
illustrated below:
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