Freddie Mac 2005 Annual Report Download - page 31

Changes in interest rates could reduce our earnings in material amounts, especially if actual conditions turn out to be
materially diÅerent than our expectations. For example, if interest rates rise or fall faster than we expect or the slope of the
yield curve changes in ways diÅerent than we anticipated, we may incur signiÑcant losses. Changes in interest rates can also
aÅect prepayment assumptions and the fair value of our assets, including investments in our Retained portfolio, our
derivative portfolio and our Guarantee asset. When interest rates fall, borrowers are more likely to prepay their mortgage
loans by reÑnancing them at a lower rate. An increased likelihood of prepayment on the mortgages underlying our mortgage-
related securities may adversely impact the performance of these securities. An increased likelihood of prepayment on the
mortgages we hold may also negatively impact the performance of our Retained portfolio and the fair value of our Guarantee
asset. Interest rates can Öuctuate for a number of reasons, including changes in the Ñscal and monetary policies of the
federal government and its agencies, such as the Federal Reserve. Federal Reserve policies directly and indirectly inÖuence
the yield on our interest-earning assets and the cost of our interest-bearing liabilities. The availability of derivative Ñnancial
instruments (such as options and interest-rate and foreign-currency swaps) from acceptable counterparties of the types and
in the quantities needed could also aÅect our ability to eÅectively manage the risks related to our investment funding.
Our strategies and eÅorts to manage our exposures to these risks may not be as eÅective as they have been in the past.
See ""MD&A Ì RISK MANAGEMENT Ì Interest-Rate Risk and Other Market Risks'' for a description of the types of
market risks to which we are exposed and how we manage those risks.
Higher credit losses could require us to increase our allowance for credit losses through a charge to earnings.
We face primarily two types of credit risk Ì mortgage credit risk and institutional credit risk. As described in
""MD&A Ì RISK MANAGEMENT Ì Credit Risks,'' we employ a number of credit risk management strategies.
However, there can be no assurances that our risk management strategies will be eÅective to manage our credit risks or that
our credit losses will not be higher than expected. Higher credit losses on our guarantees could require us to increase our
allowance for credit losses through a charge to earnings and other credit exposures could result in Ñnancial losses. Although
we regularly review credit exposures to speciÑc customers and counterparties, default risk may arise from events or
circumstances that are diÇcult to detect or foresee. In addition, concerns about, or default by, one institution could lead to
signiÑcant liquidity problems, losses or defaults by other institutions. This risk may also adversely aÅect Ñnancial
intermediaries, such as clearing agencies, clearinghouses, banks, securities Ñrms and exchanges with which we interact.
These potential risks could ultimately cause liquidity problems or losses for us as well.
The loss of business volume from one or more key lenders could result in a decline in market share and revenues.
Our business depends on our ability to acquire a steady Öow of mortgage loans from the originators of those loans. We
purchase a signiÑcant percentage of our single-family mortgages from several large mortgage lenders. The mortgage
industry has been consolidating and a decreasing number of large lenders originate most single-family mortgages. We could
lose signiÑcant business volume and may be unable to replace it if one or more of our key lenders signiÑcantly reduces the
volume of mortgages it delivers to us or is acquired or otherwise ceases to exist. The loss of business from any one of our
key lenders could adversely aÅect our market share, our revenues, the use of our technology by participants in the mortgage
market and the performance of our mortgage-related securities.
Negative publicity causing damage to our reputation could adversely aÅect our business prospects, earnings or capital.
Reputation risk, or the risk to our earnings and capital from negative public opinion, is inherent in our business.
Negative public opinion could adversely aÅect our ability to keep and attract customers or otherwise impair our customer
relationships; adversely aÅect our ability to obtain Ñnancing or hinder our business prospects. Perceptions regarding the
practices of our competitors or our industry as a whole may also adversely impact our reputation. Adverse reputation impacts
on third parties with whom we have important relationships may impair market conÑdence or investor conÑdence in our
business operations as well. In addition, negative publicity could expose us to adverse legal and regulatory consequences.
Negative public opinion could result from our actual or alleged action or failure to act in any number of activities, including
corporate governance, regulatory compliance, Ñnancial reporting and disclosure, or from actions taken by government
regulators and community organizations in response to our actual or alleged conduct. Adverse impacts on our reputation, or
the reputation of our industry, may also result in greater regulatory and/or legislative scrutiny or adverse regulatory or
legislative changes.
PROPERTIES
We own a 75 percent interest in a limited partnership that owns our principal oÇces, consisting of four oÇce buildings
in McLean, Virginia, that comprise approximately 1.2 million square feet. We occupy this headquarters complex under a
long-term lease from the partnership.
15 Freddie Mac