Freddie Mac 2015 Annual Report Download - page 184

Risk Factors Credit Risks
Freddie Mac 2015 Form 10-K 182
other funding transactions (i.e., cash and other investments transactions).
Many of our major counterparties provide several types of services to us. The concentration of our
exposure to our counterparties remains high, and we continue to face challenges in reducing our risk
concentrations with counterparties. Efforts we take to reduce exposure to financially weak counterparties
could concentrate our exposure to other counterparties, and increase our costs and reduce our revenue.
In recent years, challenging market conditions have, at times, adversely affected the liquidity and financial
condition of our counterparties, and some of our major counterparties have failed. Similar events may
occur in future periods. Many of our counterparties are subject to increasingly complex regulatory
requirements and oversight, which place additional stress on their resources and may affect their ability or
willingness to do business with us.
Credit risk related to loan seller/servicers
We are exposed to credit risks from the seller/servicers of our single-family loans, as described below.
• A decline in servicing performance - A decline in a servicer’s performance, such as delayed
foreclosures or missed opportunities for loan modifications, could significantly affect our ability to
mitigate credit losses and could affect the overall credit performance of our single-family credit
guarantee portfolio. The large volume of seriously delinquent loans and the complexity of the
servicing function are significant factors contributing to the risk of a decline in performance by
servicers. We could be adversely affected if our servicers lack appropriate controls, experience a
failure in their controls, or experience a disruption in their ability to service loans, including as a result
of legal or regulatory actions or ratings downgrades. We are also exposed to fraud by third parties in
the loan servicing function, particularly with respect to sales of REO properties, short sales, and other
dispositions of non-performing assets.
We could attempt to mitigate our exposure to a poorly performing servicer by terminating its right to
service; however, we may not be able to find successor servicers who have the capacity to service
the affected loans and who are also willing to assume the representations and warranties of the
terminated servicer. Terminating a large servicer may not be feasible because of the operational and
capacity challenges related to transfers of large servicing portfolios. If we replace a servicer, we
would likely incur costs and potential increases in servicing fees.
• A failure by seller/servicers to fulfill their obligations to repurchase loans or indemnify us as a result of
breaches of representations and warranties - While we may have the contractual right to require a
seller or servicer to repurchase loans from us, it may be difficult, expensive, and time-consuming to
enforce such repurchase obligations. We could enter into settlements to resolve repurchase
obligations; however, the amounts we receive under any such settlements may be less than the
losses we ultimately incur on the underlying loans.
Under our revised representation and warranty framework, as directed by FHFA, we are required in
some cases to utilize an alternative remedy, such as indemnification, in lieu of repurchase. The
amount we recover under an alternative remedy may be less than the amount we could have
recovered in a repurchase.
• Increased exposure to non-depository and smaller financial institutions - Over the last several years,
we have acquired a greater portion of our single-family business volume from non-depository and
smaller financial institutions. In addition, a large and increasing volume of our single-family loans are