Freddie Mac 2011 Annual Report Download - page 74

process may also adversely affect trends in home prices regionally or nationally, which could also adversely affect our
financial results.
It also is possible that mortgage insurance claims could be reduced if delays caused by servicers’ deficient
foreclosure practices prevent servicers from completing foreclosures within required timelines defined by mortgage
insurers. Mortgage insurance companies establish foreclosure timelines that vary by state and range between 30 and
960 days.
Delays in the foreclosure process could create fluctuations in our single-family credit statistics. For example, our
realization of credit losses, which consists of REO operations income (expense) plus charge-offs, net, could be delayed
because we typically record charge-offs at the time we take ownership of a property through foreclosure. Delays could
also temporarily increase the number of seriously delinquent loans that remain in our single-family mortgage portfolio,
which could result in higher reported serious delinquency rates and a larger number of non-performing loans than would
otherwise have been the case.
In the fall of 2010, several large seller/servicers announced issues relating to the improper preparation and execution
of certain documents used in foreclosure proceedings. These announcements raised various concerns relating to
foreclosure practices. A number of our seller/servicers, including several of our largest ones, temporarily suspended
foreclosure proceedings in certain states while they evaluated and addressed these issues. While the larger servicers
generally resumed foreclosure proceedings in early 2011, single-family mortgages in our portfolio have continued to
experience significant delays in the foreclosure process in 2011, as compared to periods before these issues arose,
particularly in states that require a judicial foreclosure process. These and other factors could also delay sales of our REO
properties. In addition, a group consisting of state attorneys general and state bank and mortgage regulators is reviewing
foreclosure practices. We have terminated the eligibility of several law firms to serve as counsel in foreclosures of Freddie
Mac mortgages, due to issues with respect to the firms’ foreclosure practices. It is possible that additional deficiencies in
foreclosure practices will be identified.
We have incurred, and will continue to incur, expenses related to deficiencies in foreclosure documentation practices
and the costs of remediating them, which may be significant. These expenses include costs related to terminating the
eligibility of certain law firms and other incremental costs. We may also incur costs if we become involved in litigation or
investigations relating to these issues. It will take time for seller/servicers to complete their evaluations of these issues and
implement remedial actions. The integrity of the foreclosure process is critical to our business, and our financial results
could be adversely affected by deficiencies in the conduct of that process.
Issues related to mortgages recorded through the MERS System could delay or disrupt foreclosure activities and have
an adverse effect on our business.
The Mortgage Electronic Registration System, or the MERS»System, is an electronic registry that is widely used by
seller/servicers, Freddie Mac, and other participants in the mortgage finance industry, to maintain records of beneficial
ownership of mortgages. The MERS System is maintained by MERSCORP, Inc., a privately held company, the
shareholders of which include a number of organizations in the mortgage industry, including Freddie Mac, Fannie Mae,
and certain seller/servicers, mortgage insurance companies, and title insurance companies.
Mortgage Electronic Registration Systems, Inc., or MERS, a wholly-owned subsidiary of MERSCORP, Inc., has the
ability to serve as a nominee for the owner of a mortgage loan and in that role become the mortgagee of record for the
loan in local land records. Freddie Mac seller/servicers may choose to use MERS as a nominee. Approximately 42% of
the loans Freddie Mac owns or guarantees were registered in MERS’ name as of December 31, 2011; the beneficial
ownership and the ownership of the servicing rights related to those loans are tracked in the MERS System.
In the past, Freddie Mac servicers had the option of initiating foreclosure in MERS’ name. On March 23, 2011, we
informed our servicers that they no longer may initiate foreclosures in MERS’ name for those mortgages owned or
guaranteed by us and registered with MERS that are referred to foreclosure on or after April 1, 2011. As of April 1, 2011,
foreclosure of mortgages owned or guaranteed by us for which MERS serves as nominee is accomplished by MERS
assigning the record ownership of the mortgage to the servicer, and the servicer initiating foreclosure in its own name.
Many of our servicers were following this procedure before the March 23 announcement.
MERS has also been the subject of numerous lawsuits challenging foreclosures on mortgages for which MERS is
mortgagee of record as nominee for the beneficial owner. For example, on February 3, 2012, the Attorney General of the
State of New York filed a lawsuit against MERSCORP, Inc., MERS and several large banks alleging, among other items,
that the creation and use of the MERS System has resulted in a wide range of deceptive and fraudulent foreclosure filings
in New York state and federal courts. It is possible that adverse judicial decisions, regulatory proceedings or action, or
69 Freddie Mac