Freddie Mac 2012 Annual Report Download - page 28

Under the new framework, Freddie Mac and Fannie Mae, under the supervision of FHFA, have established consistent
standards for:
• conducting quality control reviews earlier in the loan process, generally between 30 to 120 days after loan purchase;
• requiring lenders to submit requested loan files for review within specified timelines;
• evaluating loan files on a more comprehensive basis to ensure a focus on identifying significant deficiencies; and
• making available more transparent appeals processes for lenders to appeal repurchase requests.
Additionally, we will use our tools and available data to enable earlier identification of potentially defective loans prior
to their purchase and delivery. The changes to the representation and warranty process are key elements of the seller/servicer
contract harmonization project that supports FHFA’s strategic plan for the Freddie Mac and Fannie Mae conservatorships
announced in 2012.
The new framework does not affect seller/servicers’ obligations under their contracts with us with respect to loans sold
to us prior to January 1, 2013. The new framework also does not affect their obligation to service these loans in accordance
with our servicing standards. Freddie Mac will continue to work with lenders to resolve contractual claims on loans delivered
prior to January 1, 2013.
Credit Enhancements
Our charter requires that single-family mortgages with LTV ratios above 80% at the time of purchase be covered by
specified credit enhancements or participation interests. However, we may purchase single-family mortgages under HARP
that refinance mortgages we currently own or guarantee without obtaining additional credit enhancement in excess of that
already in place, even if the LTV ratio of the new loan is above 80%. Primary mortgage insurance is the most prevalent type
of credit enhancement protecting our single-family credit guarantee portfolio, and is typically provided on a loan-level basis.
Generally, in order to file a claim under a primary mortgage insurance policy, the insured loan must be in default and the
borrower’s interest in the underlying property must have been extinguished, such as through a short sale or foreclosure
action. The mortgage insurer has a prescribed period of time within which to process a claim and make a determination as to
its validity and amount.
For some mortgage loans, we elect to share the default risk by transferring a portion of that risk to various third parties
through a variety of other credit enhancements. Other types of credit enhancements that we use are lender recourse (under
which we may require a lender to repurchase a loan upon default), indemnification agreements (under which we may require
a lender to reimburse us for credit losses realized on mortgages), collateral pledged by lenders, and subordinated security
structures. Lender recourse and indemnification agreements are typically entered into contemporaneously with the purchase
of a mortgage loan as an alternative to requiring primary mortgage insurance on the loan or in exchange for a lower
guarantee fee on the loan.
We also use pool insurance, although we have not purchased pool insurance on single-family loans since March 2008.
Pool insurance provides insurance on a pool of loans up to a stated aggregate loss limit. In addition to a pool-level loss
coverage limit, some pool insurance contracts may have limits on coverage at the loan level. During 2012, we reached the
maximum limit of loss on certain pool insurance contracts before their maturity dates. In order to file a claim under a pool
insurance policy, we generally must have finalized the primary mortgage claim, disposed of the foreclosed property, and
quantified our net loss with respect to the insured loan to determine the amount due under the pool insurance policy. Certain
pool insurance policies have specified loss deductibles that must be met before we are entitled to recover under the policy.
Our use of credit enhancements to reduce our exposure to mortgage credit risk increases our exposure to institutional
credit risk. See “MD&A — RISK MANAGEMENT— Credit Risk — Institutional Credit Risk” for information about our
counterparties that provide credit enhancement on loans in our single-family credit guarantee portfolio, including information
about pool insurance coverage and our mortgage loan insurers.
Loss Mitigation and Loan Workout Activities
Loan workout activities are a key component of our loss mitigation strategy for managing and resolving troubled assets
and lowering credit losses. Our single-family loss mitigation strategy emphasizes early intervention by servicers in
delinquent mortgages and provides alternatives to foreclosure. Our single-family loss mitigation activities include providing
our single-family servicers with default management tools designed to help them manage non-performing loans more
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