Freddie Mac 2012 Annual Report Download - page 31

Underwriting procedures for relief refinance mortgages are limited in many cases, and such procedures generally do not
include all of the changes in underwriting standards we have implemented since 2008. As a result, relief refinance mortgages
generally reflect many of the credit risk attributes of the original loans. However, borrower participation in our relief
refinance mortgage initiative may help reduce our exposure to credit risk in cases where the borrowers’ payments under their
mortgages are reduced, thereby strengthening the borrowers’ potential to make their mortgage payments. See “MD&A —
RISK MANAGEMENT — Credit Risk — Mortgage Credit Risk —Single-family Mortgage Credit Risk —Single-Family
Loan Workouts and the MHA Program” for additional information about HARP and our relief refinance mortgage initiative.
Non-HAMP Standard Modifications
In late 2011, as part of the servicing alignment initiative (described below), we implemented a new non-HAMP standard
loan modification initiative, replacing our previous non-HAMP modification initiative. The standard modification requires a
three-month trial period (our previous non-HAMP modification program did not require a trial period). The standard
modification provides an extension of the loan’s term to 480 months. In addition, the standard modification initiative
currently provides for a standard modified interest rate of 4% (though the rate could change in the future). This initiative also
provides for a servicer incentive fee schedule for non-HAMP modifications, comparable to the current HAMP servicer
incentive fee structure. The incentive fees are intended to provide greater incentives to our servicers to modify loans earlier
in the delinquency. Unlike with HAMP modifications, our non-HAMP standard modification does not provide for borrower
incentive payments or recurring servicer incentive fees after the initial servicer incentive payment.
Servicing Alignment Initiative
During 2012, we continued to implement the FHFA-directed servicing alignment initiative, under which we and Fannie
Mae are aligning certain standards for servicing non-performing loans owned or guaranteed by the companies. We believe
that the servicing alignment initiative will continue to: (a) change, among other things, the way servicers communicate and
work with troubled borrowers; (b) bring greater consistency and accountability to the servicing industry; and (c) help more
distressed homeowners avoid foreclosure. We have provided standards to our servicers under this initiative that require them
to initiate earlier and more frequent communication with delinquent borrowers, employ consistent requirements for
collecting documents from borrowers, and follow consistent timelines for responding to borrowers and for processing
foreclosures. These standards have resulted in greater alignment of servicer processes for both HAMP and most non-HAMP
workouts.
Under these new servicing standards, we pay incentives to servicers that exceed certain performance standards with
respect to servicing delinquent loans. We also assess compensatory fees if servicers do not achieve a minimum performance
benchmark with respect to servicing delinquent loans. Incentive fees paid to servicers and compensatory fees received from
servicers are recorded in other expenses and other income, respectively, within our consolidated statements of comprehensive
income. These incentives may result in our payment of increased fees to our seller/servicers, the cost of which may be
partially mitigated by the compensatory fees paid to us by our servicers that do not perform as required.
In August 2012, as part of the servicing alignment initiative we announced a new standard short sale process, aligned
with Fannie Mae, which is designed to help more struggling borrowers use short sales to avoid foreclosure. This new process
became effective November 1, 2012, and changes many of the operational procedures required to complete a transaction,
including: (a) expanding the eligibility for borrowers to qualify for these transactions; (b) delegating the authority to
complete these transactions to our seller/servicers in most cases; and (c) providing for a standardized and simplified method
for seller/servicers to value the property and evaluate the transaction on a more timely basis.
In addition, in November 2012 we announced a new process, aligned with Fannie Mae, for deed in lieu of foreclosure
transactions. This new process will become effective on March 1, 2013.
For more information regarding credit risk, see “MD&A — RISK MANAGEMENT — Credit Risk,” “NOTE 4:
MORTGAGE LOANS AND LOAN LOSS RESERVES,” and “NOTE 5: INDIVIDUALLY IMPAIRED AND NON-
PERFORMING LOANS.”
Investments Segment
The Investments segment reflects results from our investment, funding and hedging activities. In our Investments
segment, we invest principally in mortgage-related securities and single-family performing mortgage loans, which are funded
by other debt issuances and hedged using derivatives. In our Investments segment, we also provide funding and hedging
26 Freddie Mac