Freddie Mac 2009 Annual Report Download - page 43

We depend on our institutional counterparties to provide services that are critical to our business, and our results of
operations or financial condition may be adversely affected if one or more of our institutional counterparties is unable to
meet their obligations to us.
We face the risk that one or more of the institutional counterparties that has entered into a business contract or
arrangement with us may fail to meet its obligations. We face similar risks with respect to contracts or arrangements we
enter into on behalf of our securitization trusts. Our primary exposures to institutional counterparty risk are with:
• mortgage seller/servicers;
• mortgage insurers;
• issuers, guarantors or third-party providers of other credit enhancements (including bond insurers);
• counterparties to short-term lending and other investment-related agreements and cash equivalent transactions,
including such agreements and transactions we manage for our PC trusts;
• derivative counterparties;
• hazard and title insurers;
• mortgage investors and originators; and
• document custodians and funds custodians.
In some cases, our business with institutional counterparties is concentrated. A significant failure by a major
institutional counterparty could have a material adverse effect on our investments in mortgage loans, investments in
securities, our derivative portfolio or our credit guarantee activities. See “NOTE 19: CONCENTRATION OF CREDIT AND
OTHER RISKS” to our consolidated financial statements for additional information.
Some of our counterparties also may become subject to serious liquidity problems affecting, either temporarily or
permanently, their businesses, which may adversely affect their ability to meet their obligations to us. Challenging market
conditions have adversely affected and are expected to continue to adversely affect the liquidity and financial condition of a
number of our counterparties, including some seller/servicers, mortgage insurers and bond insurers. Some of our largest
seller/servicers have experienced ratings downgrades and liquidity constraints, and certain large lenders have failed. A default
by a counterparty with significant obligations to us could adversely affect our ability to conduct our operations efficiently
and at cost-effective rates, which in turn could adversely affect our results of operations or our financial condition. Many of
our counterparties provide several types of services to us. Accordingly, if one of these counterparties were to become
insolvent or otherwise default on its obligations to us, it could harm our business and financial results in a variety of ways.
See “MD&A — RISK MANAGEMENT — Credit Risks — Institutional Credit Risk” for additional information regarding our
credit risks to our counterparties and how we seek to manage them, and recent consolidation among some of our institutional
counterparties.
Our financial condition or results of operations may be adversely affected if mortgage seller/servicers fail to repurchase
loans sold to us in breach of representations and warranties or to perform their obligations to service loans in our single-
family and multifamily mortgage portfolios.
We require seller/servicers to make certain representations and warranties regarding the loans they sell to us. If loans are
sold to us in breach of those representations and warranties, we have the contractual right to require the seller/servicer to
repurchase those loans from us. In lieu of repurchase, we may choose to allow a seller/servicer to indemnify us against
losses on such mortgages. Sometimes a seller/servicer sells us mortgages with recourse, meaning that the seller/servicer
agrees to repurchase any mortgage that is delinquent for more than a specified period (usually 120 days), regardless of
whether there has been a breach of representations and warranties.
Some of our seller/servicers failed to perform their repurchase obligations due to lack of financial capacity, while many
of our larger, higher credit-quality institutions have not fully performed their repurchase obligations in a timely manner. As
of December 31, 2009 and 2008, we had outstanding repurchase requests to our seller/servicers with respect to loans with an
unpaid principal balance of approximately $4 billion and $3 billion, respectively. At December 31, 2009, nearly 30% of our
outstanding repurchase requests were outstanding for more than 90 days. Our credit losses may increase to the extent our
seller/servicers do not fully meet their repurchase obligations. Enforcing repurchase obligations with lender customers who
have the financial capacity to perform those obligations could also negatively impact our relationships with such customers
and ability to retain market share.
If a servicer is unable to fulfill its repurchase or other responsibilities, we may be unable to sell the applicable servicing
rights to a successor servicer and recover, from the sale proceeds, amounts owed to us by the defaulting servicer. The
ongoing weakness in the housing market has negatively affected the market for mortgage servicing rights, which increases
the risk that we may be unable to sell such rights or may not receive a sufficient price for them. Increased industry
40 Freddie Mac