Freddie Mac 2009 Annual Report Download - page 179

sudden decline in home prices. Our estimate of this measure of sensitivity, after considering recoveries of credit
enhancements such as mortgage insurance and our assumptions about home price changes after the initial 5% decline, was
$11.5 billion and $8.6 billion as of December 31, 2009 and 2008, respectively.
Table 75 — Single-Family Credit Loss Sensitivity
NPV
(3)
NPV Ratio
(4)
NPV
(3)
NPV Ratio
(4)
Before Receipt of
Credit Enhancements
(1)
After Receipt of
Credit Enhancements
(2)
(dollars in millions)
At:
December 31, 2009 ................................................... $12,646 67.4 bps $11,462 61.1 bps
September 30, 2009 ................................................... $12,140 64.7 bps $11,006 58.7 bps
June 30, 2009 . . ..................................................... $12,076 65.3 bps $10,827 58.6 bps
March 31, 2009 . ..................................................... $11,900 64.9 bps $10,423 56.8 bps
December 31, 2008 ................................................... $ 9,981 54.4 bps $ 8,591 46.8 bps
(1) Assumes that none of the credit enhancements currently covering our mortgage loans has any mitigating impact on our credit losses.
(2) Assumes we collect amounts due from credit enhancement providers after giving effect to certain assumptions about counterparty default rates.
(3) Based on the single-family mortgage portfolio, excluding Structured Securities backed by Ginnie Mae Certificates.
(4) Calculated as the ratio of NPV of increase in credit losses to the single-family mortgage portfolio, defined in note (3) above.
Interest Rate and Other Market Risks
For a discussion of our interest rate and other market risks, see “QUANTITATIVE AND QUALITATIVE
DISCLOSURES ABOUT MARKET RISK.”
Operational Risks
Operational risks are inherent in all of our business activities and can become apparent in various ways, including
accounting or operational errors, business interruptions, fraud and failures of the technology used to support our business
activities. Our risk of operational failure may be increased by vacancies or turnover in officer and key business unit positions
and failed or inadequate internal controls. These operational risks may expose us to financial loss, interfere with our ability
to sustain timely and reliable financial reporting, or result in other adverse consequences.
Our business decision making, risk management and financial reporting are highly dependent on our use of models.
Although we have strengthened our model oversight and governance processes to validate model assumptions, code, theory
and the system applications that utilize our models, the complexity of and recent changes in our models and the impact of
the ongoing turmoil in the housing and credit markets create additional risk regarding the estimates and other output
produced by our models.
Our primary business processing and financial accounting systems lack sufficient flexibility to handle all the
complexities of, and changes in, our business transactions and related accounting policies and methods. This requires us to
rely more extensively on spreadsheets and other end-user computing systems. These systems are likely to have a higher risk
of operational failure and error than our primary systems, which are subject to our information technology general controls.
We believe we are mitigating this risk through active monitoring of, and improvements to, controls over the development and
use of end-user computing systems.
In order to manage the risk of inaccurate or unreliable valuations of our financial instruments, we engage in an ongoing
internal review of our valuations. We perform analysis of internal valuations on a monthly basis to confirm the
reasonableness of the valuations. For more information on the controls in our valuation process, see “CRITICAL
ACCOUNTING POLICIES AND ESTIMATES — Valuation of a Significant Portion of Assets and Liabilities — Controls
over Fair Value Measurement.”
Management, including the company’s Chief Executive Officer and Chief Financial Officer, conducted an evaluation of
the effectiveness of our internal control over financial reporting and our disclosure controls and procedures as of
December 31, 2009. As of December 31, 2009, we had one material weakness which remained unremediated related to
conservatorship, causing us to conclude that both our internal control over financial reporting and our disclosure controls and
procedures were not effective as of December 31, 2009. Given the structural nature of this weakness, we believe it is likely
that we will not remediate this material weakness while we are under conservatorship. In view of our mitigating activities
related to the material weakness, we believe that our consolidated financial statements for the year ended December 31, 2009
have been prepared in conformity with GAAP. For additional information on our disclosure controls and procedures and
related material weakness in internal control over financial reporting, see “CONTROLS AND PROCEDURES.”
Effective January 1, 2010, we adopted amendments to the accounting standards for transfers of financial assets and
consolidation of VIEs. We face significant operational risk with respect to the process and systems changes we have been
required to make in connection with our adoption of these amendments. For more information, see “RISK FACTORS —
Business and Operational Risks — We face additional risks related to our adoption of changes in accounting standards
176 Freddie Mac