Freddie Mac 2006 Annual Report Download - page 25

regulatory or administrative authority beyond current practice; the imposition of additional remedial measures; voluntary
agreements with our regulators; or the enactment of proposed legislation. In August 2006, we announced that we would
voluntarily limit the growth of our Retained portfolio, as described in ""BUSINESS Ì Business Activities Ì Investment and
Funding Activities.'' HUD is reviewing certain of our investments and other assets and liabilities to ensure conformity with
our public purpose, charter authorities and investment guidelines. In addition, the Treasury Department is reviewing its
process for approving our debt oÅerings. We cannot predict the outcomes of these reviews or whether our business activities
will be restricted as a result of these or other reviews.
We are also exposed to the risk that weaknesses in our internal systems, controls and processes could aÅect the accuracy
or timing of the data we provide to HUD or OFHEO or our compliance with legal requirements, and could ultimately lead
to regulatory actions (by HUD, OFHEO or both) or other adverse impacts on our business (including our ability or intent
to retain investments). Any assertions of non-compliance with existing or new statutory or regulatory requirements could
result in Ñnes, penalties, litigation and damage to our reputation.
Furthermore, we could be required, or may Ñnd it advisable, to change the nature or extent of our business activities if
our various exemptions and special attributes were modiÑed or eliminated, new or additional fees or substantive regulation of
our business activities were imposed, our relationship to the federal government were altered or eliminated, or our charter,
the GSE Act, or other federal legislation aÅecting us were signiÑcantly amended. Any of these changes could have a
material adverse eÅect on the scope of our activities, Ñnancial condition and results of operations. For example, such changes
could (a) reduce the supply of mortgages available to us, (b) limit a signiÑcant revenue source by imposing restrictions on
the size of our Retained portfolio, (c) make us less competitive by otherwise limiting our business activities or our ability to
create new products, (d) increase our capital requirements, or (e) require us to make an annual contribution to an aÅordable
housing fund equal to a speciÑed percentage of our average total mortgage portfolio. We cannot predict when or whether
any potential legislation will be enacted or regulation will be promulgated.
Any of the developments or factors described above could materially adversely aÅect: our ability to fulÑll our mission;
our ability to meet our aÅordable housing goals; our ability or intent to retain investments; the size and growth of our
mortgage portfolios; our future earnings, stock price and stockholder returns; the value of our assets; the rate of growth of the
fair value of our assets; or our ability to recruit qualiÑed oÇcers and directors.
We are making certain changes to our business to meet HUD's housing goals and subgoals, which may adversely aÅect
our proÑtability.
We are making signiÑcant adjustments to our mortgage sourcing and purchase strategies in an eÅort to meet our
housing goals and subgoals, including changes to our underwriting guidelines and the expanded use of targeted initiatives to
reach underserved populations. For example, we are purchasing loans and mortgage-related securities that oÅer lower
expected returns on our investment and increase our exposure to credit losses. In addition, in order to meet future housing
goals and subgoals, our purchases of goal-eligible loans need to increase as a percentage of total new mortgage purchases,
which is causing us to forego other purchase opportunities that we would expect to be more proÑtable. If our current eÅorts
to meet the goals and subgoals prove to be insuÇcient, we may need to take additional steps that could lead to a further
reduction of service to portions of the conventional conforming mortgage market, and also a reduction in our proÑtability. In
fact, for 2006, we reported to HUD that we did not meet one of the three home purchase subgoals. See ""REGULATION
AND SUPERVISION Ì Department of Housing and Urban Development'' for additional information about HUD's
regulation of our business.
We are involved in legal proceedings that could result in the payment of substantial damages or otherwise harm our
business.
We are a party to various legal actions. In addition, certain of our former directors, oÇcers and employees are involved
in legal proceedings for which they may be entitled to reimbursement by us for costs and expenses of the proceedings. The
defense of these or any future claims or proceedings could divert management's attention and resources from the needs of
the business. We may be required to make substantial payments in the event of adverse judgments or settlements of any such
claims, investigations or proceedings. Any legal proceeding, even if resolved in our favor, could result in negative publicity or
cause us to incur signiÑcant legal and other expenses. Furthermore, developments in, outcomes of, impacts of, and costs,
expenses, settlements and judgments related to these legal proceedings may diÅer from our expectations and exceed any
amounts for which we have reserved or require adjustments to such reserves. See ""NOTE 13: LEGAL CONTINGEN-
CIES'' to our consolidated Ñnancial statements for information about our pending legal proceedings and related reserves.
Legislation or regulation aÅecting the Ñnancial services industry generally may adversely aÅect our business activities.
Our business activities may be aÅected by a variety of legislative and regulatory actions related to the activities of banks,
savings institutions, insurance companies, securities dealers and other regulated entities that comprise a signiÑcant part of
our customer base. Legislative or regulatory provisions that create or remove incentives for these entities either to sell
13 Freddie Mac