Freddie Mac 2012 Annual Report Download - page 76

to our business structure during or following conservatorship, including whether we will continue to exist. These adverse
consequences could result from perceptions concerning our activities and role in addressing the housing and economic
downturn, concerns about our compensation practices, concerns about deficiencies in foreclosure documentation practices or
our actual or alleged action or failure to act in any number of areas, including corporate governance, regulatory compliance,
financial reporting and disclosure, purchases of products perceived to be predatory, safeguarding or using nonpublic personal
information, or from actions taken by government regulators in response to our actual or alleged conduct.
The servicing alignment initiative, MHA Program, and other efforts to reduce foreclosures, modify loan terms and
refinance mortgages, including HARP, may fail to mitigate our credit losses and may adversely affect our results of
operations or financial condition.
The servicing alignment initiative, MHA Program, and other loss mitigation activities are a key component of our
strategy for managing and resolving troubled assets and lowering credit losses. However, our loss mitigation strategies may
not be successful and our credit losses may continue to remain high. The costs we incur related to loan modifications and
other activities have been, and will likely continue to be, significant because we bear the full cost of the monthly payment
reductions related to modifications of loans we own or guarantee, and all applicable servicer and borrower incentives. We are
not reimbursed for these costs by Treasury. For information on our loss mitigation activities, see “MD&A — RISK
MANAGEMENT — Credit Risk — Mortgage Credit Risk —Single-Family Mortgage Credit Risk — Single-Family Loan
Workouts and the MHA Program.”
We could be required or elect to make changes to our implementation of our loss mitigation activities that could make
these activities more costly to us, both in terms of credit expenses and the cost of implementing and operating the activities.
For example, we could be required to use principal reduction to achieve reduced payments for borrowers. This could further
increase our losses, as we could bear some or all of the costs of such reductions.
A significant number of loans are in the trial period of HAMP or our non-HAMP standard loan modification. For
information on completion rates for HAMP and non-HAMP modifications, see “MD&A — RISK MANAGEMENT —
Credit Risk — Mortgage Credit Risk —Single-Family Mortgage Credit Risk — Single-Family Loan Workouts and the MHA
Program.” A number of loans will fail to complete the applicable trial period or qualify for our other loss mitigation
programs. For these loans, the trial period will have effectively delayed the foreclosure process and could increase our losses,
to the extent the prices we ultimately receive for the foreclosed properties are less than the prices we could have received had
we foreclosed upon the properties earlier. These delays in foreclosure could also cause our REO operations expense to
increase, perhaps substantially.
Mortgage modification initiatives, particularly any future focus on principal reductions (which at present we do not offer
to borrowers), have the potential to change borrower behavior and mortgage underwriting. Principal reductions may create an
incentive for borrowers that are current to become delinquent in order to receive a principal reduction. This, coupled with the
phenomenon of widespread underwater mortgages, could significantly affect borrower attitudes towards homeownership, the
commitment of borrowers to making their mortgage payments, the way the market values residential mortgage assets, the
way in which we conduct business and, ultimately, our financial results.
Depending on the type of loss mitigation activities we pursue, those activities could result in accelerating or slowing
prepayments on our PCs and REMICs and Other Structured Securities, either of which could affect the pricing of such
securities. At the direction of FHFA, we implemented a series of changes to HARP in late 2011 and 2012. We subsequently
made similar changes to the relief refinance mortgage initiative for loans with LTV ratios of 80% and less. There can be no
assurance that the benefits from the revised programs will exceed our costs. We may face greater exposure to credit and other
losses on HARP and other relief refinance loans (starting in late 2012) because we are relieving lenders of certain
representations and warranties on the original mortgage being refinanced. Due to the impact of HARP and other refinance
initiatives of Freddie Mac and Fannie Mae, we could experience declines in the fair values of certain agency security
investments classified as available-for-sale or trading resulting from changes in expectations of mortgage prepayments and
lower net interest yields over time on other mortgage-related investments. The ultimate impact of the HARP revisions on our
financial results will be driven by the level of borrower participation and the volume of loans with high LTV ratios that we
acquire under the program. Over time, relief refinance mortgages with LTV ratios above 80% may not perform as well as
relief refinance mortgages with LTV ratios of 80% and below because of the continued high LTV ratios of these loans. Based
on our historical experience, there is an increase in borrower default risk as LTV ratios increase. In addition, relief refinance
mortgages may not be covered by mortgage insurance for the full excess of their UPB over 80%. 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.”
71 Freddie Mac