Freddie Mac 2011 Annual Report Download - page 159

As of December 31, 2011, we accrued $60 million for borrower incentives not yet due. We also have the potential
to incur additional servicer incentives and borrower incentives as long as the borrower remains current on a loan
modified under HAMP.
• Under HAMP, we typically provide concessions to borrowers, which generally include interest rate reductions and
often also provide for forbearance (but not forgiveness) of principal.
• Some borrowers will fail to complete the HAMP trial period and others will default on their HAMP modified
loans. For those borrowers who redefault or who do not complete the trial period and do not qualify for another
loan workout, HAMP will have delayed the resolution of the loans through the foreclosure process. If home prices
decline while these events take place, such delay in the foreclosure process may increase the losses we recognize
on these loans, to the extent the prices we ultimately receive for the foreclosed properties are less than the prices
we could have received had we foreclosed upon the properties earlier.
• Non-GSE mortgages modified under HAMP include mortgages backing our investments in non-agency mortgage-
related securities. Such modifications reduce the monthly payments due from affected borrowers, and thus reduce
the payments we receive on these securities (to the extent the payment reductions have not been absorbed by
subordinated investors or by other credit enhancement).
Servicing Alignment Initiative and Non-HAMP Modifications
In February 2011, FHFA directed Freddie Mac and Fannie Mae to develop consistent requirements, policies, and
processes for the servicing of non-performing loans. This directive was designed to create greater consistency in servicing
practices and to build on the best practices of each of the GSEs. In April 2011, pursuant to this directive, FHFA
announced a new set of aligned standards (known as the servicing alignment initiative) for servicing non-performing loans
owned or guaranteed by Freddie Mac and Fannie Mae that are designed to help servicers do a better job of
communicating and working with troubled borrowers and to bring greater accountability to the servicing industry. We
announced our detailed requirements for this initiative on June 30, 2011, with implementation beginning for loans that
were delinquent as of October 1, 2011. These standards provide for earlier and more frequent communication with
delinquent borrowers, consistent requirements for collecting documents from borrowers, consistent timelines for
responding to borrowers, and consistent timelines for processing foreclosures. These standards are expected to result in
greater alignment of servicer processes for both HAMP and most non-HAMP workouts.
Under these new servicing standards, we will pay incentives to servicers that exceed certain performance standards
with respect to servicing delinquent loans. We will also assess compensatory fees from servicers if they do not achieve a
minimum performance benchmark with respect to servicing delinquent loans. These incentives may result in our payment
of increased fees to our seller/servicers, the cost of which may be at least partially mitigated by the compensatory fees
paid to us by our servicers that do not perform as required.
As part of the servicing alignment initiative, we began implementation of a new non-HAMP standard loan
modification initiative. This new standard modification replaced our previous non-HAMP modification initiative beginning
January 1, 2012. The new standard modification requires a three-month trial period. Servicers were permitted to begin
offering standard modification trial period plans with effective dates on or after October 1, 2011. A modest number of
borrowers entered trial periods under our standard non-HAMP modification initiative as of December 31, 2011. We expect
to experience a temporary decline in completed modification volume in the first half of 2012, below what otherwise
would be expected, as servicers transition borrowers to the new standard modification initiative and borrowers complete
the trial period. This new standard modification program is expected to result in a higher volume of modifications where
we partially forbear (but do not forgive) principal until the borrower sells the home or refinances or pays off the
mortgage. The standard modification provides an extension of the loan’s term to 480 months. In addition, the new
modification initiative currently provides for a standard modified interest rate of 5% (though FHFA could change this in
the future). This new initiative also provides for a servicer incentive fee schedule for non-HAMP modifications,
comparable to the HAMP servicer incentive fee structure, effective October 1, 2011. The incentive fees are intended to
provide greater incentives to our servicers to modify loans earlier in the delinquency, which may cause the servicer
incentive costs associated with our modification activities to increase in the future. The standard modification does not
include borrower incentive payments or recurring servicer incentive fees after the initial servicer incentive payment.
We expect that the costs we incur related to our new non-HAMP standard loan modifications will likely be
significant. These costs will be similar to those described above under “Home Affordable Modification Program” relating
to: (a) bearing the full cost of monthly payment reductions; (b) paying initial incentive fees to servicers; (c) providing
concessions to borrowers; and (d) the potential for delaying the resolution of loans through the foreclosure process. While
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