Freddie Mac 2015 Annual Report Download - page 138

Management's Discussion and Analysis Risk Management | Institutional Credit Risk
Freddie Mac 2015 Form 10-K 136
these transactions and may use collateral maintenance requirements to manage our exposure to
individual counterparties. The permitted term and dollar limits for each of these transactions are also
based on the counterparty’s financial strength. Our cash and other investments (including non-
mortgage-related investments and cash equivalents) counterparties are primarily major financial
institutions, Treasury, and the Federal Reserve Bank of New York. Our investments in non-mortgage-
related securities at December 31, 2015 and 2014 were in U.S. Treasury securities.
• Mortgage related-security issuers and servicers - We are exposed to the non-performance of
servicers and issuers of our investments in non-Freddie Mac mortgage-related securities, which can
result in credit losses, impairments and declines in the fair value of these securities. See the
“Mortgage-Related Securities Credit Risk” section for more information on how we manage risk
associated with non-agency mortgage-related securities. A significant portion of the single-family
loans underlying our investments in non-agency mortgage-related securities is serviced by non-
depository servicers. These servicers may not have the same financial strength, internal controls or
operational capacity as depository servicers. As of December 31, 2015 and 2014, approximately
$13.0 billion and $17.9 billion, respectively, of our investments in single-family non-agency mortgage-
related securities, based on UPB, were serviced by subsidiaries and/or affiliates of Ocwen.
• Document custodians - We use third-party document custodians to provide loan document
certification and custody services for the loans that we purchase and securitize. In many cases, our
seller/servicers or their affiliates also serve as document custodians for us. Our ownership rights to
the loans that we own or that back our securitization products could be challenged if a seller/servicer
intentionally or negligently pledges, sells, or fails to obtain a release of prior liens on the loans that we
purchased, which could result in financial losses to us. When a seller/servicer or one of its affiliates
acts as a document custodian for us, the risk that our ownership interest in the loans may be
adversely affected is increased, particularly in the event the seller/servicer were to become insolvent.
To manage these risks, we maintain legal and contractual arrangements that identify our ownership
interest in the loans and establish qualifying standards for our document custodians. We also monitor
the financial strength of our document custodians on an ongoing basis in accordance with our
counterparty risk management framework, and we require transfer of documents to our possession or
to a different third-party document custodian if we have concerns about the solvency or competency
of the document custodian.
• The MERS® System - The MERS System is an electronic registry that is widely used by seller/
servicers, Freddie Mac, and other participants in the mortgage industry to maintain records of
beneficial ownership of loans. The MERS System is owned and operated by MERSCORP Holdings,
Inc., a privately held company, the shareholders of which include a number of organizations in the
mortgage industry (including Freddie Mac). A significant portion of the loans we own or guarantee are
registered in the MERS System. Our business could be adversely affected if we were prevented from
using the MERS System, or if our use of the MERS System adversely affects our ability to enforce
our rights with respect to our loans registered in the MERS System.