Freddie Mac 2012 Annual Report Download - page 67

financial institutions. We may face increased risk that these institutions would not be able to satisfy their repurchase
obligations, as these institutions may not have the same financial strength as our larger seller/servicers.
At the direction of FHFA, we have launched a new representation and warranty framework for conventional loans
purchased by us on or after January 1, 2013. We may face greater exposure to credit and other losses under this new
framework since it relieves lenders of certain repurchase obligations in specific cases, such as for loans that perform for 36
consecutive months after we purchase them, with certain exclusions. For more information, see “MD&A — RISK
MANAGEMENT — Credit Risk — Institutional Credit Risk — Single-Family Mortgage Seller/Servicers.”
In 2012 and late 2011, we changed our relief refinance program (which includes HARP) such that we are relieving
lenders of certain representations and warranties on the original mortgage being refinanced. As a result, we may face greater
exposure to credit and other losses on these loans. For more information, see “MD&A — RISK MANAGEMENT — Credit
Risk — Mortgage Credit Risk —Single-Family Mortgage Credit Risk —Single-Family Loan Workouts and the MHA
Program —Relief Refinance Mortgage Initiative and the Home Affordable Refinance Program.”
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.
Seller/servicers may fail to perform their obligations to service loans in our single-family and multifamily mortgage
portfolios or 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 weak conditions of the
mortgage market, and the number and variety of additions and changes to our loan modification and other 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 legislative and 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.
In recent periods, a number of our servicers who specialize in servicing troubled loans have experienced rapid growth in
their servicing portfolios, including an increase in troubled loans they service for Freddie Mac. Although the ability of these
servicers to service troubled loans may benefit us by reducing our credit losses, the rapid expansion of their servicing
portfolios could expose us to increased risks in the event that it results in operational strains that adversely affect their
servicing performance or weakens their financial strength.
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 weakness in the housing market has negatively
affected the market for mortgage servicing rights, which increases the risk that we might not receive a sufficient price for
such rights or that we may be unable to find buyers who: (a) have sufficient capacity to service the affected mortgages in
compliance with our servicing standards; (b) are willing to assume the representations and warranties of the former servicer
regarding the affected mortgages (which we typically require); and (c) have sufficient capacity to service all of the affected
mortgages. Increased industry consolidation, bankruptcies of mortgage bankers or bank failures may also make it more
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