Freddie Mac 2011 Annual Report Download - page 63

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, 2011 and 2010, approximately 39% and 34%,
respectively, of these repurchase requests were outstanding more than four months since issuance of our repurchase
request (these figures included repurchase requests for which appeals were pending).
The amount we collect on these requests and others we may make in the future could be significantly less than the
UPB of the loans subject to the repurchase requests primarily because we expect many of these requests will likely be
satisfied by reimbursement of our realized credit 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may be rescinded in the course of the contractual appeals process.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 will 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 could result in the loss of some or all of our business
with such customers, which could negatively impact our ability to retain market share. It may be difficult, expensive, and
time-consuming to legally enforce a seller/servicer’s repurchase obligations, in the event a seller/servicer continues to fail
to perform such obligations.
On October 24, 2011, FHFA, Freddie Mac, and Fannie Mae announced a series of FHFA-directed changes to HARP.
We may face greater exposure to credit and other losses on these HARP loans because we are not requiring lenders to
provide us with certain representations and warranties on these HARP loans. For more information, see “MD&A — RISK
MANAGEMENT — Credit Risk — Mortgage Credit Risk — Single-Family Loan Workouts and the MHA Program —
Home Affordable Refinance Program and Relief Refinance Mortgage Initiative.”
We also have exposure to seller/servicers with respect to mortgage insurance. When a mortgage insurer rescinds
coverage or denies or curtails a claim, we may require the seller/servicer to repurchase the mortgage or to indemnify us
for additional loss. The volume of rescissions, claim denials, and curtailments by mortgage insurers remains high.
We 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.
Our seller/servicers have a significant role in servicing loans in our single-family credit guarantee portfolio, which
includes an active role in our loss mitigation efforts. Therefore, a decline in their performance could impact our credit
performance (including through missed opportunities for mortgage modifications), which could adversely affect our
financial condition or results of operations and have a significant impact on our ability to mitigate credit losses. The risk
of such a decline in performance remains high. The high levels of seriously delinquent loan volume, the ongoing weak
conditions of the mortgage market, and the number and variety of additions and changes to HAMP and our other loan
modification and loss mitigation initiatives have placed a strain on the loss mitigation resources of many of our seller/
servicers. This has also increased the operational complexity of the servicing function, as well as the risk that errors will
occur. A number of seller/servicers have had to address issues relating to the improper preparation and execution of
certain documents used in foreclosure proceedings, which has further strained their resources. There have also been a
number of regulatory developments that have increased, or could increase, the complexity of the servicing function. It is
also possible that we could be directed to introduce additional changes to the servicing function that increase its
complexity, such as new or revised loan modification or loss mitigation initiatives or new compensation arrangements.
Our expected ability to partially mitigate losses through loan modifications and other alternatives to foreclosure is a factor
we consider in determining our allowance for loan losses. Therefore, the inability to realize the anticipated benefits of our
loss mitigation plans could cause our losses to be significantly higher than those currently estimated. Weak economic
conditions continue to affect the liquidity and financial condition of many of our seller/servicers, including some of our
largest seller/servicers. Any efforts we take to attempt to improve our servicers’ performance could adversely affect our
relationships with such servicers, many of which also sell loans to us.
If a servicer does not fulfill its servicing obligations (including its repurchase or other responsibilities), we may seek
partial or full recovery of 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 might not receive a
58 Freddie Mac