Freddie Mac 2011 Annual Report Download - page 134

On September 2, 2011, FHFA announced that, as Conservator for Freddie Mac and Fannie Mae, it had filed lawsuits
against 17 financial institutions and related defendants alleging: (a) violations of federal securities laws; and (b) in certain
lawsuits, common law fraud in the sale of residential non-agency mortgage-related securities to Freddie Mac and Fannie
Mae. FHFA, as Conservator, filed a similar lawsuit against UBS Americas, Inc. and related defendants on July 27, 2011.
FHFA seeks to recover losses and damages sustained by Freddie Mac and Fannie Mae as a result of their investments in
certain residential non-agency mortgage-related securities issued by these financial institutions.
See “CONSOLIDATED BALANCE SHEETS ANALYSIS — Investments in Securities” for additional information on
credit risk associated with our investments in mortgage-related securities, including higher-risk components and
impairment charges we recognized in the years ended December 31, 2011, 2010, and 2009 related to these investments.
For information about institutional credit risk associated with our investments in non-mortgage-related securities, see
“NOTE 7: INVESTMENTS IN SECURITIES — Table 7.9 — Trading Securities” as well as “Cash and Other Investments
Counterparties” below.
Single-family Mortgage Seller/Servicers
We acquire a significant portion of our single-family mortgage purchase volume from several large lenders, or seller/
servicers. Our top 10 single-family seller/servicers provided approximately 82% of our single-family purchase volume
during 2011. Wells Fargo Bank, N.A. and JPMorgan Chase Bank, N.A. accounted for 28% and 13%, respectively, of our
single-family mortgage purchase volume and were the only single-family seller/servicers that comprised 10% or more of
our purchase volume in 2011.
We have contractual arrangements with our seller/servicers under which they agree to sell us mortgage loans, and
represent and warrant that those loans have been originated under specified underwriting standards. If we subsequently
discover that the representations and warranties were breached (i.e., that contractual standards were not followed), we can
exercise certain contractual remedies to mitigate our actual or potential credit losses. These contractual remedies include
the ability to require the seller/servicer to repurchase the loan at its current UPB or make us whole for any credit losses
realized with respect to the loan. As part of our expansion of HARP, we have agreed not to require lenders to provide us
with certain representations and warranties that they would ordinarily be required to commit to in selling loans to us. As a
result, we may face greater exposure to credit and other losses on these HARP loans. For more information, see
“Mortgage Credit Risk — Single-Family Mortgage Credit Risk — Single-Family Loan Workouts and the MHA Program —
Home Affordable Refinance Program.”
We are exposed to institutional credit risk arising from the potential insolvency or non-performance by our mortgage
seller/servicers, including non-performance of their repurchase obligations arising from breaches of the representations and
warranties made to us for loans they underwrote and sold to us or failure to honor their recourse and indemnification
obligations to us. Pursuant to their repurchase obligations, our seller/servicers are obligated to repurchase mortgages sold
to us when there has been a breach of the representations and warranties made to us with respect to the mortgages. In lieu
of repurchase, we may choose to allow a seller/servicer to indemnify us against losses realized on such mortgages or
otherwise compensate us for the risk of continuing to hold the mortgages. In some cases, the ultimate amounts of
recovery payments we have received from seller/servicers may be significantly less than the amount of our estimates of
potential exposure to losses related to their obligations. If a seller/servicer does not satisfy its repurchase or
indemnification obligations with respect to a loan, we will be subject to the full range of credit risks posed by the loan if
the loan fails to perform, including the risk that a mortgage insurer may deny or rescind coverage on the loan (if the loan
is insured) and the risk that we will incur credit losses on the loan through the workout or foreclosure process.
Our contracts require that a seller/servicer repurchase a mortgage after we issue a repurchase request, unless the
seller/servicer avails itself of an appeals process provided for in our contracts, in which case the deadline for repurchase is
extended until we decide the appeal. 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. The table below provides a summary of our repurchase request activity for
2011, 2010, and 2009.
129 Freddie Mac