Freddie Mac 2015 Annual Report Download - page 186

Risk Factors Credit Risks
Freddie Mac 2015 Form 10-K 184
If a mortgage insurer fails to meet its obligations to reimburse us for claims, our credit losses could
increase. In addition, if a regulator determines that a mortgage insurer lacks 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. We face similar risks with respect to the insurers and reinsurers in our ACIS credit
risk transfer transactions.
We cannot differentiate pricing based on the strength of a mortgage insurer or revoke a mortgage
insurer's status as an eligible insurer without FHFA approval. Further, we do not select the insurance
provider on a specific loan, since the selection is made by the lender at the time the loan is originated.
We continue to acquire new loans with mortgage insurance from the mortgage insurers that have credit
ratings below investment grade.
If a bond insurer were to become insolvent, it is likely that we would not fully collect our claims from the
insurer and that any such claims payments could be delayed significantly. This would affect our ability to
recover certain unrealized losses on our investments in non-agency mortgage-related securities. We
evaluate the expected recovery from bond insurance policies as part of our impairment analysis for our
investments in securities. If a bond insurer is not expected to meet its obligations, we could recognize
additional impairment of those securities.
For more information, see “MD&A - Risk Management - Credit Risk - Institutional Credit Risk - Mortgage
and Bond Insurers.”
Our loss mitigation activities may be costly and may adversely affect our financial results.
Our loss mitigation strategies (including HAMP and HARP) may not be successful. The costs we incur
related to loan modifications and other loss mitigation activities have been, and could continue to be,
significant. For example, we bear the full cost of the monthly payment reductions related to modifications
of loans we own or guarantee, as well as all applicable servicer incentive fees for our mortgage
modifications.
We could be required or elect to make changes to our loss mitigation activities that could make these
activities more costly to us. For example, we could be required to use principal forgiveness to reduce
payments for borrowers and to bear some or all of the costs of such reductions.
Loan modification initiatives, particularly any future focus on principal forgiveness on a widespread basis,
could have the potential to change borrower behavior and loan underwriting. Principal reductions may
create an incentive for borrowers who are current on their loans to become delinquent in order to receive
a principal reduction. This incentive could significantly affect borrower attitudes toward homeownership,
borrower commitment to making their loan payments, the values of residential mortgage assets, and the
way in which we conduct business.
We have loans on trial period plans as required under certain loan modification programs. Some of these
loans will fail to complete the trial period or fail to qualify for our other borrower assistance programs. For
these loans, the trial period will have effectively delayed the foreclosure process and could increase our
losses.
Many of our HAMP loans, which initially were set at a below-market interest rate, have provisions for the
interest rates to increase gradually until they reach the market rate that was in effect at the time of the
modification. The resulting increase in the borrowers' payments may increase the risk that these