Freddie Mac 2009 Annual Report Download - page 44

consolidation, bankruptcies of mortgage bankers or bank failures may also make it more difficult for us to sell such rights,
because there may not be sufficient capacity in the market, particularly in the event of multiple failures.
Our seller/servicers also have a significant role in servicing loans in our single-family mortgage portfolio, which
includes an active role in our loss mitigation efforts. Therefore, a decline in their performance could impact the overall
quality of our credit performance, which could adversely affect our financial condition or results of operations and have
significant impacts on our ability to mitigate credit losses. The risk of such a failure remains high as weak economic
conditions continue to affect the liquidity and financial condition of many of our seller/servicers, including some of our
largest seller/servicers.
The inability to realize the anticipated benefits of our loss mitigation plans, a lower realized rate of seller/servicer
repurchases or default rates and severity that exceed our current projections could cause our losses to be significantly higher
than those currently estimated.
Our seller/servicers also have a significant role in servicing loans in our multifamily mortgage portfolio. We are exposed
to the risk that multifamily seller/servicers may come under financial pressure due to the current stressful economic
environment and weak real estate markets, which could cause degradation in the quality of servicing they provide.
See “MD&A — RISK MANAGEMENT — Credit Risks — Institutional Credit Risk — Mortgage Seller/Servicers” for
additional information on our institutional credit risk related to our mortgage seller/servicers.
Our financial condition or results of operations may be adversely affected by the financial distress of our derivative and
other counterparties.
We use derivatives for several purposes, including to rebalance our funding mix in order to more closely match changes
in the interest rate characteristics of our mortgage-related assets and to hedge forecasted issuances of debt. Our exposure to
derivative counterparties remains highly concentrated as compared to historical levels. Four of our derivative counterparties
each accounted for greater than 10% and collectively accounted for 92% of our net uncollateralized exposure, excluding
commitments, at December 31, 2009. For a further discussion of our derivative counterparty exposure see “MD&A — RISK
MANAGEMENT — Credit Risks — Institutional Credit Risk — Derivative Counterparties” and “NOTE 19:
CONCENTRATION OF CREDIT AND OTHER RISKS” to our consolidated financial statements.
Some of our derivative and other counterparties have experienced various degrees of financial distress in the past few
years, including liquidity constraints, credit downgrades and bankruptcy. Our financial condition and results of operations
may be adversely affected by the financial distress of these derivative and other counterparties to the extent that they fail to
meet their obligations to us. For example, we may incur losses if collateral held by us cannot be liquidated at prices that are
sufficient to recover the full amount of the loan or derivative exposure due us.
In addition, our ability to engage in routine derivatives, funding and other transactions could be adversely affected by
the actions and commercial soundness of other financial institutions. Financial services institutions are interrelated as a result
of trading, clearing, counterparty or other relationships. As a result, defaults by, or even rumors or questions about, one or
more financial services institutions, or the financial services industry generally, could lead to market-wide disruptions in
which it may be difficult for us to find acceptable counterparties for such transactions.
We also use derivatives to synthetically create the substantive economic equivalent of various debt funding structures.
Thus, if our access to the derivative markets were disrupted, it may become more difficult or expensive to fund our business
activities and achieve the funding mix we desire, which could adversely affect our business and results of operations. The
use of these derivatives may also expose us to additional counterparty credit risk.
Our credit and other losses could increase if our mortgage or bond insurers become insolvent or fail to perform their
obligations to us.
We are exposed to risk relating to the potential insolvency or non-performance of mortgage insurers that insure single-
family mortgages we purchase or guarantee and bond insurers that insure bonds we hold as investment securities on our
consolidated balance sheets. Most of our mortgage insurer and bond insurer counterparties experienced ratings downgrades
during 2009, and several of them announced comprehensive restructuring plans. The weakened financial condition and
liquidity position of these counterparties increases the risk that these entities will fail to reimburse us for claims under
insurance policies.
As a guarantor, we remain responsible for the payment of principal and interest if a mortgage insurer fails to meet its
obligations to reimburse us for claims. Thus, if any of our mortgage insurers fails to fulfill its obligation, we could
experience increased credit-related costs. We believe that several of our mortgage insurance counterparties are at risk of
falling out of compliance with regulatory capital requirements, which may result in regulatory actions that could restrict the
mortgage insurer’s ability, in certain states, to write new business, and thus could negatively impact our access to mortgage
insurance for high LTV loans. In addition, if a regulator determined that a mortgage insurer lacked sufficient capital to pay
41 Freddie Mac