Freddie Mac 2011 Annual Report Download - page 246

Single-Family TDRs
We rely on our single-family servicers to contact borrowers who are in default and to identify a loan workout, or
other alternative to foreclosure, in accordance with our requirements. We establish guidelines for our servicers to follow
and provide them default management tools to use, in part, in determining which type of loan workout would be expected
to provide the best opportunity for minimizing our credit losses. We require our single-family servicers to first evaluate
problem loans for a repayment or forbearance plan before considering modification. If a borrower is not eligible for a
modification, our seller/servicers pursue other workout options before considering foreclosure. We receive information
related to loan workouts, such as modifications and loans in a modification trial period, and other alternatives to
foreclosure from our servicers at the loan level on at least a monthly basis. For loans in a modification trial period under
HAMP, we do not receive the terms of the expected completed modification until the modification is completed. For these
loans, we only receive notification that they are in a modification trial period under HAMP. See “NOTE 1: SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES — Allowance for Loan Losses and Reserve for Guarantee Losses” for
more detail.
Repayment plans are agreements with the borrower that give the borrower a defined period of time to reinstate the
mortgage by paying regular payments plus an additional agreed upon amount in repayment of the past due amount. These
agreements are considered TDRs if they result in a delay in payment that is considered to be more than insignificant.
Forbearance agreements are agreements between the servicer and the borrower where reduced payments or no
payments are required during a defined period. These agreements are considered TDRs if they result in a delay in
payment that is considered to be more than insignificant.
In the case of borrowers considered for modifications, our servicers obtain information on income, assets, and other
borrower obligations to determine modified loan terms. Under HAMP, the goal of a single-family loan modification is to
reduce the borrower’s monthly mortgage payments to 31% of the borrower’s gross monthly income, which may be
achieved through a combination of methods, including: (a) interest rate reductions; (b) term extensions; and (c) principal
forbearance. Principal forbearance is when a portion of the principal is non-interest-bearing, but this does not represent
principal forgiveness. Although HAMP contemplates that some servicers will also make use of principal forgiveness to
achieve reduced payments for borrowers, we have only used forbearance of principal and have not used principal
forgiveness in modifying our loans.
HAMP requires that each borrower complete a trial period during which the borrower will make monthly payments
based on the estimated amount of the modification payments. Trial periods are required for at least three months. After
the final trial-period payment is received by our servicer, the borrower and servicer enter into the modification. With the
adoption of the new accounting guidance for TDRs in the third quarter of 2011, we began to consider restructurings under
HAMP as TDRs at the inception of the trial period if the expected modification will result in a change in our expectation
to collect all amounts due at the original contract rate.
Our HAMP and non-HAMP modification initiatives are available for borrowers experiencing what is generally
expected to be a longer-term financial hardship. Historically, for our non-HAMP modifications, our single-family servicers
have generally taken an approach to modifying the loan’s terms in the following order of priority until the borrower’s
monthly payment amount is reduced to a sustainable level given the borrower’s individual circumstances: (a) extend the
term of the loan; and (b) reduce the interest rate of the loan. As discussed below, this non-HAMP modification initiative
has been replaced by the standard modification effective January 1, 2012.
In April 2011, FHFA announced a new set of aligned standards for servicing non-performing loans owned or
guaranteed by Freddie Mac and Fannie Mae. As part of the servicing alignment initiative, we implemented 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 began offering standard modification trial period plans with effective dates on or after October 1, 2011. We
consider restructurings under this initiative as TDRs at the inception of the trial period if the expected modification will
result in a change in our expectation to collect all amounts due at the original contract rate.
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