Freddie Mac 2014 Annual Report Download - page 216

211 Freddie Mac
We are exposed to institutional credit risk arising from the potential insolvency or non-performance by our sellers and
servicers of their obligations to repurchase mortgages or (at our option) indemnify us in the event of: (a) breaches of the
representations and warranties they made when they sold the mortgages to us; or (b) failure to comply with our servicing
requirements. Our contracts require that a seller/servicer repurchase a mortgage after we issue a repurchase request, unless the
seller/servicer avails itself of an appeals process provided for in our contracts, in which case the deadline for repurchase is
extended until we decide on the appeal. As of December 31, 2014 and 2013, the UPB of loans subject to our repurchase
requests (seller and servicer related) issued to our single-family sellers and servicers was approximately $0.7 billion and $2.2
billion, respectively (these figures include repurchase requests for which appeals were pending). During 2014 and 2013 we
recovered amounts that covered losses with respect to $2.0 billion and $5.6 billion, respectively, in UPB of loans subject to our
repurchase requests.
During 2014, we entered into settlement agreements with certain counterparties to release specified loans from certain
seller repurchase obligations in exchange for one-time cash payments, which totaled approximately $0.4 billion in aggregate.
These agreements related to loans with $27.6 billion in aggregate principal amount (as of the dates of the respective
agreements) and we recognized a benefit for credit losses of $0.3 billion included within our consolidated statement of
comprehensive income during 2014 related to these agreements.
As of December 31, 2014, single-family loans with aggregate UPB of approximately $315.1 billion (representing 19% of
our single-family credit guarantee portfolio) had been released from repurchase obligations primarily because either: (a) the
mortgages are subject to negotiated agreements; or (b) the seller/servicers were no longer in business and their obligations have
been discharged or a settlement amount was determined in bankruptcy or receivership proceedings.
At the direction of FHFA, Freddie Mac and Fannie Mae have revised their representation and warranty framework for
conventional loans purchased by the GSEs on or after January 1, 2013. The objective of the revised framework is to clarify
lenders’ repurchase exposures and liability on future sales of mortgage loans to Freddie Mac and Fannie Mae. This framework
does not affect seller/servicers’ obligations under their contracts with us with respect to loans sold to us prior to January 1,
2013. This framework also does not affect their obligation to service these loans in accordance with our servicing standards.
Under this framework, sellers are relieved of certain repurchase obligations for loans that meet specific payment requirements.
This includes, subject to certain exclusions, loans with 36 months (12 months for relief refinance mortgages) of consecutive,
on-time payments after we purchase them. In May 2014, we announced changes to our representation and warranty framework
for loans acquired on and after July 1, 2014. These changes relieve sellers of additional representations and warranties for these
loans and provide relief for loans we have fully reviewed in our quality control process and determined to be acceptable. As of
December 31, 2014, approximately 36% in UPB of loans in our single-family credit guarantee portfolio were purchased since
January 1, 2013 and are subject to our revised representation and warranty framework.
The ultimate amounts of recovery payments we receive from seller/servicers related to their repurchase obligations may
be significantly less than the amount of our estimates of potential exposure to losses. Our estimate of probable incurred losses
for exposure to seller/servicers for their repurchase obligations is considered in our allowance for loan losses. See “NOTE 1:
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES — Allowance for Loan Losses and Reserve for Guarantee
Losses” for further information.
We are also exposed to the risk that servicers might fail to service mortgages in accordance with our contractual
requirements, resulting in increased credit losses. For example, our servicers have an active role in our loss mitigation efforts,
including under the servicing alignment initiative and the MHA Program, and therefore, we have exposure to them to the extent
a decline in their performance results in a failure to realize the anticipated benefits of our loss mitigation plans. Since we do not
have our own servicing operation, if our servicers lack appropriate controls, experience a failure in their controls, or experience
an operating disruption in their ability to service mortgage loans, our business and financial results could be adversely affected.
A significant portion of our single-family mortgage loans are serviced by several large servicers. Our top two single-
family loan servicers, Wells Fargo Bank, N.A. and JPMorgan Chase Bank, N.A., serviced approximately 22% and 12%,
respectively, of our single-family mortgage loans, and were the only servicers that serviced more than 10% of our loans, as of
December 31, 2014. In recent years, there has been a shift in our servicing from depository institutions to non-depository
specialty servicers that specialize in workouts of problem loans. Some of these non-depository specialty servicers have grown
rapidly in recent years and now service a large share of our loans. As of both December 31, 2014 and 2013, approximately 10%
of our total single-family credit guarantee portfolio was serviced by our three largest non-depository specialty servicers
(including subsidiaries and/or affiliates of Ocwen Financial Corp., or Ocwen) , on a combined basis. Several of these non-
depository specialty servicers also service a large share of the loans underlying our investments in non-agency mortgage-related
securities. As of December 31, 2014, approximately 43% of our investments in single-family non-agency mortgage-related
securities, based on UPB, were serviced by Ocwen, and it was the only non-depository specialty servicer who serviced 10% or
more of the UPB underlying our investments in non-agency mortgage-related securities at that date.
Ocwen and its subsidiaries and/or affiliates have recently been the subject of significant adverse regulatory scrutiny,
including in New York and California, and Ocwen’s credit rating and servicer rating have been downgraded. In December
2014, the New York State Department of Financial Services (NYDFS) entered into a consent order with Ocwen that provided
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