Freddie Mac 2010 Annual Report Download - page 50

Some of our counterparties may become subject to serious liquidity problems affecting, either temporarily or
permanently, their businesses, which may adversely affect their ability to meet their obligations to us. Challenging market
conditions have adversely affected and are expected to continue to adversely affect the liquidity and financial condition of a
number of our counterparties, including some seller/servicers, mortgage insurers and bond insurers. In the past few years,
some of our largest seller/servicers have experienced ratings downgrades and liquidity constraints, and certain large lenders
have failed. These challenging market conditions could also increase the likelihood that we will have disputes with our
counterparties concerning their obligations to us, especially with respect to counterparties that have experienced financial
strain and/or have large exposures to us. A default by a counterparty with significant obligations to us could adversely affect
our ability to conduct our operations efficiently and at cost-effective rates, which in turn could adversely affect our results of
operations or our financial condition. See “MD&A — RISK MANAGEMENT — Credit Risk — Institutional Credit Risk” for
additional information regarding our credit risks to our counterparties and how we seek to manage them.
Our financial condition or results of operations may be adversely affected if mortgage seller/servicers fail to repurchase
loans sold to us in breach of representations and warranties or fail to honor any related indemnification or any recourse
obligations. We also face the risk that seller/servicers may fail to perform their obligations to service loans in our single-
family and multifamily mortgage portfolios or that their servicing performance could decline.
We require seller/servicers to make certain representations and warranties regarding the loans they sell to us. If loans are
sold to us in breach of those representations and warranties, we have the contractual right to require the seller/servicer to
repurchase those loans from us. In lieu of repurchase, we may agree to allow a seller/servicer to indemnify us against losses
on such mortgages or otherwise compensate us for the risk of continuing to hold the mortgages. Sometimes a seller/servicer
sells us mortgages with recourse, meaning that the seller/servicer agrees to repurchase any mortgage that is delinquent for
more than a specified period (usually 120 days), regardless of whether there has been a breach of representations and
warranties.
Some of our seller/servicers have failed to fully perform their repurchase obligations due to lack of financial capacity,
while others, including many of our larger seller/servicers, have not fully performed their repurchase obligations in a timely
manner. As of December 31, 2010 and December 31, 2009, the UPB of loans subject to repurchase requests issued to our
single-family seller/servicers was approximately $3.8 billion and $4.2 billion, respectively. Our contracts require that a seller/
servicer repurchase a mortgage within 30 days after we issue a repurchase request, unless the seller/servicer avails itself of
an appeal process provided for in our contracts, in which case the deadline for repurchase is extended until we decide the
appeal. As of December 31, 2010, approximately 34% of these repurchase requests were outstanding more than four months
since issuance of our repurchase request. The actual amount we collect on these requests and others we may make in the
future could be significantly less than their UPB amounts because we expect many of these requests will be satisfied by
reimbursement of our realized losses by seller/servicers, instead of repurchase of loans at their UPB, or may be rescinded in
the course of the contractual appeals process. Based on our historical loss experience and the fact that many of these loans
are covered by credit enhancement, we expect the actual credit losses experienced by us should we fail to collect on these
repurchase requests would also be less than the UPB of the loans. We may also enter into agreements with seller/servicers to
resolve claims for repurchases. The amounts we receive under any such agreements may be less than the losses we
ultimately incur. Our credit losses may increase to the extent our seller/servicers do not fully perform their repurchase
obligations. Enforcing repurchase obligations of seller/servicers who have the financial capacity to perform those obligations
could also negatively impact our relationships with such customers and ability to retain market share.
We also have exposure to seller/servicers with respect to mortgage insurance. When a mortgage insurer rescinds
coverage, the seller/servicer generally is in breach of representations and warranties made to us when we purchased the
affected mortgage. Consequently, we may require the seller/servicer to repurchase the mortgage or to indemnify us for
additional loss. The volume of rescissions of claims under mortgage insurance remains high.
If a servicer is unable to fulfill its repurchase or other responsibilities, we may seek to recover the amounts that such
servicer owes us, such as by attempting to sell the applicable mortgage servicing rights to a different servicer and applying
the proceeds to such owed amounts, or by contracting the servicing responsibilities to a different servicer and retaining the
net servicing fee. The ongoing weakness in the housing market has negatively affected the market for mortgage servicing
rights, which increases the risk that we may be unable to sell such rights or may not receive a sufficient price for them.
Increased industry consolidation, bankruptcies of mortgage bankers or bank failures may also make it more difficult for us to
sell such rights, because there may not be sufficient capacity in the market, particularly in the event of multiple failures. This
option may be difficult to accomplish with respect to our larger seller/servicers, as it may be difficult to transfer a large
servicing portfolio. The financial stress on servicers and increased costs of servicing may lead to strategic defaults (i.e.,
defaults done deliberately as a financial strategy, and not involuntarily) by servicers, which would also require us to seek a
successor servicer.
47 Freddie Mac