Freddie Mac 2015 Annual Report Download - page 141

Management's Discussion and Analysis Risk Management | Operational Risk
Freddie Mac 2015 Form 10-K 139
Operational Risk Issue Relating to Master Trust Agreement
Loan payments remitted to the company from seller/servicers are deposited into a custodial account that
contains both property of the company and property of the company's securitization trusts, including:
• Mortgage payments of principal and/or interest owed to investors;
• Mortgage payments of principal and/or interest owed to the company;
• Management and guarantee fees due to the company;
• Excess payments as to which a refund or credit may be owed to a seller/servicer; and
• Earnings owed to the company from the investment of the funds in the custodial account.
The custodial account also holds the securitization trusts' funds arising from transactions between the
company and the trusts, such as advances and guarantee payments by the company to the trusts and
payments by the company for its purchases of defaulted loans from the trusts. Funds in the custodial
account are restricted (i.e., not available for the company's general corporate purposes) even though
some of the funds in that account are owed to the company. Amounts owed to the company are
reclassified as unrestricted when funds are transferred into an operating cash account.
The company's processes and controls provide reasonable assurance that: (i) amounts that should be
received from seller/servicers into the custodial account are so received; and (ii) amounts that should be
paid to holders of its PCs are so paid. However, the company has concluded that some of its operating
procedures are not sufficiently detailed to comply with certain of its obligations under its PC Master Trust
Agreement or to enable the company to optimize its cash management.
Specifically, the company:
• Has not kept detailed pool-by-pool records of funds in the custodial account, as required by the
Master Trust Agreement; and
• Has not been withdrawing from the custodial account all amounts due to the company, as required by
the Master Trust Agreement, except for earnings from investment of funds.
Also, instead of recording separate, individual payments in the custodial account to reflect transactions
between the company and the trusts, the company has been netting amounts due to and due from the
trusts and then making monthly transfers to the custodial account of any aggregate net amount required
to be paid to the trusts. Since amounts owing to the company have generally exceeded amounts owed by
the company to the trusts in recent periods, this practice has led to a build-up in the custodial account of
funds that may belong to the company.
The company initiated a project to correct these operational deficiencies, to attribute the funds in the
custodial account as between the securitization trusts and the company and to record the relevant
transactions and balances at a more detailed level. The company does not believe that this issue has had
or will have a material adverse effect on holders of the company's PCs or on the company's financial
condition or results.