Freddie Mac 2015 Annual Report Download - page 130

Management's Discussion and Analysis Risk Management | Institutional Credit Risk
Freddie Mac 2015 Form 10-K 128
INSTITUTIONAL CREDIT RISK
We are exposed to institutional credit risk as a result of our contracts with seller/servicers, mortgage and
bond insurers, derivative counterparties, including clearing members and clearinghouses, cash and other
investments counterparties, mortgage-related security issuers, and document custodians. We manage
our exposure to institutional credit risk using the following principal strategies:
• Maintaining eligibility standards;
• Evaluating counterparty financial strength and performance and monitoring our exposure; and
• Working with underperforming counterparties and limiting our losses from their nonperformance of
obligations, when possible.
In the sections below, we discuss our management of institutional credit risk for each type of counterparty
to which we have significant exposure.
Sellers and Servicers
Overview
In our single-family guarantee business, we do not originate loans or have our own loan servicing
operation. Instead, our sellers and servicers perform the primary loan origination and loan servicing
functions on our behalf. We establish standards for our sellers and servicers to follow and have
contractual arrangements with them under which they represent and warrant that the loans they sell to us
meet our standards and that they will service loans in accordance with our standards. If we discover that
the representations or warranties related to a loan were breached (i.e., that contractual standards were
not followed), we can exercise certain contractual remedies to mitigate our actual or potential credit
losses. If our sellers or servicers lack appropriate controls, experience a failure in their controls, or
experience an operating disruption, including as a result of legal or regulatory actions or ratings
downgrades, we could experience a decline in mortgage servicing quality and/or be less likely to recover
losses through lender repurchases, recourse agreements, or other credit enhancements, where
applicable.
In our multifamily business, we are exposed to the risk that multifamily seller/servicers could come under
financial pressure, which could potentially cause degradation in the quality of the servicing they provide
us, including their monitoring of each property’s financial performance and physical condition. This could
also, in certain cases, reduce the likelihood that we could recover losses through lender repurchases,
recourse agreements or other credit enhancements, where applicable. This risk primarily relates to
multifamily loans that we hold on our consolidated balance sheets where we retain all of the related credit
risk.
Maintaining Eligibility Standards
Our eligibility standards for sellers and servicers require the following: a demonstrated operating history in
residential mortgage origination and servicing, or an eligible agent acceptable to us; adequate insurance
coverage; a quality control program that meets our standards; and sufficient net worth, liquidity, and
funding sources.
In 2015, at the direction of FHFA, we and Fannie Mae announced changes to our single-family seller and
servicer eligibility requirements. These changes include revisions to net worth requirements, adoption of