Freddie Mac 2012 Annual Report Download - page 78

increase, including: (a) the increasingly lengthy foreclosure process in many states (affected, in some states, by new
foreclosure requirements); (b) the difficulty of servicers in processing the high volume of seriously delinquent loans, due in
part to general constraints on servicer capacity and the increasing complexity of the servicing function; and (c) concerns
about deficiencies in seller/servicers’ conduct of the foreclosure process. For more information on these developments, see
“BUSINESS — Regulation and Supervision — Legislative and Regulatory Developments —Developments Concerning
Single-Family Servicing Practices.”
Delays in the foreclosure process could cause our credit losses to increase for a number of reasons. For example,
properties awaiting foreclosure could deteriorate until we acquire ownership of them through foreclosure. This would
increase our expenses to repair and maintain the properties when we do acquire them. Such delays may also adversely affect
the values of, and our losses on, the non-agency mortgage-related securities we hold. Delays in the foreclosure process may
also adversely affect trends in home prices regionally or nationally, which could also adversely affect our financial results.
It also is possible that mortgage insurance claims could be reduced if delays caused by servicers’ deficient foreclosure
practices prevent servicers from completing foreclosures within required timelines defined by mortgage insurers. Mortgage
insurance companies establish foreclosure timelines that vary by state and range between 60 and 990 days.
Delays in the foreclosure process could create fluctuations in our single-family credit statistics. For example, our
realization of credit losses, which consists of REO operations income (expense) plus charge-offs, net, could be delayed
because we typically record charge-offs at the time we take ownership of a property through foreclosure. Delays could also
temporarily increase the number of seriously delinquent loans that remain in our single-family mortgage portfolio, which
could result in higher reported serious delinquency rates and a larger number of non-performing loans than would otherwise
have been the case.
In the fall of 2010, several large seller/servicers announced issues relating to the improper preparation and execution of
certain documents used in foreclosure proceedings. These announcements raised various concerns relating to foreclosure
practices, and caused significant delays in the foreclosure process, particularly during 2011. It is possible that additional
deficiencies in foreclosure practices will be identified in the future. The integrity of the foreclosure process is critical to our
business, and our financial results could be adversely affected by deficiencies in the conduct of that process.
Issues related to mortgages recorded through the MERS System could delay or disrupt foreclosure activities and have an
adverse effect on our business.
The Mortgage Electronic Registration System, or the MERS®System, is an electronic registry that is widely used by
seller/servicers, Freddie Mac, and other participants in the mortgage finance industry, to maintain records of beneficial
ownership of mortgages. The MERS System is owned, operated, and maintained by MERSCORP Holdings, Inc., a privately
held company (which we refer to below as MERSCORP), the shareholders of which include a number of organizations in the
mortgage industry, including Freddie Mac, Fannie Mae, and certain seller/servicers, mortgage insurance companies, and title
insurance companies.
Mortgage Electronic Registration Systems, Inc., or MERS, a wholly-owned subsidiary of MERSCORP, has the ability
to serve as a nominee for the owner of a mortgage loan and in that role become the mortgagee of record for the loan in local
land records. Freddie Mac seller/servicers may choose to use MERS as a nominee, though they are no longer permitted to
initiate foreclosures in MERS’ name with respect to mortgages owned or guaranteed by us. Approximately 41% of the loans
Freddie Mac owns or guarantees were registered in MERS’ name as of December 31, 2012; the beneficial ownership and the
ownership of the servicing rights related to those loans are tracked in the MERS System.
MERS has been the subject of numerous lawsuits challenging foreclosures on mortgages for which MERS is mortgagee
of record as nominee for the beneficial owner. It is possible that adverse judicial decisions, regulatory proceedings or action,
or legislative action related to MERS, could delay or disrupt foreclosure of mortgages that are registered on the MERS
System. Negative publicity about MERS could adversely affect the mortgage industry and negatively impact public
confidence in the foreclosure process, which could lead to legislative or regulatory action. Because MERS often executes
legal documents in connection with foreclosure proceedings, it is possible that investigations by governmental authorities and
others into deficiencies in foreclosure practices may negatively impact MERS and the MERS System.
Federal or state legislation or regulatory action could prevent us from using the MERS System for mortgages that we
own, guarantee, and securitize, or could create additional requirements for the transfer of mortgages that could affect the
process for and costs of acquiring, transferring, servicing, and foreclosing on mortgages. Such legislation or regulatory action
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