Freddie Mac 2014 Annual Report Download - page 42

37 Freddie Mac
to be indemnified against losses on the loans. We have similar rights and remedies with respect to loans that seller/servicers
service on our behalf. If a seller/servicer does not satisfy its contractual obligations to us with respect to a loan, we will be
subject to the full range of credit risks if the loan fails to perform, including the risk that a mortgage insurer may deny or
rescind coverage on the loan (if the loan is insured) and the risk that we will incur credit losses on the loan through the workout
or foreclosure process. It may be difficult, expensive, and time-consuming to enforce (through the exercise of contractual
remedies, including legal proceedings) a seller/servicer's repurchase obligations, in the event a seller/servicer fails to perform
such obligations.
During 2013 and 2014, we entered into a number of agreements with sellers to resolve certain existing and future
repurchase obligations, and we may enter into additional agreements with sellers or servicers in the future. The amounts we
receive under any such agreements may be less than the losses we ultimately incur on the underlying loans.
If, as we expect, origination volume remains low and there is a change in the mix of originations (refinance vs. purchase)
in 2015, the competitive and financial pressures on single-family sellers and servicers could increase, thereby increasing our
counterparty risk with respect to these entities.
Over the last several years, our exposure to non-depository and smaller financial institutions has increased. We are
acquiring a greater portion of our single-family business volume directly from these types of institutions. In addition, specialty
servicers (i.e., companies that specialize in servicing troubled loans) service a large share of our single-family loans, and many
of these specialty servicers are non-depository financial institutions. These non-depository and smaller financial institutions
may not have the same financial strength, internal controls or operational capacity as our large single-family mortgage seller
and servicer counterparties (which are depository institutions). As a result, we face increased risk that these counterparties
could fail to perform their obligations to us. In particular, non-depository servicers have experienced rapid growth in their
servicing portfolios in the last several years. This could expose us to increased risks in the event that the rapid growth results in
operational strains that adversely affect their servicing performance or weakens their financial strength. Certain non-depository
specialty servicers, particularly subsidiaries and/or affiliates of Ocwen Financial Corp., have recently been the subject of
significant adverse regulatory scrutiny, and Ocwen’s credit rating has been downgraded.
Our seller/servicers also have a significant role in servicing loans in our multifamily mortgage portfolio. We are exposed
to the risk that multifamily seller/servicers could come under financial pressure, which could potentially cause degradation in
the quality of the servicing they provide us, including their monitoring of each property’s financial performance and physical
condition.
For more information, see “MD&A — RISK MANAGEMENT — Credit Risk Overview —Institutional Credit Risk
Profile — Single-family Mortgage Seller/Servicers” and “— Multifamily Mortgage Seller/Servicers.”
Our losses could increase if more of our mortgage or bond insurers become insolvent or fail to perform their obligations to
us.
We are unlikely to receive full payment of our claims from several of our mortgage insurers (that insure some of the
single-family mortgages we purchase or guarantee) and bond insurers (that insure certain of the non-agency mortgage-related
securities we hold), as they are insolvent or are not paying us in full for claims under mortgage and bond insurance policies.
Instead, a significant portion of their claims are generally recorded by us as deferred payment obligations. It is possible that
these companies may never pay us in full for our claims. For more information, see “NOTE 15: CONCENTRATION OF
CREDIT AND OTHER RISKS — Mortgage Insurers” and “— Bond Insurers.”
We also remain exposed to the risk that some of our other mortgage or bond insurance counterparties could become
insolvent or fail to fully perform their obligations to us. The weakened financial condition and liquidity position of many of
these other counterparties increases the risk that they will fail to fully reimburse us for claims under the insurance policies.
As a guarantor, we remain responsible for the payment of principal and interest if a mortgage insurer fails to meet its
obligations to reimburse us for claims. Thus, if any of our mortgage insurers fails to fulfill its obligations, we could experience
increased credit losses. In addition, if a regulator determined that a mortgage insurer lacked sufficient capital to pay all claims
when due, the regulator could take action that might affect the timing and amount of claim payments made to us. A regulator
could also restrict an insurer's ability to write new business.
In the event a mortgage insurer falls out of compliance with regulatory capital requirements, it may attempt various
strategies (such as a corporate restructuring or raising additional capital) designed to enable it to continue to write new
business. There can be no assurance that any such restructuring or recapitalization will enable payment in full of all of our
claims in the future.
A mortgage insurer may make business decisions that could increase the risk that the insurer would be unable to fully
perform its obligations to us. For example, an insurer could improperly forecast the risks associated with a given group of
loans, which could lead the insurer to charge lower prices for insuring those loans than are necessary to cover the risk. Over
the long term, this could result in the insurer not having sufficient financial resources to pay all claims when due.
If a bond insurer were to become insolvent, it is likely that we would not fully collect our claims from the insurer and that
payment of such claims could be delayed significantly. This would affect our ability to recover certain unrealized losses on our
Table of Contents