Freddie Mac 2011 Annual Report Download - page 138

affected and will continue to significantly impact our single-family mortgage servicers. For more information on
regulatory and other developments in mortgage servicing, and how these developments may impact our business, see
“BUSINESS — Regulation and Supervision — Legislative and Regulatory Developments —Developments Concerning
Single-Family Servicing Practices.”
While we have legal remedies against seller/servicers who fail to comply with our contractual servicing requirements,
we are exposed to institutional credit risk in the event of their insolvency or if, for other causes, seller/servicers fail to
perform their obligations to repurchase affected mortgages, or (at our option) indemnify us for losses resulting from any
breach, or pay damages for any breach. In the event a seller/servicer does not fulfill its repurchase or other
responsibilities, we may seek partial recovery of amounts owed by the seller/servicer by transferring the applicable
mortgage servicing rights of the seller/servicer to a different servicer. However, this option may be difficult to accomplish
with respect to our largest seller/servicers due to the operational and capacity challenges of transferring a large servicing
portfolio. In 2011, we changed most of our servicing standards to permit full or partial termination of loan servicing in
order to transfer portions of the servicing portfolios to new servicers.
Multifamily Mortgage Seller/Servicers
As of December 31, 2011, our top three multifamily servicers, Berkadia Commercial Mortgage LLC, CBRE Capital
Markets, Inc., and Wells Fargo Bank, N.A., each serviced more than 10% of our multifamily mortgage portfolio, and
together serviced approximately 40% of our multifamily mortgage portfolio. For 2011, our top two multifamily sellers,
CBRE Capital Markets, Inc. and NorthMarq Capital, LLC, accounted for 20% and 12%, respectively, of our multifamily
purchase volume. Our top 10 multifamily lenders represented an aggregate of approximately 81% of our multifamily
purchase volume for 2011.
In our multifamily business, we are exposed to the risk that multifamily seller/servicers could come under financial
pressure, which could potentially cause degradation in the quality of the servicing they provide us, including their
monitoring of each property’s financial performance and physical condition. This could also, in certain cases, reduce the
likelihood that we could recover losses through lender repurchases, recourse agreements or other credit enhancements,
where applicable. This risk primarily relates to multifamily loans that we hold on our consolidated balance sheets where
we retain all of the related credit risk. We monitor the status of all our multifamily seller/servicers in accordance with our
counterparty credit risk management framework.
Mortgage Insurers
We have institutional credit risk relating to the potential insolvency of, or non-performance by, mortgage insurers that
insure single-family mortgages we purchase or guarantee. As a guarantor, we remain responsible for the payment of
principal and interest if a mortgage insurer fails to meet its obligations to reimburse us for claims. If any of our mortgage
insurers that provide credit enhancement fail to fulfill their obligation, we could experience increased credit losses.
We attempt to manage this risk by establishing eligibility standards for mortgage insurers and by monitoring our
exposure to individual mortgage insurers. Our monitoring includes performing regular analysis of the estimated financial
capacity of mortgage insurers under different adverse economic conditions. In addition, state insurance authorities regulate
mortgage insurers and we periodically meet with certain state authorities to discuss their views. We also monitor the
mortgage insurers’ credit ratings, as provided by nationally recognized statistical rating organizations, and we periodically
review the methods used by such organizations. None of our mortgage insurers had a rating higher than BBB as of
February 27, 2012. In evaluating the likelihood that an insurer will have the ability to pay our expected claims, we
consider our own analysis of the insurer’s financial capacity, any downgrades in the insurer’s credit rating, and various
other factors.
As part of the estimate of our loan loss reserves, we evaluate the recovery and collectability related to mortgage
insurance policies for mortgage loans that we hold on our consolidated balance sheets as well as loans underlying our
non-consolidated Freddie Mac mortgage-related securities or covered by other guarantee commitments. We believe that
many of our mortgage insurers are not sufficiently capitalized to withstand the stress of the current weak economic
environment. Additionally, a number of our mortgage insurers have exceeded risk to capital ratios required by their state
insurance regulators. In many cases, such states have issued waivers to allow the companies to continue writing new
business in their states. Most waivers are temporary in duration or contain other conditions that the companies may be
unable to continue to meet due to their weakened condition or other factors. As a result of these and other factors, we
reduced our expectations of recovery from several of these insurers in determining our allowance for loan losses
associated with our single-family loans on our consolidated balance sheet as of December 31, 2011.
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