Freddie Mac 2012 Annual Report Download - page 35

are not the master servicer for multifamily loans we have securitized (i.e., K Certificates) since we transfer the master
servicing responsibilities to the trustees on behalf of the bondholders in accordance with the securitization and trust
documents. For loans over $1 million where we own the servicing rights, servicers must generally submit an annual
assessment of the mortgaged property to us based on the servicer’s analysis of the property as well as the borrower’s
quarterly financial statements. In situations where a borrower or property is in distress, the frequency of communications
with the borrower may be increased. Because the activities of multifamily seller/servicers are an important part of our loss
mitigation process, we rate their performance regularly and may conduct on-site reviews of their servicing operations in an
effort to confirm compliance with our standards.
For loans for which we are the master servicer, if a borrower is in distress, we may offer a workout option to the
borrower. For example, we may modify the terms of a multifamily mortgage loan, which gives the borrower an opportunity
to bring the loan current and retain ownership of the property. These arrangements are made with the expectation that we will
recover our initial investment or minimize our losses. We do not enter into these arrangements in situations where we believe
we would experience a loss in the future that is greater than or equal to the loss we would experience if we foreclosed on the
property at the time of the agreement.
Conservatorship and Related Matters
Overview and Entry into Conservatorship
We have been operating under conservatorship, with FHFA acting as our conservator, since September 6, 2008. The
conservatorship and related matters have had a wide-ranging impact on us, including our regulatory supervision,
management, business, financial condition and results of operations.
On September 7, 2008, the then Secretary of the Treasury and the then Director of FHFA announced several actions
taken by Treasury and FHFA regarding Freddie Mac and Fannie Mae. These actions included the execution of the Purchase
Agreement, pursuant to which we issued to Treasury both senior preferred stock and a warrant to purchase common stock. At
that time, FHFA set forth the purpose and goals of the conservatorship as follows: “The purpose of appointing the
Conservator is to preserve and conserve the company’s assets and property and to put the company in a sound and solvent
condition. The goals of the conservatorship are to help restore confidence in Fannie Mae and Freddie Mac, enhance their
capacity to fulfill their mission, and mitigate the systemic risk that has contributed directly to the instability in the current
market.” We refer to the Purchase Agreement and the warrant as the “Treasury Agreements.”
There is significant uncertainty as to whether or when we will emerge from conservatorship, as it has no specified
termination date, and as to what changes may occur to our business structure during or following conservatorship, including
whether we will continue to exist. We are not aware of any current plans of our Conservator to significantly change our
business model or capital structure in the near-term. Our future structure and role will be determined by the Administration
and Congress, and there are likely to be significant changes beyond the near-term. We have no ability to predict the outcome
of these deliberations.
On February 21, 2012, FHFA sent to Congress a strategic plan for the next phase of the conservatorships of Freddie
Mac and Fannie Mae. The plan outlines how FHFA, as Conservator, intends to guide us and Fannie Mae over the next few
years, and identifies the strategic goals of (a) building a new infrastructure for the secondary mortgage market; (b) gradually
contracting Freddie Mac and Fannie Mae’s dominant presence in the marketplace while simplifying and shrinking their
operations; and (c) maintaining foreclosure prevention activities and credit availability for new and refinanced mortgages. In
March 2012, FHFA instituted the Conservatorship Scorecard that established objectives, performance targets and measures,
and provided the implementation roadmap for FHFA’s strategic plan.
We receive substantial support from Treasury and FHFA, as our Conservator and regulator, and are dependent upon
their continued support in order to continue operating our business. This support includes our ability to access funds from
Treasury under the Purchase Agreement, which is critical to: (a) keeping us solvent; (b) allowing us to focus on our primary
business objectives under conservatorship; and (c) avoiding the appointment of a receiver by FHFA under statutory
mandatory receivership provisions. For the past several years, the Federal Reserve has purchased significant amounts of
mortgage-related securities issued by us, Fannie Mae, and Ginnie Mae. These purchases, which are ongoing, have affected
mortgage spreads (positively and, in some periods, negatively) and the demand for and value of our PCs.
For a description of certain risks to our business relating to the conservatorship and Treasury Agreements, see “RISK
FACTORS.”
30 Freddie Mac