Freddie Mac 2009 Annual Report Download - page 37

goal of managing to a positive stockholders’ equity. Some of these changes have increased our expenses or caused us to
forego revenue opportunities. For example, FHFA, has directed that we implement various initiatives under the MHA
Program. We expect to incur significant costs associated with the implementation of these initiatives and it is not possible at
present to estimate whether, and the extent to which, costs, incurred in the near term, will be offset by the prevention or
reduction of potential future costs of loan defaults and foreclosures due to these initiatives. We are also providing significant
support to state and local housing finance agencies pursuant to the Housing Finance Agency Initiative. The Conservator and
Treasury did not authorize us to engage in certain business activities and transactions, including the sale of certain assets,
which we believe may have had a beneficial impact on our results of operations or financial condition, if executed. Our
inability to execute such transactions may adversely affect our profitability. Other agencies of the U.S. government, as well
as Congress, also may have an interest in the conduct of our business. We do not know what actions they may request us to
take.
In view of the conservatorship and the reasons stated by FHFA for its establishment, it is likely that our business model
and strategic objectives will continue to change, possibly significantly, including in pursuit of our public mission and other
non-financial objectives. Among other things, we could experience significant changes in the size, growth and characteristics
of our guarantor and investment activities, and we could further change our operational objectives, including our pricing
strategy in our core mortgage guarantee business. Accordingly, our strategic and operational focus going forward may not be
consistent with the investment objectives of our investors. It is possible that we will make material changes to our capital
strategy and to our accounting policies, methods, and estimates. It is also possible that the company could be restructured
and its statutory mission revised. In addition, we may be directed to engage in activities that are operationally difficult or
costly to implement.
In a letter to the Chairmen and Ranking Members of the Congressional Banking and Financial Services Committees
dated February 2, 2010, the Acting Director of FHFA stated that minimizing our credit losses is our central goal and that we
will be limited to continuing our existing core business activities and taking actions necessary to advance the goals of the
conservatorship. The Acting Director stated that FHFA does not expect we will be a substantial buyer or seller of mortgages
for our mortgage-related investments portfolio, except for purchases of delinquent mortgages out of PC pools. The Acting
Director also stated that permitting us to engage in new products is inconsistent with the goals of the conservatorship. These
restrictions could limit our ability to return to profitability in future periods.
As our Conservator, FHFA possesses all of the powers of our stockholders, officers and directors. During the
conservatorship, the Conservator has delegated certain authority to the Board of Directors to oversee, and management to
conduct, day-to-day operations so that the company can continue to operate in the ordinary course of business. FHFA has the
ability to withdraw its delegations of authority and override actions of our Board of Directors at any time. In addition, FHFA
has the power to take actions without our knowledge, that could be material to investors and could significantly affect our
financial performance.
FHFA is also Conservator of Fannie Mae, our primary competitor. We do not know the impact on our business of
FHFA’s serving as Conservator of Fannie Mae.
These changes and other factors could have material adverse effects on, among other things, our portfolio growth, net
worth, credit losses, net interest income, guarantee fee income, net deferred tax assets, and loan loss reserves, and could have
a material adverse effect on our future results of operations and financial condition. In light of the significant uncertainty
surrounding these changes, there can be no assurances regarding when, or if, we will return to profitability.
We are subject to significant limitations on our business activities under the Purchase Agreement which could have a
material adverse effect on our results of operations and financial condition.
The Purchase Agreement includes significant restrictions on our ability to manage our business, including limitations on
the amount of indebtedness we may incur, the size of our mortgage-related investments portfolio and the circumstances in
which we may pay dividends, raise capital and pay down the liquidation preference on the senior preferred stock. In addition,
the Purchase Agreement provides that we may not enter into any new compensation arrangements or increase amounts or
benefits payable under existing compensation arrangements of any executive officers without the consent of the Director of
FHFA, in consultation with the Secretary of the Treasury. In deciding whether or not to consent to any request for approval it
receives from us under the Purchase Agreement, Treasury has the right to withhold its consent for any reason and is not
required by the agreement to consider any particular factors, including whether or not management believes that the
transaction would benefit the company. The limitations under the Purchase Agreement could have a material adverse effect
on our future results of operations and financial condition.
On February 18, 2010, we received a letter from the Acting Director of FHFA stating that FHFA has determined that
any sale of the LIHTC investments by Freddie Mac would require Treasury’s consent under the terms of the Purchase
Agreement. The letter further stated that FHFA had presented other options for Treasury to consider, including allowing
34 Freddie Mac