Freddie Mac 2014 Annual Report Download - page 47

42 Freddie Mac
affect our reputation. Damage to the reputation of third parties with whom we have important relationships may also impair
market confidence in our business operations. In addition, negative publicity could expose us to greater regulatory scrutiny or
adverse regulatory or legislative changes, and could affect changes that may occur to our business structure during or following
conservatorship, including whether we will continue to exist.
Our efforts to reduce foreclosures, modify loan terms and refinance mortgages may adversely affect our financial results.
The servicing alignment initiative, MHA Program (which includes HAMP and HARP), and other loss mitigation
activities are key components of our strategy for managing and resolving troubled assets and lowering credit losses. However,
our loss mitigation strategies may not be successful and our credit losses may remain high. The costs we incur related to loan
modifications and other activities have been, and will likely continue to be, significant. For example, with respect to our non-
HAMP loan modifications, we bear the full cost of the monthly payment reductions related to modifications of loans we own or
guarantee, and all applicable servicer incentive fees.
We could be required or elect to make changes to our loss mitigation activities that could make these activities more
costly to us, both in terms of credit expenses and the cost of implementing and conducting the activities. For example, we could
be required to use principal forgiveness to achieve reduced payments for borrowers. This could further increase our costs, as we
could bear some or all of the costs of such reductions.
Many loans are in the trial period of HAMP or our non-HAMP loan modification programs. A number of these loans will
fail to complete the applicable trial period or qualify for our other loss mitigation programs. For these loans, the trial period will
have effectively delayed the foreclosure process and could increase our losses.
Many of our HAMP loans have provisions for the interest rates, which initially were set at a below-market rate, to
increase gradually until they reach the market rate that was in effect at the time of the modification. This increase in payments
may increase the risk that these borrowers will default.
Mortgage modification initiatives, particularly any future focus on principal forgiveness, which at present we do not offer
to borrowers, have the potential to change borrower behavior and mortgage underwriting. Principal reductions may create an
incentive for borrowers who are current to become delinquent in order to receive a principal reduction. This incentive, coupled
with continued high volumes of underwater mortgages, could significantly affect borrower attitudes towards homeownership,
the commitment of borrowers to making their mortgage payments, the way the market values residential mortgage assets, the
way in which we conduct business and, ultimately, our financial results.
Depending on the type of loss mitigation activities we pursue, those activities could result in accelerating or slowing
prepayments on our PCs and REMICs and Other Structured Securities, either of which could affect the pricing of such
securities or the earnings from mortgage-related assets we hold in our Investments segment mortgage investments portfolio. In
addition, loss mitigation activities may adversely affect our ability to securitize and sell the loans subject to those activities
(e.g., modified single-family mortgage loans).
Due to the impact of HARP and other refinance initiatives of Freddie Mac and Fannie Mae on prepayment expectations,
we could experience declines in the fair values of certain agency security investments classified as available-for-sale or trading
and lower net interest yields over time on other mortgage-related investments. Furthermore, HARP and similar programs make
it harder to estimate prepayments, which could adversely affect our ability to hedge our mortgage-related investments.
We are devoting significant internal resources to the implementation of the servicing alignment initiative and the MHA
Program. The costs we incur related to these initiatives have been, and will likely continue to be, significant. The size and scope
of these efforts may also limit our ability to pursue other business opportunities or corporate initiatives.
For more information on our loss mitigation activities, see “BUSINESS — Our Business — Our Business Segments —
Single-Family Guarantee Segment — Single-Family Loan Workouts and the MHA Program” and “MD&A — RISK
MANAGEMENT — Credit Risk Overview — Single-Family Mortgage Credit Risk Framework and Profile — Managing
Problem Loans.”
We have incurred, and will continue to incur, expenses and we may otherwise be adversely affected by delays and
deficiencies in the single-family foreclosure process.
We have been, and will likely continue to be, adversely affected by delays and deficiencies in the foreclosure process.
The average length of time for foreclosure of a Freddie Mac loan significantly increased since the onset of the housing and
economic downturn, particularly in states that require a judicial foreclosure process, and may further increase. Delays in the
foreclosure process could cause our expenses to increase for a number of reasons. For example, properties awaiting foreclosure
could deteriorate until we acquire ownership of them. This would increase our expenses to repair and maintain the properties.
Such delays may also adversely affect the values of, and our losses on, the non-agency mortgage-related securities we hold.
Delays in the foreclosure process may also adversely affect trends in home prices regionally or nationally, which could
adversely affect our financial results.
It is possible that mortgage insurance claims could be reduced or denied if servicers do not follow proper procedures in
addressing seriously delinquent borrowers, including if servicers do not complete foreclosures within required timelines.
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