Freddie Mac 2008 Annual Report Download - page 160

modification process, where we evaluate the borrower’s capacity to meet the modified terms by reviewing qualifications such
as income and other indebtedness. This trial program primarily involved loan modification with concessions where we
reduced the interest rate on the loans but not the outstanding balance. The early results of this trial modification program
indicate a significantly higher incidence of redefault on modified loans than our historical experience.
During the fourth quarter of 2008, large-scale loss mitigation programs through the use of modifications that freeze or
reduce the interest rate and sometimes reduce the principal balance of a troubled borrower’s loan became increasingly
prevalent in the market. For example, in October 2008, Bank of America Corporation announced a program for modifications
of certain subprime and option ARM loans originated by Countrywide Financial Corporation prior to December 31, 2007. In
October 2008, FHA implemented a program under the HOPE for Homeowners Program that enables refinancing of
mortgages originated prior to January 1, 2008 for borrowers meeting certain criteria.
On November 11, 2008, our Conservator announced a broad-based “Streamlined Modification Program,” involving
Freddie Mac, Fannie Mae, FHA, FHFA and 27 seller/servicers, which is intended to offer fast-track loan modifications to
certain troubled borrowers. Effective December 15, 2008, we directed our servicers to begin offering loan modifications to
troubled borrowers under this program. Such borrowers may be eligible for modifications that would reduce the borrower’s
monthly payment by capitalizing past due payments, reducing interest rates, extending mortgage terms, forbearing principal,
or a combination of these options. The resulting modified loans are intended to provide these borrowers with an affordable
monthly payment, defined as one where the borrower’s monthly payment is no more than 38% of the household’s monthly
gross income. The Streamlined Modification Program complements existing loss modification programs we utilize to avoid
foreclosures. In order to allow our seller/servicers time to implement the Streamlined Modification Program and provide
additional relief to troubled borrowers, we temporarily suspended all foreclosure sales on occupied homes from
November 26, 2008 through January 31, 2009 and from February 14, 2009 through March 6, 2009. We pursue loss
mitigation options with delinquent borrowers during these temporary suspension periods; however, we also have continued to
proceed with aspects of the foreclosure process. In addition, we temporarily suspended the eviction process for occupants of
foreclosed homes from November 26, 2008 through April 1, 2009 and announced an initiative to provide for month-to-month
rentals to qualified former borrowers and tenants that occupy our newly-foreclosed single-family properties.
We expect that a significant number of delinquent loans eligible for modification under the Streamlined Modification
Program and the HASP will enter forbearance during 2009. The programs require a three-month probationary period during
which the borrower will be deemed in forbearance and must pay the reduced monthly payment. After the third monthly
payment is received by our seller/servicers, the modification under these programs will become effective. We anticipate that
this will result in a temporary increase in our forbearance volume in addition to the expected rise in modifications with
concessions during 2009. We expect to purchase a significant number of loans modified under these programs from PC
pools. Purchases of these loans from PC pools will likely result in recognition of increased losses on loans purchased on our
consolidated statements of operations during 2009. The success of modifications under our Streamlined Modification
Program and the HASP is dependent on many factors, including the ability to obtain updated information from borrowers,
resources of our seller/servicers to execute the process, the employment status and financial condition of the borrower and
the intent of the borrower to continue to occupy the home. In many cases, borrowers who have either overextended
themselves with second liens on the property, experienced financial hardship or vacated the property will not be able to cure
their delinquency through this program.
In early January 2009, legislation was introduced into Congress that is intended to stem the rate of foreclosures by
allowing bankruptcy judges to modify the terms of mortgages on principal residences for borrowers in Chapter 13
bankruptcy. If enacted, this legislation could cause bankruptcy filings to rise, potentially increasing troubled debt
restructurings for mortgages in our single-family mortgage portfolio and increasing our losses on loans purchased, which are
recognized on our consolidated statements of operations. For more information, see “BUSINESS — Regulation and
Supervision — Pending Bankruptcy Legislation” and “RISK FACTORS — Legal and Regulatory Risks — Legislation or
regulation affecting the financial services, mortgage and investment banking industries may adversely affect our business
activities and financial results.”
On February 18, 2009, the Obama Administration announced the HASP, which includes an initiative to encourage
modifications of mortgages for both homeowners who are in default and those who are at risk of imminent default, through
various government incentives to both lenders and homeowners. We expect that our efforts under the HASP will replace
those under our Streamlined Modification Program. Beginning March 7, 2009, we will suspend foreclosure sales for those
loans that are eligible for modification under the HASP until our servicers determine that the borrower of such a loan is not
responsive or that the loan does not qualify for a modification under HASP or any of our other alternatives to foreclosure.
For more information, see “EXECUTIVE SUMMARY — Conservatorship.”
We require multifamily seller/servicers to manage mortgage loans they have sold to us in order to mitigate potential
losses. For loans over $1 million, servicers must generally submit an annual assessment of the mortgaged property to us
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