Freddie Mac 2006 Annual Report Download - page 26

mortgage loans to us or to purchase our securities could have a material adverse eÅect on our business results. Among the
legislative and regulatory provisions applicable to these entities are capital requirements for federally insured depository
institutions and regulated bank holding companies.
For example, the Basel Committee on Banking Supervision, composed of representatives of certain central banks and
bank supervisors, has developed a proposed set of risk-based capital standards for banking organizations. The U.S. banking
regulators have proposed new capital standards for certain banking organizations that would incorporate the Basel
Committee's proposed risk-based capital standards into existing requirements. If Ñnal rules adopted by the U.S. banking
regulators revise the capital treatment of mortgage assets, decisions by U.S. banking organizations about whether to hold or
sell such assets could be aÅected. However, the contents and timing of any Ñnal rules remain uncertain, as does the manner
in which U.S. banking organizations may respond to them.
The actions we expect to take in connection with the Interagency Guidance on Nontraditional Mortgage Product Risks
are described in ""REGULATION AND SUPERVISION Ì OÇce of Federal Housing Enterprise Oversight Ì Nontradi-
tional Mortgage Product Risks.'' On March 2, 2007, the federal Ñnancial institutions regulatory agencies issued for public
comment a ""statement'' on subprime mortgage lending. If adopted, the statement would instruct lenders to apply
underwriting standards similar to those in the Interagency Guidance on non-traditional products to hybrid ARMs. In
addition, on February 27, 2007, we announced that we would implement stricter investment standards for certain subprime
ARMs originated after September 1, 2007 and develop new mortgage products providing lenders with more choices to oÅer
subprime borrowers. This initiative could reduce the number of subprime mortgages available to us for purchase,
potentially reducing our proÑtability, and is likely to make it more diÇcult for us to achieve our housing goals and subgoals.
In addition, our business could also be adversely aÅected by any modiÑcation, reduction or repeal of the federal income
tax deductibility of mortgage interest payments.
Competitive and Market Risks
Changes in general business and economic conditions may adversely aÅect our business and earnings.
Our business and earnings may be adversely aÅected by changes in general business and economic conditions, including
changes in the markets for our portfolio investments or our mortgage-related and debt securities. These conditions include
employment rates, Öuctuations in both debt and equity capital markets, the value of the U.S. dollar as compared to foreign
currencies, and the strength of the U.S. economy and the local economies in which we conduct business. An economic
downturn or increase in the unemployment rate could result in fewer mortgages for us to purchase, an increase in mortgage
delinquencies or defaults and a higher level of credit-related losses than we estimated, which could reduce our earnings or
reduce the fair value of our net assets. Various factors could cause the economy to slow down or even decline, including
higher energy costs, higher interest rates, pressure on housing prices, reduced consumer or corporate spending, natural
disasters such as hurricanes, terrorist activities, military conÖicts and the normal cyclical nature of the economy.
A general decline in U.S. housing prices or changes in the U.S. housing market could negatively impact our business and
earnings.
The rate of home price appreciation in the U.S. declined in 2006 as the housing market slowed. This decline follows a
decade of strong appreciation and particularly dramatic price increases in the past few years. Home price appreciation
generally has increased the values of properties underlying the mortgages in our portfolio. A continued reversal of this strong
home 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.''
If the conforming loan limits are decreased as a result of a decline in the index upon which such limits are based, we
may face operational and legal challenges associated with changing our mortgage purchase commitments to conform with
the lower limits and there could be fewer loans available for us to purchase. In October 2006, the FHFB reported that the
national average price of a one-family residence had declined slightly, the Ñrst time this has occurred since its 1992-1993
survey. OFHEO announced that the conforming loan limits would be maintained at the 2006 limits for 2007 and deferred the
decrease for one year.
In addition, 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. The rate of growth in total residential mortgage debt declined to
9 percent in 2006 from 14 percent in 2005. If the rate of growth in total outstanding U.S. residential mortgage debt were to
continue to decline, there could be fewer mortgage loans available for us to purchase. A decline in the volume of loans
available for us to purchase could reduce our earnings and margins, as we could face more competition to purchase a smaller
number of loans.
14 Freddie Mac