Freddie Mac Issuer Session. STACR and Other Credit Risk Transfer Updates: Servicing and REO Disposition Practices

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1 Freddie Mac Issuer Session STACR and Other Credit Risk Transfer Updates: Servicing and REO Disposition Practices September 17, 2015

2 STACR and Other Credit Risk Transfer Updates: Servicing and REO Disposition Practices Moderator: Mike Reynolds, Vice President, Credit Risk Transfer Speakers: Yvette Gilmore, Vice President, Servicer Performance Management Jennifer Meagher, Ops Change Management Director Eric Will, REO Sales & Closing Senior Director

3 Achievements Launched the STACR Market Leading the way in Disclosures Industry Awards Including:» 2015 RMBS Deal of the Year Award by Global Capital» 2014 Global Structure Deal of the Year Award by Euromoney» 2014 Deal of the Year for Americas Award by The Banker Freddie Mac continues to evolve this asset class, introducing new products and features to make the program even more effective 3

4 Freddie Mac s Role in US Housing Finance 4

5 Single-Family Servicing & Loss Mitigation Yvette Gilmore, Vice President Servicing Performance Management

6 Functional Areas Single Family Servicing Servicing Leadership Team Who We Are Servicing Performance Management Servicing Relationship Management Servicing Policy Portfolio Data Analytics Servicing QA Customer Performance Management Structured Transactions Responsible for managing the servicing performance of the company s 1,400 national, regional and community servicers. Establishes relationships with servicers that enable improvement of operational performance and execution to reduce credit losses, preserve homeownership and facilitate positive servicing industry change. Responsible for developing mortgage servicing policies, and changes to our Single-Family Seller/ Servicer Guide. Works with FHFA, industry participants, and internal partners to develop solutions to Servicing issues. Responsible for Servicing data and reporting, and the analytics support for Loss Mitigation solutions, as well as the Servicer Success Scorecard, integral to Servicer Relationship Management. Responsible for loan file reviews to evaluate Servicers' compliance with FRE requirements for managing delinquent loans and workout alternatives. Also identifies remedies for non-compliance and collects on all requests. Responsible for providing and maintaining a consistent framework for business protocols, approval authority, and account mgmt, including management of negotiated terms of business, risk evaluation, and customer support.. Responsible for delivering financing support related to negotiated servicing transfers and for managing the performance of the T-Deal servicers, including monthly recoveries on loss-producing loans 6

7 Servicer Monitoring Freddie Mac executes a coordinated and integrated approach to monitoring and evaluating servicer risks Scheduled Monitoring Scheduled Monitoring: Ongoing Monitoring: Key Monitoring Mechanisms baseline activities as prescribed by policies/procedures triggered based on surveillance, for example: financial analysis results, market risk indicators, and changes in the business, industry or regulation Both Scheduled and Ongoing Monitoring Ongoing Monitoring Credit Monitoring Onsite Operational Review Servicer Performance Monitoring On-site Operational Reviews (CORE) Financial Analysis Compliance & Eligibility QA Remedies Fraud Investigations Performance is discussed at various forums with cross-divisional representation (e.g., integrated account plan meetings, Credit Integration Team (CIT) meetings, Single Family Risk Committee) Results of any of the above functions can lead to actions taken against the counterparties. Common reasons for actions 1. Failure to repurchase 2. Fraud findings 3. Inadequate capital / net worth 4. Non-compliance with Guide 5. Failure to file annual certification or financials timely Examples of actions taken 1. Collateral agreements/parental guarantees 2. Suspend negotiated servicing transfers 3. Partial transfers of servicing 4. Terminate eligibility through adverse actions 7

8 Monitoring Servicer Performance Freddie Mac s Servicing Success Program focuses on all aspects of mortgage servicing to improve Servicer performance. The program includes three components: The Servicer Performance Profiles website is a tool to help measure results of all Servicers for the Program, and is available to all Servicers. Tools to monitor performance include: Servicer Success Scorecard Tools Servicer-specific targets and performance metrics Large & Specialty Servicer performance grid Bottom 25% NPL performance grid Servicer Account Plans Executive Summary Reports Negotiated Terms of Business Integrated Account Plans Holistic view of relationship Portfolio Data Analytics sets annual targets for Servicers and ranks them each month based on performance against the Scorecard criteria. 8

9 Loss Mitigation Solutions Current Days Delinquent 30 DPD 60 DPD 90 DPD 120 DPD 360 Days 720 Days FCL Sale Payment Relief Options 1 2 Forbearance Repayment Plan 3 Disaster Relief Modification Loan Modification Options 4 5 Standard Mod with Imminent Default HAMP Mod with Imminent Default Standard Modification HAMP Modification 6 Streamlined Modification Liquidation Options 7 8 Standard Short Sale Deed-in-Lieu Forbearance - Relief option that provides a temporary reduction or suspension of payments to give Borrowers a period of time to improve their financial situation Repayment Plan - Borrowers that have had a short term hardship, and now have the ability to begin making payments again, but either do not want or do not require a loan modification. Disaster Relief Modification A capitalization and extension modification that is offered only to those Borrowers that were impacted by an Eligible Disaster. HAMP Modification - Modification that reduces delinquent and at-risk borrowers' monthly mortgage payments by achieving a post-modified 31% PITIAS Payment-to-Income ratio ( Target Payment ) Standard Modification - Modification for Borrowers who are ineligible for HAMP. Standard Mod achieves an affordable payment through the capitalization of arrearages, interest rate adjustment, term extension, and partial principal forbearance, as necessary Streamlined Modification - A proactive modification solution with the same terms as the Standard Modification, the Streamlined Modification is offered to Borrowers who are at least 90 days delinquent, but not more than 720 days delinquent. A complete Borrower Response Package is not required. Standard Short Sale - Borrowers that wish to gracefully exit the home by selling the property for less than the total amount necessary to satisfy the mortgage. Cash or note contribution may be required in some instances. Standard Deed-in-Lieu - Borrowers that wish to gracefully exit the home by voluntarily conveying clear and marketable title to the property to Freddie Mac in exchange for a discharge of debt. 9

10 Areas of Alignment Borrower Contact Focus on Quality Right Party Contact and standards Delinquency Management Emphasis on earlier, more frequent contact and response Loan Modifications, Workouts, and Foreclosure Alternatives Promote long-term, sustainable solutions based on best practices Foreclosure Timelines Focus on consistent application of timeline measurements from referral through date of sale Servicer Incentives and Compensatory Fees Compensate for meeting quality benchmarks Assess fees/remedies for failing to meet quality benchmarks Servicers have done a better job of engaging with homeowners, resolving their cases more quickly and consistently There is greater transparency and a quicker decision-making process for distressed homeowners Modifications and Foreclosure Alternative programs have been greatly expanded, resulting in more positive Borrower outcomes Reduced Credit Losses 10

11 HomeSteps REO Overview Eric Will, REO Sales & Closing Senior Director Jennifer Meagher, Operations Change Management Senior Director

12 Mission HomeSteps Mission To effectively manage Freddie Mac s credit losses in a way that provides affordable housing opportunities and benefits communities. Improve Collateral Values Refinement of our valuation methodology; Repair strategy focus to improve sales prices and return on investment; Frequent market area reviews and analytics to adjust sales and pricing strategies. Manage Expenses Monitoring of asset expenditures at the account group level; Business model review for savings and efficiencies; Negotiating volume discounts with vendor for service fees. Maximize Remedies Effective management and collection of hazard insurance, primary MI, pool MI, repurchase claims and any other remedies available. Preserve, Maintain, & Repair Homes Adherence to the highest quality of preservation, maintenance and repair standards; Homes look as good or better than others in the market. Price Homes at Fair Market Value Homes priced and sold in-line with other retail sales in the community, ensuring we do not establish negative comparable sales that lead to home value declines. Target Owner Occupant Buyers Sales and marketing strategies employed to attract owner occupant buyers, resulting in stronger recoveries than investor sales. 12

13 REO Business Process REO Core Process Pre List Not Available Pre List Available Listing & Sales Closing & Title Redemption Valuation Listing Sale Pending Eviction Strategy Strategy Updates Title Resolution Complex Title Repair Offer Negotiation Settlement Litigation Rental Contract Execution Bulk Sales REO Support & Financial Functions Outsourcer Oversight Vendor Services Operational Accounting Valuation Management Servicer Relations & Recoveries Regional Area Managers Quality Assurance Special Sales Programs - Auction, Bulk Marketing & Customer Service Reporting & Process Automation Repurchase Primary MI 13

14 Portfolio Overview 14

15 Portfolio Overview Inventory Statistics 15

16 Portfolio Overview Top 10 States 5K 4K 11.9% Inventory Volume & % of Total Inventory 3K 2K 1K 8.4% 7.0% 6.2% 6.2% 5.5% 4.7% 4.0% 3.9% 3.0% 0 FL IL OH MD MI NJ NY MN PA OR Current Inventory YTD Authorizations YTD Dispositions As of August 31,

17 Portfolio Overview Top 10 States The Top 10 States Comprise 61% Of Our Total Portfolio FL 2. IL 3. OH 4. MD 5. MI 6. NJ 1 7. NY 8. MN 9. PA As of August 31, OR 17

18 Best Practices Valuation Practices Establishing the most accurate market value is critical to maximizing financial recovery, reducing timelines, and protecting home values. Vendor Management To maximize financial recovery and reduce liability risks, HomeSteps utilizes an extensive vendor network of licensed, experienced, and well-trained service providers. Good Neighbor Policy To reduce the negative impact of foreclosures and enhance marketability, HomeSteps adheres to stringent preservation and maintenance standards. Community Stabilization HomeSteps actively partners with non-profits, local governments and HUD to use our homes in support of community stabilization efforts. Marketing Programs & Incentives Marketing promotions and programs encourage owner-occupant sales, mitigating the perception that REOs sell below market value to investors. 18

19 Best Practices Valuation Practices Vendor Management Good Neighbor Policy Community Stabilization Marketing Programs & Incentives Recognized Best In Class REO Management Practices & Systems Strong Reputation, Liability & Operational Risk Management Support for community stabilization and housing recovery Maximized Financial Recovery for Freddie Mac, Taxpayers, & Credit Investors 19

20 Improved Capabilities In response to the significant increase in REO inventory resulting from the housing crisis, HomeSteps heavily invested in enhancements to our business model, processes, vendor networks, and production/end-user systems. Improved Capabilities Valuation precision. Preservation & Maintenance standards / monitoring Repair decisioning and maximization of ROI Stronger, more flexible, diverse vendor networks and management Capabilities to quickly adapt to changes in laws, ordinances, and processes governing management and oversight of REO homes Improved data analytics to help maximize financial recovery 20

21 Results & Accomplishments In response to the significant increase in REO inventory resulting from the housing crisis, HomeSteps heavily invested in enhancements to our business model, processes, vendor networks, and production/end-user systems. Results & Accomplishments Acquired and Sold 500,000 REO Sold nearly two-thirds of homes to owner-occupant buyers Achieved better than 95% sales price to market value Reduced standing inventory over 73% since it s peak of 75,000 Paid more than 10M invoices; $4.3B in property expenses Delivered 3.6M Broker s Price Opinions (BPO s) 21

22 Focus Areas Enhanced Collateral Recoveries Localization of valuation and pricing Refinement of repair program Remedy optimization Aggressive Portfolio Management Focus on Community Stabilization FHFA s portfolio contraction and community stabilization goals Promote Freddie Mac s Home Possible Advantage program for REO Optimize Vendor Relationships Not Listed inventory reduction Increasing P&M Vendor Coverage Listed and Aged inventory acceleration Broader use of alternative marketing channels (i.e. auction, bulk) Effectively managing size of vendor network to optimize vendor performance and fees 22

23 Q & A