Freddie Mac 2015 Annual Report Download - page 297

Financial Statements Notes to the Consolidated Financial Statements | Note 13
Freddie Mac 2015 Form 10-K 295
and we purchase a significant share of our loans from them. Our top three non-depository sellers
provided approximately 10% of our single-family purchase volume during 2015.
We are exposed to institutional credit risk arising from the potential insolvency or non-performance by our
sellers and servicers of their obligations to repurchase loans or (at our option) indemnify us in the event
of breaches of the representations and warranties they made when they sold the loans to us or failure to
comply with our servicing requirements. Our contracts require that a seller/servicer repurchase a loan
after we issue a repurchase request, unless the seller/servicer avails itself of an appeals process
provided for in our contracts, in which case the deadline for repurchase is extended until we decide on the
appeal. As of December 31, 2015 and 2014, the UPB of loans subject to our repurchase requests issued
to our single-family sellers and servicers was approximately $0.4 billion and $0.7 billion, respectively
(these figures include repurchase requests for which appeals were pending). During 2015 and 2014 we
recovered amounts that covered losses with respect to $0.8 billion and $2.0 billion, respectively, in UPB of
loans subject to our repurchase requests.
At the direction of FHFA, Freddie Mac and Fannie Mae have revised their representation and warranty
framework for conventional loans purchased by the GSEs on or after January 1, 2013. The objective of
the revised framework is to clarify lenders’ repurchase exposures and liability on future sales of loans to
Freddie Mac and Fannie Mae. This framework does not affect seller/servicers’ obligations under their
contracts with us with respect to loans sold to us prior to January 1, 2013. This framework also does not
affect their obligation to service these loans in accordance with our servicing standards. Under this
framework, sellers are relieved of certain repurchase obligations for loans that meet specific payment
requirements. This includes, subject to certain exclusions, loans with 36 months (12 months for relief
refinance loans) of consecutive, on-time payments after we purchase them.
In May 2014, we announced changes to our representation and warranty framework for loans acquired on
and after July 1, 2014. These changes relieve sellers of additional representations and warranties for
these loans and provide relief for loans we have fully reviewed in our quality control process and
determined to be acceptable. As of December 31, 2015, approximately 50% in UPB of loans in our single-
family credit guarantee portfolio were purchased since January 1, 2013 and are subject to our revised
representation and warranty framework.
At the direction of FHFA, we implemented a new remedies framework for the categorization of loan
origination defects for loans with settlement dates on or after January 1, 2016. Among other items, the
framework provides that "significant defects" will result in a repurchase request or a repurchase
alternative, such as recourse or indemnification. We may require the seller to pay us additional fees or
provide us with additional data on the loan.
The ultimate amounts of recovery payments we receive from seller/servicers related to their repurchase
obligations may be significantly less than the amount of our estimates of potential exposure to losses. Our
estimate of probable incurred losses for exposure to seller/servicers for their repurchase obligations is
considered in our allowance for loan losses. See Note 4 for further information.
We are also exposed to the risk that servicers might fail to service loans in accordance with our
contractual requirements, resulting in increased credit losses. For example, our servicers have an active
role in our loss mitigation efforts, including under the MHA Program, and therefore, we have exposure to
them to the extent a decline in their performance results in a failure to realize the anticipated benefits of
our loss mitigation plans. Since we do not have our own servicing operation, if our servicers lack