Freddie Mac 2005 Annual Report Download - page 30

A general decline in U.S. housing prices or in activity in the U.S. housing market could negatively impact our earnings.
House prices have risen signiÑcantly over the last ten years, and have grown very dramatically over the last three years.
This house price appreciation has increased the values of properties underlying the mortgages in our portfolio. A reversal of
this strong house price appreciation in any of the geographic markets we serve could result in an increase in delinquencies
or defaults and a higher level of credit-related losses, which could reduce our earnings. For more information, see
""MD&A Ì RISK MANAGEMENT Ì Credit Risks.''
Our business volumes are closely tied to the rate of growth in total outstanding U.S. residential mortgage debt and the
size of the U.S. residential mortgage market. If the rate of growth in total outstanding U.S. residential mortgage debt were
to decline, there could be fewer mortgage loans available for us to purchase. This decline could reduce our earnings and
margins, as we could face more competition to purchase a smaller number of loans.
Competition from banking and non-banking companies may harm our business.
We operate in a highly competitive environment and we expect competition to increase as Ñnancial services companies
combine to produce larger companies that are able to oÅer similar mortgage-related products at competitive prices. Our
principal competitors in the secondary mortgage market are Fannie Mae, the Federal Home Loan Banks and other Ñnancial
institutions that retain or securitize mortgages, such as banks, dealers and thrift institutions. Increased competition in the
secondary mortgage market may make it more diÇcult for us to purchase mortgages to meet our mission objectives while
providing favorable returns for our business. Furthermore, competitive pricing pressures may make our products less
attractive in the market and negatively impact our proÑtability.
We also compete for low-cost debt funding with Fannie Mae, the Federal Home Loan Banks and other institutions that
hold mortgage portfolios. Competition from these entities can vary with changes in economic, Ñnancial market and
regulatory environments. Increased competition for low-cost debt funding may result in a higher cost to Ñnance our business,
which could decrease our net income.
We may face limited availability of Ñnancing, variation in our funding costs and uncertainty in our securitization
Ñnancing.
The amount, type and cost of our funding, including Ñnancing from other Ñnancial institutions and the capital markets,
directly impacts our interest expense and results of operations and can therefore aÅect our ability to grow our assets. A
number of factors could make such Ñnancing more diÇcult to obtain, more expensive or unavailable on any terms, both
domestically and internationally (where funding transactions may be on terms more or less favorable than in the U.S.),
including adverse Ñnancial results, speciÑc events that adversely impact our reputation, changes in the activities of our
business partners, disruptions in the capital markets, speciÑc events that adversely impact the Ñnancial services industry,
counterparty availability, changes in the preferences of the holders of our securities, changes aÅecting our assets, our
corporate and regulatory structure, interest-rate Öuctuations, ratings agencies actions, and the legal, regulatory, accounting
and tax environments governing our funding transactions, the general state of the U.S., Asian and other world economies,
and factors aÅecting those economies.
Our PCs and Structured Securities are an integral part of our mortgage purchase program and any decline in the price
performance of or demand for our PCs could have a material adverse eÅect on the proÑtability of our new credit guarantee
business. There is a risk that our PC and Structured Securities support activities may not be suÇcient to support the
liquidity and depth of the market for PCs.
A reduction in our credit ratings could adversely aÅect our liquidity.
Ratings agencies play an important role in determining, by means of the ratings they assign to issuers and their debt, the
availability and cost of debt funding. We currently receive ratings from several ratings agencies for our unsecured
borrowings. Our credit ratings are important to our liquidity. Actions by governmental entities or others could adversely
aÅect our credit ratings. A reduction in our credit ratings could adversely aÅect our liquidity, competitive position, or the
supply or cost of equity capital or debt Ñnancing available to us. A signiÑcant increase in our borrowing costs could cause us
to sustain losses and impair our liquidity by requiring us to Ñnd other sources of Ñnancing.
Fluctuations in interest rates could negatively impact our reported net interest income, earnings and fair value of net
assets.
Our portfolio investment activities and credit guarantee activities expose us to interest rate and other market risks.
Changes in interest rates Ì up or down Ì could adversely aÅect our net interest yield. Although the yield we earn on our
assets and our funding costs tend to move in the same direction in response to changes in interest rates, one can rise or fall
faster than the other, causing our net interest yield to expand or compress. For example, when interest rates rise, our
funding costs may rise faster than the yield we earn on our assets, causing our net interest yield to compress until the eÅect of
the increase is fully reÖected in asset yields. Changes in the slope of the yield curve could also reduce our net interest yield.
14 Freddie Mac