Freddie Mac 2008 Annual Report Download - page 167

obligations of the defaulting servicer or negatively affect our ability to recover amounts owed by the defaulting servicer. We
have contingency procedures in place that are intended to provide for a timely transfer of current servicing information in the
event one of our major counterparties is no longer able to fulfill its servicing responsibilities. However, due to the significant
size of the mortgage-servicing portfolios of some of our major customers relative to the servicing capacity of the market, the
failure of one of our major servicers could adversely affect our ability to conduct operations in a timely manner.
In order to manage the credit risk associated with our mortgage seller/servicers, we require them to meet minimum
financial capacity standards, insurance and other eligibility requirements. We institute remedial actions against seller/
servicers that fail to comply with our standards. These actions may include transferring mortgage servicing to other qualified
servicers or terminating our relationship with the seller/servicer. We conduct periodic operational reviews of our single-
family mortgage seller/servicers to help us better understand their control environment and its impact on the quality of loans
sold to us and the quality of the loan servicing activities performed on our loans. We use this information to determine the
terms of business we conduct with a particular seller/servicer.
Due to the strain on the mortgage finance industry during 2007 and 2008, a number of our significant seller/servicers
have been adversely affected and have undergone dramatic changes in their ownership or financial condition. In July 2008,
Bank of America Corporation completed its acquisition of Countrywide Financial Corporation, and together these companies’
subsidiaries accounted for 22% of our single-family mortgage purchase volume during 2008. GMAC Mortgage, LLC, or
GMAC, a subsidiary of Residential Capital LLC, or ResCap, is one of our seller/servicers and comprised approximately 4%
of our mortgage purchase volume during 2008. ResCap has recently made several announcements related to its weakened
financial condition and concern regarding its ability to continue operations in the short-term. In December 2008, GMAC
received additional capital from Treasury under the TARP. In September 2008, Washington Mutual Bank, which accounted
for 7% of our single-family mortgage purchase volume during the nine months ended September 30, 2008, was closed by the
Office of Thrift Supervision. The FDIC was named receiver and the deposits, assets and certain liabilities of Washington
Mutual’s banking operations were acquired by JPMorgan Chase Bank, N.A. We have agreed to JPMorgan Chase becoming
the servicer of mortgages previously serviced by Washington Mutual in return for JPMorgan Chase’s agreement to assume
Washington Mutual’s recourse obligations to repurchase any of such mortgages that were sold to us with recourse. With
respect to mortgages that Washington Mutual sold to us without recourse, JPMorgan Chase has agreed to make a one-time
payment to us with respect to obligations of Washington Mutual to repurchase any of such mortgages that are inconsistent
with certain representations and warranties made at the time of sale. Chase Home Finance LLC, a subsidiary of JPMorgan
Chase, is also a significant seller/servicer and when combined with Washington Mutual collectively provided 15% of our
single-family mortgage purchase volume during 2008. In addition, Wachovia Corporation, the parent of our customers
Wachovia Bank, N.A. and Wachovia Mortgage, FSB, which together accounted for 2% of our single-family mortgage
purchase volume during the nine months ended September 30, 2008, agreed to be acquired by Wells Fargo & Company in
September 2008. Wells Fargo Bank, N.A., a subsidiary of Wells Fargo & Company, is also one of our significant seller/
servicers and accounted for 20% of our single-family mortgage purchase volume during 2008. Given the uncertainty of the
current housing market we have entered into arrangements with existing customers at their renewal dates that allow us to
change credit and pricing terms faster than in the past. However, these arrangements, as well as significant customer
consolidation discussed above, may increase the volatility of mortgage purchase and securitization volume from these
customers in the future.
In July 2008, IndyMac Bancorp, Inc. announced that the FDIC had been made a conservator of the bank, and we also
have potential exposure to IndyMac for servicing-related obligations, including repurchase obligations, which we currently
estimate to be between $600 to $800 million. Although IndyMac has suspended its repurchases from us during its
conservatorship, we are pursuing our ability to recover certain amounts from the assignment of mortgage servicing rights on
mortgages currently serviced by IndyMac. Lehman and its affiliates also service single-family loans for us. We have potential
exposure to Lehman for servicing-related obligations due to us, including mortgage repurchase obligations, which is currently
estimated to be approximately $670 million. Lehman has also suspended its repurchases from us since declaring bankruptcy.
Our estimate of probable losses for exposure to seller/servicers for their repurchase obligations to us is considered as part of
our estimate for our provision for credit losses as of December 31, 2008. The estimates of potential exposure are higher than
our estimates for probable loss as we consider the range of possible outcomes as well as the passage of time, which can
change the indicators of incurred, or probable losses. Our current estimates of potential exposure to Lehman and IndyMac
have increased in 2008, particularly the last half of the year. We also consider the estimated value of related mortgage
servicing rights in determining our estimates of probable loss, which reduce our potential exposures. We believe we have
adequately provided for these exposures in our loan loss reserves at December 31, 2008; however, our actual losses may
exceed our estimates.
We manage the credit risk associated with our multifamily seller/servicers by establishing eligibility requirements for
participation in our multifamily programs. These seller/servicers must also meet our standards for originating and servicing
164 Freddie Mac